World Trade Organisation - Benefits and Beneficiaries - Research Paper Example

1.0. INTRODUCTION Rapid changes have characterised the contemporary period (Suarez-Orozco & Qin- Hilliard, 2004; Coatsworth, 2004; Tucker, 2004; Malanczuk, 2007). Two of the most important drivers for this event are globalisation and the fast phase developments in computer and information technology (Soros, 2002; Calder & Watkins, 2008). Its influence spans in almost all human transactions and undertakings in the contemporary period. Globalisation has been understood in several ways (Suarez-Orozco & Qin- Hilliard, 2004). However, it is generally perceived as pertaining to the removal of trade barriers which, have allowed freer movements of goods, people, services, capital and even culture and national identity (Suarez-Orozco & Qin- Hilliard, 2004; Peet, 2004; Balakrishnan, 2003). On the other hand, continued progress in computer and information technology has dynamically transformed the role of information, its value and access to it. It has opened venue with which people across the globe communicates and become connected. In this regard, these two phenomena have created a smaller world. However, as physical boundaries become less important, an ensuing widening divide between developed and developing countries continues (Peet, 2004; Soros, 2002). In lieu with this, the research will be looking into one of the most valuable contemporary institution (Soros, 2002) which, is primarily established to help facilitate international trade – World Trade Organisation (WTO). WTO lays down the framework for international trade. As such, WTO opens the possibility of economic benefits that may be experienced at the grass roots level if it succeeds but the current failure in negotiations only benefitted those who are not in need of it. 1.1. AIMS OF THE RESEARCH The study intends to attain the following. First, it seeks to understand the nature and function of WTO in international trade. Second, it aims to know the economic benefits that accrue as a result of the trade negotiations in WTO. Third, it intends to identify the beneficiaries of the current WTO agreements. Finally, it intends to apprehend the role of economics in identifying and assessing the benefits’ and beneficiaries of WTO. 1.2. RESEARCH PROBLEM Recognising vital role of WTO in international trade, this research will be addressing the following questions 1. How we can identify and asses the economic benefits that might occur as a result of a successful conclusion to the current and recent trade negotiations at the WTO? 2. How can we use economics to identify the beneficiaries of the current failure to reach agreement? 1.3. SIGNIFICANCE OF THE STUDY Undeniably, through international trade consumers are currently enjoying array of commodities at low prices (Slavin, 1996). In the face of this truism, of freer trade transpiring around the globe, understanding the role of WTO becomes essential because WTO is an effective, strong and powerful institution that has successfully provided the link between the regime of international trade and reduce tariff and services, intellectual property, government procurement and aspects of investments (Guzman, 2004; Soros, 2002;Alvarez, 2002). Moreover, by looking into the principles that supports the very foundation of WTO, it will enable scholars and stakeholders to apprehend the resulting gap between the North and South. Finally, this study is important as it deals with one of the most important issue that permeates the contemporary human condition – international trade. 1.4. RESEARCH METHODOLOGY To address the questions of the study, a documentary research had been conducted. The electronic databases Academic Source Premier, Business Source Premier, Jstor, and Google Scholar had been searched using the combination of the following key terms: free trade, World Trade Organisation, globalization, GATT, international trade, liberalisation, mercantilism, and governance. Articles written only in English and published in journals from the period of 1995 – 2010 had been selected. Likewise, books and empirical studies had been included in the searched. Excluded in the selection were monographs, position papers, editorials and pamphlets. The reference list of the articles was searched to identify additional relevant publications. 1.5. STRUCTURE OF THE PAPER The paper will be divided in to four parts. The first is the introduction where the research questions, aims of the research, significance of the study, research methodology and the structure of the paper is presented. In the second part a discussion of the theories underlying international trade and the nature, functions and principles of World Trade Organisation will be presented. The rationale behind this part segment is to lay down the theories and principles that support the inception of WTO. The third part will be the presentation of the role economics as pertaining to the benefits and beneficiaries of current trade negotiations at the WTO. This section directly addresses the questions of the research. The last part of the research will be dealing with the conclusion of the research. In the end, it is the hope of the researcher that this study may contribute to the better understanding of WTO and its significant role in contemporary economics and in explicating the current human condition. 