World Trade Organization (WTO) impacts agriculture - Research Paper Example

? World Trade Organization (WTO) Impacts Agriculture World Trade Organization (WTO) Impacts Agriculture The WTO is the sole international organization that deals with the regulation of international trade. Central to the WTO lies WTO agreements conferred and signed by most trading countries and ratified within their individual parliaments. The aim of the WTO and the agreements is to assist exporters, importers, consumers and producers to conduct international trade. The outcome is essentially assurance as producers and consumers feel that they have security in supplies and a range of options of products, services and raw materials. As a result of accountability in the economic world, international trade is peaceful and prosperous as the WTO settles trade disputes by interpreting commitments and agreements made by member states. This paper will examine various areas of trade such as international and domestic trade, discussing different elements that influence both forms of trade. The essence of trade is to benefit both consumers and sellers in a mutually beneficial relationship (Mankiw, 2011). Compare and contrast free trade and protectionist theories  Economists continue to argue on the issue of protectionist theories and free trade. These arguments are complex, but the underpinning controversy is even greater. Free trade refers to a strategy through which a government allows imports and does not interfere with exports. This is through the application of import tariffs or export quotas or subsidies. Free trade allows both trading partners to gain from trade. This is because, under free trade, the prices of goods and services emerge from the forces of demand and supply (Mankiw, 2011). In addition, free trade allows resource allocation on account of demand and supply. Free trade enables counties to acquire greater levels of production and consumption, which they can obtain in isolation. In case of perfect competition, free trade allows optimal, global resource allocation. This essentially means that free trade allows trading countries to achieve equality in their marginal production transformation rates (OECD, 2000). Theory on free trade suggests that free trade facilitates income increments and equitable distribution of income among countries (Lambert & McKoy, 2009). Free trade differs significantly from protectionist theories since the latter allows the determination of the allocation of products and services amongst trading nations on the basis of different price strategies. The different price strategies amongst trading partners emerge from government interventions in the market. Here, governments intervene by adjusting prices or instituting supply restrictions. Essentially, under protectionist theories of trade, government interventions either increase or decrease the cost of products and services to producers and consumers. Protectionism involves the establishment of trade barriers such as currency restrictions with regard to international trade, taxes, import quotas and other subsidies offered to domestic industries. The essential purpose of protectionist theories is to protect domestic industries from losses incurred in unstable marketplaces (Giovanni, Bohman, Carter, & McCalla, 2007). Consequently, governments also establish non-tariff barriers. They include: the Central America Free Trade Agreement (CAFTA) and the North America Free Trade Agreement (NAFTA), which intervene in markets, hence producing artificial prices. These are prices not set by the natural mechanisms of demand and supply. Moreover, protectionist theories deter equilibrium in countries’ marginal production transformation rates by establishing differences between international and domestic prices of goods (Mankiw, 2011). In essence, this means that protectionist theories produce suboptimal allocations of factors of production, as well as lower global real income than free trade would produce. Protectionism reallocates income, which would not occur under free trade since income reallocation would mean one trade party benefits from trade more than the other partner (Swinbank, 2010). Despite their notable differences, both theories play an integral role in enhancing trade albeit on distinct merits. For instance, free trade enhances international trade since there are no barriers to trade. This is perhaps the reason why international economists continually advocate for open international competition centered on the policy of free trade. Protectionism, on the other hand, enhances domestic trade by putting barriers on international trade. This has the effect of strengthening domestic industries and boosting domestic trade (Mankiw, 2011). Political policy makers continue to implement protectionist policies. This is because the benefactors of the policy i.e. industry workers and owners spend immense resources to lobby and manipulate political decisions. The WTO manages international trade activities by prohibiting countries from establishing highly restrictive trade barriers, which make trade with other counties unfair. In the same breath, the WTO controls trade in agricultural products by demanding trading partners to maintain fairness in their pricing strategies and equitable resource allocation. Micro and Macro Environment Micro and macro environments are segments of environmental scanning that focus on the global environment. Although most analyses center on the macro environment, it is critical to note that the micro environment is just as critical. Essentially, the macro environment centers on the companies, markets, competitors, clients and industries in the global environment. The micro environment, on the other hand, deals with customers, suppliers and competitors. The global environment functions on both the macro and micro level since the