World Trade Organization - Example

World Trade Organization Student’s name Course name and number Name of paper Instructor’s name Date submitted Introduction World Trade Organization is a body with an international recognition whose aim is ton help in the promotion of free trade through setting up the rules on how international trade is to be conducted. In its efforts to do this however, it has been mired in crisis and most times seen to be manipulated by the rich countries who have their interests first making World Trade Organization receive protests and much criticism. Some of the roles that the World Trade Organization is involved with are among them free trade agreements, organizing trade negotiations and settling of trade disputes between countries around the world. (Landsburg) The World Trade Organization decisions are absolute meaning that every member sate has to abide by the rules set by the WTO. For instance when the European Union gets into a stand off with the United States over a trade issue, WTO presides over the issue acting us the judge and the jury. The members of WTO are empowered by the organization to impose and enforce the trade sanctions against the countries that they believe breach the standing rules. The WTO is based in Geneva and it was set up in 1995 to replace General agreement on Tariffs and Trade (GATT) which had been formed in 1948 as an agreement to reduce customs tariffs. (Shah, 2002) Up to date, the membership of WTO stands at 153 member counties and it has Ministerial Conference is the highest body of WTO. In the course of carrying out its activities, WTO has been faced with various issues which have lead to serious criticism from the member states who have worried about the effects of economic globalization and free trade. Many have viewed World Trade Organization to be ignorant of the plight oft the developing world instead they view that the benefits of free trade continue to accrue on the developed countries in the most cases. (Bhagwat, 2008) Main Principles of World Trade Organization Non-Discrimination Both the national and the foreign companies as the national treatment implies that they should all be treated the same. According to the principle, it is regarded unfair to favor the domestic companies over the foreign companies. For the countries that have most favor treatment, under the World Trade Organization policy, all nations are required to give equal treat all the companies for the trade terms., trade concessions offered to one nation should be offered to another. (World Trade Organization, 2009) Transparency The World Trade Organization requires its members to do a publish of their trade rules and regulations in order to be able to maintain institutional administrative decisions that are affecting trade and in the process be able to respond to the requests by other members the information. This will help the other members to know the changes in the trade policies and to the World Trade Organization. The internal transparency gets supplementation from the country reports which are done through the Trade Policy Review Mechanism. The system also aims at improving the stability while discouraging quotas and other measures that are used to restrict trade or even limiting the quantities of imports. (Shah, 2002) Advantages and disadvantages of free trade Free Trade Free Trade is a trade policy system that allows traders to transact and act without the interference from the government. From the policy, the trading partners are permitted to get mutual gains from the trade of goods and services. Free trade takes place when the artificial barriers put in place by the various governments in countries around the world are not there to put a restriction to smooth flow of goods and services between nations in trade relationship. Some of the trade barriers like the tariffs and subsidies are put in by governments in order to offer protection to their domestic producers from international competition thus redirecting the trade rather than allowing the trade flow. There are two potential ways of understanding the benefits of free trade are through the theory of David Ricardo of comparative advantage and by doing the analysis of the impact on a tariff or import quota. (Landsburg) Using the demand and supply law in conducting a simple economic analysis and the effects of tax gives a clear picture of the benefits of the free trade. From the chart below, the effect of imposition of import tariff on good is analyzed. When tariffs are imposed, prices on goods around the world market and the domestic market are P (world). The increase for this reason increases the price in the domestic market; this in turn increases the production causing domestic consumption to decline. (Landsburg) Advantages of Free Trade From the theory of comparative advantage, having a specializing in goods in countries that have a lower opportunity cost will result to an increase economic welfare for all the countries involved in trade. On the other hand, free trade reduces Tariff barriers and leads to creation or growth of trade. From the above graph, we can learn that the removal of the tariffs will lead to consumers getting lower prices and one more thing that happens is that the surplus of the 1+2+3+4 increases therefore creating trade. The occurrence of trade creation happens when consumption of different goods switches to low cost producers from high cost producers. From the above imports are bound to increase from Q3-Q2 to Q4-Q1in the overall, economic welfare increases, the increase is of 2+4 (1+2+3+4 – (1+3) the extent at which the economic welfare increases is dependant on the elasticity of supply and demand. The demand elastic consumers will always have the greatest increase in the economic welfare. (Landsburg) Increased Exports Besides the benefits that accrue to t he consumers from importing goods, firms that export goods where for instance the UK has a comparative advantage acquire a great improvement in the economic welfare. Like in the UK, lower export tariffs will give it a higher quantity of exports and in the long run boost the jobs in the UK as well as foster economic growth. Increased Competition Domestic firms face more competition from the foreign firms with the increase in trade. This means that there will be more incentives to enable them cut the cost as they try to increase the efficiency. By so doing, the domestic firms will be prevented from enjoying the monopoly and the charge fee which they charge often too high. Foster economic growth Over the years, there has been a notable growth of about 7% in the world trade; this has been the main contributing factor to economic growth in various countries around the world. With Free Trade, people around the world are able to receive goods and services which they need for their development and because of the competition; they receive it at a cheaper price which checks the balance of the various sectors of their economy. Disadvantages of free trade Effect on infant industries In the developing world, industries that are new and are struggling against the international competition get hit by the policy since they find it hard to grow with the invasion of the domestic market by the foreign markets. With the trade barriers being removed, structural unemployment at this level may occur. Moreover, the free trade increases domestic instability all from the international cycles since most of the countries/ nations become more dependant on the global market. In times of recessions or financial crisis many countries have been seen to offer protection to their industries in such times. Since many developing countries have heavily relied on the production of the primary products, there are ve0rious disadvantages that are posed by the free trade when these countries produce agricultural products, these being; Price fluctuation due to the present environmental factors Elasticity of demand on goods and due to this the growth on the economy is usually minimal. Effect on the environment There is a school of thought that believes that free trade has great harm on the environment because the LDC may happen to use the natural reserves of the raw materials to be used as exports. And for the countries that have regulations on pollution control, may find imports finding their way in when the rules are lax and allow pollution. Bibliography Bhagwat, J. (2008). Free trade today, . Princeton: Princeton Univ. Press. Landsburg, S. E. Price Theory and Applications. In C. 8. Sixth Edition (Ed.). Shah, A. (2002, July 2). The WTO and Free Trade. Retrieved December 13, 2009, from global issues: http://www.globalissues.org/article/42/the-wto-and-free-trade World Trade Organization. (2009, July 21). Retrieved November 13, 2009, from global exchange: http://www.globalexchange.org/campaigns/wto/ Read More