2.0. THEORIES OF INTERNATIONAL TRADE Plato’s The Republic stipulates that an individual person is not self-sufficient. In order to survive, an individual needs the help and cooperation of another human being to meet needs that will allow him to satisfy his basic needs and continue existing. This supposition recognises the truism that no human being, on his own, can satisfy all his needs and in the face of this reality is the fact that human interdependence is necessary for human existence. As such, Plato has suggested optimising efficiency; each individual will focus only in producing products resulting from their own specialised craft. Thus, a shoe maker will only produce shoes, a farmer farm produce, a carpenter the building of houses and a weaver clothes. These people, in turn, necessitate cooperation as they exchange their goods and exist. This Platonic discourse acknowledges three important attributes that can be used in describing human nature and the human condition respectively. Human beings by nature are not self-sufficient. However, each individual has special talent that can be optimised through specialisation which, means performing only that where one is best. On the other hand, plague by the reality of human inefficiency, the necessity of cooperation and the actuality of human interdependence characterise the human condition. This individual reality reflects the status of each individual nation-state and describes the circumstance representing the trading relation among nations. International trade is built on the supposition that countries trade and specialises in production (Slavin, 2000). This truth brings to fore the two basic theories supporting international trade – comparative advantage and absolute advantage (Slavin, 2000; Krugman & Obstfield, 2000; Kenwood & Lougheed, 1984). The law of comparative advantage states that “total output is greatest when each product is made by the country that has the lowest opportunity costs” (Slavin, 2000, p. 441). To better understand this law, take for example the production of cheese of Country X and wine of Country Y. Country X can produce Qx (20 gallons) per hour while it produces wine at Yx (7 gallons) per hour. If the two commodities are compared, more resources in terms of labour, costs, and capital are invested in production of wine yet the output is lower compared with the cheese production. On the other hand, Country Y produces cheese at the rate of Qy (6 gallons) per hour while it produces wine at Yy (20 gallons) per hour. Again, this shows that more wines are produced using the same amount of resources in the production of cheese. Following the law of comparative advantage, Country X has a comparative advantage in producing cheese over Country Y, while, Country Y has comparative advantage over Country X in producing wine. Note that both countries are capable of producing both commodities but, Country X’s cheese production and Country Y’s wine production are produced at the lowest possible costs. Fig 1 F T P F P* T* (A) HOME (B) FOREIGN SOURCE: Krugman & Obstfield, 2000 In figure 1, both figures show the advantage of trading wine and cheese between the two countries. The solid black lines possibilities in the market if both cheese and/or wine are produced locally while the blue lines refer to the changes in the market possibilities as the two countries trade the products where they have relative advantage. When trading ensues, more products are made available, increasing the range of sources, thereby, making the residents of both countries better off (Krugman & Obstfield, 2000). On the other hand, absolute advantage happens when only one of the trading partners has the lowest opportunity costs in production. A good example of absolute advantage is the trading of oil between U.S. and Saudi Arabia. Saudi Arabia is the major exporter of oil in the United States. She is earning billions of dollars every year with this export transaction as she produces oil at the lowest costs compared with the domestic costs of oil production in the U.S. Absolute advantage is not necessary in international trading (Krugman & Obstfield, 1997; Slavin, 1997). Comparative advantage highlights the fact that countries are interdependent and that no country on its own is self-sufficient (Krugman, 2002; Shaffer, 2000). For international trade to authentically ease the burden of the vast majority of people and to make life better by opening the array of choices to consumers, international cooperation is necessary for the benefits of international trade to be felt by the people. Recognising the significant role of international trade and its underlying principle, the following discussion will look into one of the most effective organisation that has been established for the primary purpose of linking nations together in international trade – World Trade Organisation. 