The World Trade Organization - Essay Example

Table of Contents 0 The World Trade Organization 1 Principles 2 Member Countries 2.0 Free Trade Downside and Protectionism 3.0 World Governments Trade Policies and Trade Barriers 4.0 Free Trade Pro’s and Con’s 5.0 Conclusion 6.0 References The World Trade Organization The World Trade Organization (WTO) is an international organization that strives to promote smooth and virtually free trade. Free trade allows for the free flow of goods and services to permeate all aspects of contemporary life such as being able to buy cheap products from China, consume quality rice from Vietnam, enjoy fine wine from Italy, and even listen to indie music from India. The WTO came into being in 1995, following its predecessor, the General Agreement on Tariffs and Trade (GATT). GATT was created during World War II and established the policies the WTO follows today. GATT held rounds—a series of trade negotiations—which ultimately developed the system. The final round, the 1986-94 Uruguay Round, gave birth to the WTO. In 1997, 69 governments agreed to liberalize trading policies. The turn-out was greater than that of the 1986–1994 Uruguay Round. The World Trade Organization Principles The principles of the WTO trading system are based on trade without discrimination, free trade, predictability, promotion of fair competition, and encouraging economic development and reform. The most-favored-nation (MFN) is required to treat other nations and peoples equally. If the MFN treats one nation a certain way, it must treat all of the WTO nations the same. This applies to all other WTO members. WTO Member Countries Two-thirds of the WTO’s members are developing countries. The developing countries play important roles within the WTO. The developing countries need trade in order to develop and their importance in the global economy is increasing. Their roles in the WTO are important but the WTO understands the situations of developing countries. The less-developed countries are given “special treatment”. Developing countries are given extra time to meet their WTO agreements, provisions which aid in the development of the least-developed countries, and to protect the developing country’s interests. Free Trade Downside and Protectionism Unfortunately, free trade has another side of the coin that less developed countries often experience: unfair competition. Since the advent of free trade, cheap imported goods flooded the market, which pose as a threat to a small industry in a country. Thus, trade barrier becomes for some less developed countries. There are three valid reasons why countries must impose trade barriers: 1) to generate revenue for the government, 2) shield domestic producers from foreign competition, and 3) protect an underdeveloped sector of the economy. Indeed, the word “protectionism” is commonly used as an argument by countries when imposing trade barriers. However, a more malevolent consequence of free trade is dumping. Dumping is a type of pricing policy which is viewed as predatory since it means selling at less than “fair value”. Developed countries have also resorted to protectionism in order to protect their domestic industry. In the case of the European Union (EU), the European Council through the Directorate General trade investigates cases of dumping. In cases where violations have been found, a level of tariff is set depending on the injury caused by dumping. The imposition of tariff is actually a trade barrier, so when there is tariff, there is a certain level of security measure against unfair trade practice. World Governments Trade Policies and Trade Barriers Governments have different trade policies. Some policies will make exporting hard for other governments. The purpose of the WTO is to create an easier trade system. Governments gather together to sort out problems to find a neutral solution which benefits all governments and promotes a smooth-running trade system. The WTO is aware of the need for barriers in trade policies. Even progressive countries such as the United States strictly monitor their trade regulations. According to Kaempfer, Tower, and Thomas (2002), the Unites States is vigilant in protecting its own trade by constantly monitoring imports that are priced unfairly through its two watchdogs: U.S. International Trade Commission and the U.S. Department of Commerce.1 Another sound argument for imposing trade barriers is that a country’s industry is the source of its revenue especially for underdeveloped countries like the Philippines. Tax is the lifeblood of the government. Without it, the government cannot deliver services to its people. In free trade, all tariffs are removed thereby there is a big loss in income for a country. According to the website of NEDA (National Economic Development Authority), the Philippines’ Bureau of Customs alone loses P180 billion annually as a result of its free trade agreements. In order to minimize the impact of the imported goods, the country chooses to impose higher tariff on alcohol and liquor so that the domestic producers of such will be protected especially if that industry is not yet fully developed. In fact, efficient taxation is a major fiscal policy of the Philippine government in order to minimize its fiscal deficit. Another reason why countries must impose trade barriers is that underdeveloped or developing countries may have sectors like agriculture that will need protection. Countries dependent on agriculture like the Philippines will not only suffer from loss of revenue but also in terms of poverty reduction due to free trade. An interesting study was made by a group of researchers to forecast the effect of full trade liberalization to the Philippines. In Appendix A, a Table illustrates the simulation of different trade agreements effect on poverty levels in the Philippines. Studies made by Cororaton et.al (2005) supports that the effect of full trade liberalization would cause a decline in the headcount index by -0.02 percent, however, this would also result into a more severe poverty gap. Furthermore, the researchers argued that although urban poverty would decline, rural poverty would increase since rural income is tied to agriculture.2 The full effect of free trade is felt by the agriculture sector since it favors non-agricultural sectors in the Philippine setting. With the help of the Doha Agenda negotiations, less developed countries gain export opportunities. They gain a reformed agricultural trade system, they gain productiveness in their businesses, their customs duties are becoming few, and they are erasing restrictions on certain goods. The WTO raises global demand of these countries’ services. Free Trade Pro’s and Con’s However, free trade has its advantages and disadvantages. The benefits include “the theory of comparative advantage.” The theory states that specializing goods in a poor country benefits all countries. It reduces the tariff barriers and leads to the creation of trades. It creates competition. Free trade increases exports, and creates use for raw materials. The dissipation of trading tariffs may increase efficiency in work. On the downside of free trade, new businesses will have to immediately compete on the global scale. They can be successful if they have invested in the industry. Inefficient businesses need money to become efficient. Protectionism can be just an excuse to preserve inefficient companies. Agricultural investments can be damaging to a country’s economy due to natural changes and occurrences. This causes prices to fluctuate. Exports raise money for the exporting country but the amount of money the government makes is low. There are also environmental and cultural issues that cause negativity. Pollution and a loss of cultural identity impose a threat to many developing countries. The goal of the WTO is to “improve the welfare of the peoples of member countries.”3 The WTO is doing a good job as it steps towards this goal. The worth of the least-developed countries in the WTO is growing in the global economy and the countries themselves are becoming more efficient. The WTO plays an important role in the global economy for it gives worth to lesser countries and establishes a strong and efficient trade system. CONCLUSION Although free trade benefits the general society, mostly consumers, there are still sectors that will be severely affected. The imposition of trade barriers is a safeguarding mechanism to protect these sectors. Also, trade barriers help generate revenue collections for the government in form of tariffs and duties. Although developed countries can gain more benefits through free trade agreements, poorer countries would not be able to compete and even experience higher incidence of poverty as in the case of Philippines. In this manner, free trade would counteract human development in the name of economic progress. References Cororaton, C.,Cockburn J., Corong , E.( July 2002) DOHA Scenarios, Trade Reforms and Poverty in the Philippines: A CGE analysis. International Food Policy Research Institute .Retrieved on March 15, 2009 from http://www.ifpri.org /divs/mtid /dp/papers/mtidp86.pdf \ Economics Help .Retrieved from: http://www.economicshelp.org/2007/06/advantages-and-disadvantages-of-wto.html Kaempfer ,William H. and Tower, Edward. Willett Thomas D. (2005 )Trade Protectionism for the Encyclopedia of Public Choice. Retrieved on Nov 16,2009 from http:// www.econ .duke.edu /Papers /Other/Tower/Protectionism.pdf. National Economic Development Authority. Retrieved from http://neda.gov.ph. on Nov 20 2009. World Trade Organization. Retrieved from http://www.wto.org/ on Nov 13 2009 Read More