aforementioned factors all influence global or international trade (Mankiw, 2011). The function of the WTO in this global environment is to govern the conduct of trade transactions to ensure that global suppliers, customers, markets, companies, industries and competitors act in acceptable ways that do not injure other parties. The macro environment consists of six environmental factors, which affect the global environment (Mankiw, 2011). The macro global environment considers the different environments in which trade forces exist. Macro global environment denotes the agencies and forces to a WTO member country. Some of these forces are closer (proximate macro environment) to the country’s operations than others, for instance, the country’s suppliers and competitors. Firstly, the supplier’s environment encompasses WTO member countries who provide the nation with product constituents, raw materials (such as agricultural products) or services. Whether a country is a producer or consumer, it often depends on several suppliers. This makes the buyer/supplier relationship one of shared economic interdependence. The WTO ensures this relationship adheres to strict rules of fairness and equitable resource distribution. The global competitive environment encompasses countries that produce or supply similar products or substitutes. A country should seek ways of mitigating the effects of global competitors by enriching its products or lowering the prices to acceptable levels. Countries seek to protect their domestic industries by maintaining high export levels making the competitive global environment a key macro environment (Mankiw, 2011). The purpose of the WTO, in this case, is to regulate countries’ competitive strategies by prohibiting underhanded strategies. For instance, the WTO regulates the global competitive environment by prohibiting the establishment of extremely low prices for agricultural products produced by competing countries. The global political environment requires that countries sell or purchase legally permissible products. For instance, although marijuana is an agricultural product, the WTO prohibits its sale except for medical purposes in countries that support such usage. The economic environment provides mechanisms for the establishment of prices and resource allocation. The global environment also encompasses socio-cultural and technological environments that influence purchase and sale of, for instance, agricultural products between nations. The global micro environment operates under the influences of elements over which countries have control. Since the global environment, in this case, entails nations under the WTO, the micro environment, therefore, refers to the environment in which countries can use elements to gather information that improves their trade. The WTO acknowledges that the essence of trade it to realize profits through customer satisfaction. Countries attain this objective by manipulating different forms of variables in its control (Southgate & Graham, 2006). However, while the WTO gives countries the latitude to manipulate their trading variables, it prohibits member countries from employing deceitful tactics to increase their profits. For instance, the WTO prohibits countries from restricting trade in order to create artificial shortages so that prices may rise. Countries trading in agricultural products or services can, therefore, not manipulate their micro environments to create artificial shortages so as to increase global prices (Mankiw, 2011). Organizational Decision Making in a Globalised Environment The two-level game theory refers to a political system for the resolution of international conflicts between countries. The political model of global conflict resolution considers international negotiations among countries as encompassing simultaneous negotiations at the domestic and international level (Mankiw, 2011). On the subject of domestic negotiations, the government absorbs all concerns of societal actors and establishes relationships with the trading countries. On the issue of negotiations at the international level, the government attempts to put these concerns into practice without making commitments for anything that might have negative effects on the domestic scale. The two-level game theory holds that win-sets only occur when both actors’ concerns overlap thereby providing leeway for the establishment of international agreements. The two-level game theory influences significantly how organizations conduct business on both the domestic and international front. The domestic environment of organizations with regard to the two-level game theory is the domestic market, while the international environment is the international market (Mankiw, 2011). This means that organizations optimally require the realization of the concerns of both the international and domestic markets. Scholars in the field of international relations continue to rally behind the notion that domestic politics matter and have a substantial impact on international outcomes. Essentially organizational decisions that threaten trade on a domestic level are detrimental. However, treating countries as unitary actors in international trade is also misguided. Organizations are polyarchic since the power of decision making does not lie in a single actor but rather many actors (for instance, company executives and shareholders). The international market also influences organizational decision making since the international environment dictates aspects such as standardized currency use for international trade. In essence, organizations make financial decisions based on the domestic and international occurrences. For instance, on the domestic level, a company dealing in agricultural products can opt to cut costs in order to sell their goods at a cheaper rate than their competitors hence attain