2.1. WORLS TRADE ORGANISATION: ITS ORIGIN, FUNCTIONS AND PRINICPLES Following World War II, the world has learned the importance of establishing global institutions that foster and act as vanguard of humanity against atrocities (Peet, 2004; Soros, 2001; Hoekman, 2004). In this regard, many international and global organizations have been established during that period. One of which is the General Agreement on Tariff and Trade, more popularly known as GATT. The inception of GATT is based on the premise that a freer trade existing among nations may encourage not only economic growth among the contracting countries but, it will also promote peace among nations (Bhagwati, 2005). During its establishment in 1947, initially, there were 23 member countries. GATT was limited only to tariff agreements among nations (Hoekman, 2004). However, as levels of tariff continue to decrease, GATT started to focus on non-tariff trade policies and local and domestic policies that have effects on trade relations. Moreover, GATT is a flexible institution that has an ‘opt-out policy’ which, means that a signatory country can opt out on specific disciplines if it deems that it counters certain national, economic, or cultural values (Hoekman, 2004). This is an important facet of GATT. Since, it presents the idea that GATT is basically a bargaining institution wherein parties can have the chance to opt out. Despite this ‘policy’, as of 2001, from 23 countries in 1947, there are now 144 country members. The origins of WTO are intertwined with that of GATT. Although both are concern with international trade, World Trade Organisation has been established only in 1995 and it differs in important aspect from that of GATT – disputes settlement system. Under WTO, all rules apply to all the members and all are subject to binding dispute settlements (Hoekman, 2004). This is an important change in the rules since it can bring variegated interests in the international arena but, at the same time, it is a cause of concern to countries who have to respond to domestic pressures as they try to address issues of market failure (Hoekman, 2004). However, what is significant is that under WTO trade disparities among nations can be litigated for governments can file legal claims. As such, WTO becomes an arena that has been opened wherein countries aggrieved by trade may find recourse (Bhagwati, 2005). The main function of WTO is that it serves as a forum for “international cooperation on trade related policies – the creation of the code of conduct for member governments” (Hoekman, 2004, pp. 41 – 42). These codes emerge from the trade policies that have been exchange during negotiations. Furthermore, the codes of conduct are integral in international trade precisely because trade among countries is trade in market access which is basically a barter market (Hoekman, 2004). As such, in this condition codes of conduct have been created in order to protect contracting country parties. In this regard, WTO contains specific legal obligations regulating trading policies and relations among nations and these are embodied in General Agreement on Tariff and Trade (GATT), the General Agreement on Trade and Services (GATS) and the Trade-Related Aspects of Intellectual Property Rights (TRIPS). In this regard, it can be impugned that WTO as a forum or an arena, does not chart or determine the outcome of the trading relations among the countries. It provides the framework with which trading will be conducted. It does not define the outcome. As WTO regulates trading policies among nations, it is guided by five basic principles. These are non-discrimination, reciprocity, binding and enforceable commitments, transparency and safety valves. Non-discrimination has two major components – the most-favoured-nation (MFN) rule and the national treatment principle. MFN rule stipulates that “that a product made in one member country be treated no less favorably than a “like” (very similar) good that originates in any other country. Thus, if the best treatment granted a trading partner supplying a specific product is a 5 percent tariff, this rate must be applied immediately and unconditionally to imports of this good originating in all WTO members”(Hoekman, 2004,p. 42). On the other hand, the national treatment principle states that “that foreign goods, once they have satisfied whatever border measures are applied, be treated no less favourably, in terms of internal (indirect) taxation than like or directly competitive domestically produced goods” (Hoekman, 2004,p. 42). Reciprocity, on the other hand, is the foundation of the entire process of negotiations. This lays down assumption that gains derived from the bilateral trade will be experienced by both contracting country parties and that this gain is better if compared with a unilateral trade. However, it should be noted that reciprocity is driven not only by economic relations among nations but is also driven by political- economy literature (Finger & Winters, 2004). Binding and enforceable commitments principle stipulates that the agreement entered into by contracting countries are implemented and maintained. The rationale behind this principle is that the agreement will mean nothing if countries who are signatories of teh agreement will not follow the stipulated agreement and disregard the rules and trading policies (Bagwell & Staiger, 2001). Furthermore, what makes this principle balance is that it provides the arena wherein countries that are aggrieved or a country who believes that there is an imbalance in the trade has recourse in WTO. The principle of transparency, on the other hand, serves as the pillar of WTO since this principle allows for exchange of necessary information among countries. This is a vital in the continued trade because it is through transparency that real data are acquired and the dynamics of the trade is maintained. In fact “WTO members are required to publish their trade regulations, to establish and maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO” (Hoekman, 2004, p. 44). Aside from the domestic parameters set by the government, surveillance conducted by citizens, partner countries and other international institutions is also encouraged as it deters divergence or non-fulfilment of the trading policies. Furthermore, an important facet of transparency is that it allows stake holders the chance to evaluate the trading relations and policies that are undertaken by their government. In this way, the principle of transparency empowers the civil society. The last principle is safety valves. This principle allows for governmental restrictions in trade on certain conditions. These conditions are “a) articles allowing for the use of trade measures to attain noneconomic objectives; (b) articles aimed at ensuring “fair competition”; and (c) provisions permitting intervention in trade for economic reasons” (Hoekman, 2001;2004). The discussion regarding WTO presents the reality that in the contemporary period, international trade has become the norm. It opens the actuality that people and governments around the globe stand from benefitting from the global transactions that are happening. Furthermore, as WTO becomes the venue wherein governments can enter in to contract with other member countries and under the principles of liberalisation of the market, lesser governmental intervention, and free trade creates a web of possibilities and opportunities both for the home country and the partner country is created(Killion, 2003; Chakraborty & Basu, 2002; Helleiner, 2003; Balakrishnan, 2003). In this condition, it is important that identification and assessment of benefits of becoming a member of WTO is crucial enticing countries to participate in the global market. 3.0. THE ECONOMIC BENEFITS: IDENTIFICATION AND ASSESSMENT Several benefits might have accrued as a result of the possibility of a success of current negotiation in WTO. These benefits are: 1. An increase in international trade opens the market and allows people to gain access of commodities that are not made available to them if the market embraced the protectionist policy. The reality of the increase of global exports attest to the truism that the world through WTO have gained access to commodities allowing consumers to have the freedom to choose among the array of commodities that the global market has opened (Slavin, 1997; Krugman & Obstfield, 1997; Subraminian & Wei, 2006). Fig 1. SOURCE: www.wto.org. Figure one shows that all segments of the world are now involved exports. Of course, it should not be discounted that there are still countries that have not yet opened their market to free trade and still embrace the protectionist policy. However, as no individual is self-sufficient so is true with countries. Thus, even North Korea has China for her trading partner. In this sense, the reality of commodities that are made from other countries are now a common presence in domestic market of many countries. Furthermore, global trading is no longer limited to some commodities. Figure 2 SOURCE: www.wto.org This figure shows that all kinds of products are now being exported around the globe. Although in the figure it is noticeable that there is a decline in exports in all products – agricultural, fuel and mining and manufactures. This can be attributed to the global slump that started during 2007. However, what is being highlighted in this figure is the fact that in the past decade all kinds of products in one way or another are being exported. In this regard, the opening of the global market has created a larger market with an array of commodities increasing consumers’ power of choice and influencing the kind of life style that they may have (Slavin, 1997). 2. The second benefit that may have resulted is an increase in foreign direct investments. Foreign direct investments, is defined, as “an activity in which an investor resident of one country obtains a lasting interest in and a significant influence in the management of an entity resident in another country. This may involved either creating an entirely new enterprise, or more typically, changing the ownership of an existing enterprise” (Gupta & Gupta 2008, p 614). A good example of this reality is perceptible in the rise of China since she opened her door to foreign trade. Figure 3 FDI in China, 1984 -2007 SOURCE: Lau & Burton, 2008 Figure 1 shows how in just the span of twenty – three years China has become one of the favourite local country of foreign investors. Foreign direct investments have become one of the