high sales and increase its revenue. Government policies also influence an organization’s financial decision making since the government has the capacity to enact rules and policies to manage domestic trade between producers and consumers (Mankiw, 2011). On the international level, the same organization has to conform to international trade agreements such as the stipulations of the WTO. For instance, the organization’s financial decisions such as the currency to use in international trade are dictated by international trade agreements. This means that international trade organizations influence organizational, financial decision making as they prohibit investments in certain sectors such as illicit drugs. Moreover, international agreements stipulate requirements such as curbing environmental emissions, which affect an organization’s financial decision making. This is because the regulations require organizations to invest in the latest technologies in order to curb their emissions. The underpinning assumption of the two-level theory is, therefore, that an organization plays two games simultaneously; one with other organizations in other nations and one with its stakeholders. The notable feature of this theory is that while an organization’s financial decision can be rational in one game (for instance, offering incredibly low prices to ward off domestic competitors) the decision can be irrational in the other game. Benefactors of Increasing or decreasing trade restrictions   International trade has the advantage of increasing the range of goods available for domestic consumers. This is through decreasing the prices of these goods through amplified competition and allowing domestic industries to export their products (Mankiw, 2011). However, although all these elements are beneficial, free trade is not widely accepted as countries establish trade restrictions for one reason or the other. Countries impose tariffs or taxes on imports thereby increasing the cost of imported products. Increase in import tariffs is beneficial to infant industries, as well as developing economies as it limits competition from established international industries and economies. Increasing trade restrictions, for instance, through the imposition on tariffs on imported products also protects consumers when a government feels that the products could endanger its population. For instance, the US may levy a tariff on imported coffee from Ethiopia if it believes the agricultural products are riddled with diseases (Mazoyer & Roudart, 2006). Trade restrictions are also beneficial for the protection of national security. Developed countries establish trade restrictions to protect industries considered strategically crucial, for instance, those that support national security. Defense industries are critical to countries’ interest and enjoy immense protection (Mankiw, 2011). For instance, the US is quite insistent on the protection of its defense-oriented organizations. Industries and consumers of countries that do not play by international trade rules suffer the consequences of trade restrictions. The restrictions are imposed by their trading partners as a retaliation technique. For instance, if France thinks that the US allowed its wine producers to call its sparkling wines “Champagne” (a name unique to France’s Champagne region), France may retaliate by leveling a tariff on imports from the US. The government also benefits from increasing trade restrictions as it earns revenues through taxes. However, increasing trade restrictions adversely affects individual consumers and domestic industries because high import prices denote high prices of goods. Therefore, decreasing trade restrictions benefit consumers and domestic businesses as reduced import prices mean low product prices. However, the government does not benefit from reduced trade restrictions since taxes on imported reduce thereby reducing government revenues. Other trade restrictions such as export restrictions adversely affect domestic industries trading in the international market since the cost of exportation increases the prices of the goods making them inconsistent with international prices (Mankiw, 2011). Influences of Economic Theory and Performance Measurement Business decision making refers to the process of choosing the best among alternative opportunities available to the business. Economic theory provides seven steps to test business managers’ analytical abilities and establish the validity and appropriateness of decisions made in the contemporary local and global business world (Mankiw, 2011). These steps include the establishment of clear objectives, specification of the business decision issue, identification of alternatives, evaluation of the alternatives, and selection of the most suitable alternatives, decision implementation and performance monitoring. Since contemporary business conditions change quite rapidly and become increasingly complex and competitive, personal intuition and business sense alone are insufficient to appropriate business decision making. Economic theories and tools of performance analysis are; thus quite crucial in business decision making whether on a local or global front. These theories and tools include the incremental principle, opportunity cost, discounting principle, the equi-marginal principle and the time perspective principle (Diaz-Bonilla & Morley, 2003). The theory of opportunity cost refers to the foregone alternatives required in making a business decision. For instance, the opportunity cost of using a new technology to produce one agricultural product is the income foregone from other products. The incremental principle concerns the consideration marginal costs and revenues in decision making (Mankiw, 2011). This involves the estimation of effects of decision alternatives on business revenue and costs. This theory