most important drivers of the economic success of China. Yao (2006) claims that ““The empirical results show that both exports and FDI have made a positive and significant contribution to economic growth in the Chinese regions… They suggest that economic development, exports and FDI appear to be mutually reinforcing under the open-door policy.” (p 339,340). In another study, Haddad (2007) states that “China is now the sixth largest economy in the world and the third largest in trade (behind the United States and Germany). Its exports have grown even more rapidly than its economy, at rates exceeding 20 percent per year. As a result, China’s share of world trade has increased from less than 1 percent two decades ago to 6 percent today. Between 1990 and 2002, its market shares more than tripled in Japan (from 5 percent to 18 percent) and rose from 3 percent to 11 percent in the United States and from 2 percent to 7 percent in the European Union.” (p 18). All of these happen because China captures and has capitalised well on the foreign direct investments that have flooded her doors since the time that she opened her market to international trade. 3. Directly link with foreign direct investments are technological spillovers from developed countries to developing countries. It is recognised that FDI “triggers technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use” (OECD 2002, p 5). These scenarios are not just rhetoric but are concrete realities that are experienced by host countries of FDIs. These attributes bring to reality the theory that the economic benefits derived form fdi is aligned to the economic development pursued by the country. It contributes to the modernisation efforts of governments and creates the possibility for global share in the market. All of these are turned into actuality because fdi “(a) Increasing financial resources for development; (b) boosting export competitiveness; (c) generating employment and strengthening the skills base; (d) protecting the environment and social responsibility; and (e) enhancing technological capabilities (transfer, diffusion and generation of technology). Technology transfer operates via four related channels: (i) vertical (backward and forward) linkages with suppliers or purchasers in the host countries; (ii) horizontal linkages with competing or complementary companies in the same industry; (iii) migration skilled labour; and (iv) the internationalization of R&D” (OECD 2002, Chapter 1). India provides a very good example of technological development out from technological spillover. India’s software and hardware experts have turned the industry into one of the most lucrative industry of India with IT comprising“25 % of India’s export and that it has achieved a sustained annual increase of 56% in the last years” (Arora et al 2002; Arora & Athreye 2001; Nasscom 2007). 4. Another benefit gained from the success of WTO is that it reduces poverty (Menon & Sanyal, 2007) and creates a wider base of middle class which is good not only for the economic stature of the country but also for the development of democracy (Jenkins, 2004). This is significant change since a stronger and stable middle class not only pumps up the economy but it stabilises the economic structure. It is projected that by 2020, 700 million Chinese will have the stature of a middle class (Euromonitor, 2008). In the same manner, in India, there is a decrease in the number of people who are living below poverty (Menon & Sanyal, 2007).This development leads to the fifth benefit. 5. Following the decrease in number of people living in poverty and an increase in the number of a stable middle class, the protection of the environment gains ground in developing countries (www.wto.org). The ‘environmental Kuznet curve’ stipulates that “once a certain income threshold has been crossed do further increases in per capita income lead to gains in environmental quality” (Trade and Climate Change, 2009, p 52). Although it is recognised that before the onset of economic stability, there is an experience of environmental degradation due to pursuit of modernisation (Trade and Climate Change, 2009). However, with the increase in income, comes the preference of consumers for products that environmentally friendly. Products are becoming climate friendly and are sold cheaper because of the global market (Trade and Climate Change, 2009). These economic benefits experienced by countries as a result of their joining WTO are really happening. Being such, if the current rounds of negotiations in WTO are successful, one can just imagine the extent of the possible economic gains that people from the lowest economic strata from developing countries may possibly experience. WTO does not claim to be the panacea for all the ills of the world. It attempts to address the basic human problem that hounds contemporary human condition and in this regard the efforts of WTO are laudable (Bhagwatti, 2005; Subramanian & Wei, 2006). In fact Soros (2002) says “...it is so important to establish general rules by which all parties abide, and that is what the WTO has accomplished. This makes the WTO a very valuable institution. If it didn’t exist, it has to be invented” (p. 31). Acknowledging that there are gains from participating in WTO, the most important question should be asked “who are the beneficiaries of the current failure in negotiation rounds? 4.0. THE BENEFICIARIES In addressing this segment of the study, the researcher will be showing who are not benefitting from it and hopefully from there deduced the beneficiaries of the failure. FIG 4 This figure shows the stark reality that 80% of the global population are living below $10 dollars a day income (Shaouhou & Ravillion, 2008). Moreover, according to UNICEF, 22000 children die each day and And they “die quietly in some of the poorest villages on earth, far removed from the scrutiny and the conscience of the world. Being meek and weak in life makes these dying multitudes even more invisible in death.” (www.globalissues.com). Furthermore, “Infectious diseases continue to blight the lives of the poor across the world. An estimated 40 million people are living with HIV/AIDS, with 3 million deaths in 2004. Every year there are 350–500 million cases of malaria, with 1 million fatalities: Africa accounts for 90 percent of malarial deaths and African children account for over 80 percent of malaria victims worldwide” (Human Development Report, 2007, p 25) What is more, Water problems affect half of humanity: Some 1.1 billion people in developing countries have inadequate access to water, and 2.6 billion lack basic sanitation. Almost two in three people lacking access to clean water survive on less than $2 a day, with one in three living on less than $1 a day. More than 660 million people without sanitation live on less than $2 a day, and more than 385 million on less than $1 a day. Access to piped water into the household averages about 85% for the wealthiest 20% of the population, compared with 25% for the poorest 20%. 1.8 billion people who have access to a water source within 1 kilometre, but not in their house or yard, consume around 20 litres per day. In the United Kingdom the average person uses more than 50 litres of water a day flushing toilets (where average daily water usage is about 150 liters a day. The highest average water use in the world is in the US, at 600 liters day.) Some 1.8 million child deaths each year as a result of diarrhoea The loss of 443 million school days each year from water-related illness. Close to half of all people in developing countries suffering at any given time from a health problem caused by water and sanitation deficits. Millions of women spending several hours a day collecting water. To these human costs can be added the massive economic waste associated with the water and sanitation deficit.… The costs associated with health spending, productivity losses and labour diversions … are greatest in some of the poorest countries. Sub-Saharan Africa loses about 5% of GDP, or some $28.4 billion annually, a figure that exceeds total aid flows and debt relief to the region in 2003. SOURCE: United Nations Human Development Report, 2006. On the other hand, Fig 5 The figure shows that in 2005, the wealthiest 20% of the world accounted for 76.6% of total private consumption. The poorest fifth just 1.5% World gross domestic product (world population approximately 6.5 billion) in 2006 was $48.2 trillion in 2006. The world’s wealthiest countries (approximately 1 billion people) accounted for $36.6 trillion dollars (76%). The world’s billionaires — just 497 people (approximately 0.000008% of the world’s population) — were worth $3.5 trillion (over 7% of world GDP). Low income countries (2.4 billion people) accounted for just $1.6 trillion of GDP (3.3%) Middle income countries (3 billion people) made up the rest of GDP at just over $10 trillion (20.7%) SOURCE: Kroll & Fass, 2007 These facts are only some of the many data regarding the widening gap between the rich and the poor. It seems that the beneficiaries of the failure are the world’s richest 20% who consume 76.6% products and resources. 5.0. CONCLUSION WTO is an institution that is established for the primary purpose of facilitating international trade. This is necessary as international trade has become one of the most dynamic human transactions undertaken in the contemporary period. Moreover, humanity under the age of WTO has experienced economic benefits like a global market that has an array of commodities empowering consumers with the power of choice, technology spillovers, foreign direct investments that have helped countries’ economies attain success, has developed a wider middle class and has started the inception of people who have become conscious of their responsibility towards the environment. However, who are the beneficiaries? 80% of the world’s population live under $10 income a day while world’s billionaires – just 497 people is worth $3.5 trillion. WTO is not the panacea for all human ills. But if it succeeds, it can alleviate and narrow the gap, the divide between the rich and the poor in a society and the North –South divide in the world. REFERENCES: Arora, A, Arunachalam, VS, Asundi, J & Fernandes, R 2001, ‘The Indian Software Services Industry’, Research Policy, 30, pp. 1267-1287. 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