emphasizes that shifts in total revenue and cost result from shifts in procedures, investments and prices. The discounting principle holds that the future is unpredictable, and there may be uncertainty in obtaining resources in the future if decision makers do not take advantage of the present opportunity. The equi-marginal economics theory concerns resource allocation amongst different undertakings. The principle requires that resource allocation decision making ensures that the value added by the final unit is similar in all instances (Das, 2002). For instance, if an agricultural firm engages in 5 activities and has 200 units of labor, it can enhance a single activity, for instance, research and development by adding more labor albeit at the expense of the other activities. The time perspective principle deals with performance measurement of the effects of business decisions on the short and term. The critical problem in decision making is maintaining the right balance between considerations on the short and long term. This involves performance measurements of short term decisions in making decisions that affect the businesses’ long term performance. Conceptual Models and Theoretical Frameworks Economic literature on conceptual models and theoretical frameworks that influence business practice and theory speculate that businesses use the models and frameworks to enhance their performance capacities (Mankiw, 2011). This is because businesses use conceptual models and theoretical frameworks to try to understand what the critical areas of the organization should be, how the areas will relate with each other and functions of each business area. The model and framework centers on business related aspects such as how the business should look rather than how the business looks at present. It is vital to allow the appreciation what the vital areas of the business are and discover how they interact with each other. This allows an organization to remain focused on where it needs to be and establish pertinent strategies to move towards this outlook. The operating model of a business is captured with regard to the organization’s design through the definition of business roles. This denotes the organization’s design in terms of the relationship between different roles. These key business relationships encompass aspects such as responsibilities and containment (Das, 1998). Containment deals with capturing the sub-roles that constitute a role, for instance, business roles required in constituting a logical team. Responsibility, on the other hand, deals with capturing the roles to which a business role is responsible. Factors that Influence the Relationship between Economic Theory and Practice In recent years, economic theory and practice has become highly socialized and legalized with increasing efforts to integrate technological advancements in the field of economics (Mankiw, 2011). Emerging trends such as the establishment of regional and local trade governing bodies influence the relationship between economic theory and practice. These organizations control trade on a local and regional basis thereby influencing the relation between economic theory and practice. For instance, in theory, market forces like demand and supply set the prices of commodities, but in practice, regional institutions set commodity prices and require all states within the region to abide by the established prices. At the center of the relationship between economic theory and practice, today, lies technological advances. As technology changes, so does the practice of economic undertakings (Anderson & Josling, 2007). Technology has simplified economic practices thereby altering the implementation of fundamental theories. Today, there are computer applications for everything from predictions of future economic events to short and long term performance predictions. Social influences on the relationship between economic theory and practice include shifts in individuals’ requirements and opportunities. For instance, in theory, demand and supply forces determine factors such as employee remuneration; however, shifting social trends such as increased educational attainments and qualifications change the process of employee remuneration. A person with a PhD and another person with high school qualifications have different remunerations regardless of the market forces that theoretically influence remuneration. References Anderson, K., & Josling, T. E. (2007). The WTO and agriculture. Journal of Agricultural Economics, 58(2), 384-387. Das, B. L. (1998). The WTO agreements: Deficiencies, imbalances and required changes. Penang, Malaysia: Third World Network. Das, B. L. (2002). Report on effects of removal of subsidies in Southern Africa. London: Oxfam. Diaz-Bonilla, C., & Morley, S. (2003). The effects of export-led growth on employment, poverty and inequality: The case of Mexico. Mexico: IFPRI. Giovanni, A., Bohman, M. E., Carter, C. A., & McCalla, A. F. (2007). Agricultural policy reform and the WTO: Where are we heading? Journal of Agricultural Economics, 58(1), 163-166. Lambert, D., & McKoy, S. (2009). Trade creation and diversion effects of preferential trade associations on agricultural and food trade. Journal of Agricultural Economics, 60(1), 17-39. Mankiw, G. N. (2011). Principles of economics (6th ed.). Ohio: South-Western College Publishing. Mazoyer, M., & Roudart, L. (2006). A history of world agriculture: From the Neolithic Age to the current crisis. New York: Monthly Review Press. OECD (2000). Agricultural policies in OECD countries: Monitoring and evaluation 2000. Paris: OECD Secretariat. Southgate, D. D., & Graham, D. H. (2006). World food economy. Ohio: Wiley-Blackwell. Swinbank, A. (2010). Agriculture and the WTO: Towards a new theory of international trade regulation. Journal of Agricultural Economics, 61(2), 447-448. Read More