Fundamental Principles That Govern the Roles of World Trade Organization - Essay Example

Developments in European and Pacific Rim Trade Evaluate and outline the fundamental principles that govern the roles of World Trade Organization. Discuss the effects of these trade principles on trade relations between china and the European Union. Support your analysis with reference to specific examples. The World Trade Organization (WTO) has five major fundamental principles which should guide all trades made by its members: Trading without Discrimination The first fundamental principle is divided into two parts: the most favored nation: treating other people equally which states that countries members of WTO can not normally discriminate between their trading partners, give special advantages to some partners and do act in the same way to all partners. However we there can be several exceptions to this first rule - which is the first article of the General Agreements on Tariffs and Trade (GATT) - such as for example giving developing countries special access to a market or raising barriers against products being produced unfairly in other countries. The second part is the National treatment: treating foreigners and locals equally meaning that locally-produced goods should be treated equally when compared to imported goods once the imported goods have entered the national market. The same thing has also to be applied for services, trademarks, copyrights and patents. Freer Trade: gradually through negotiations The second principle of WTO favors the lowering of trade barriers meaning customs duties and tariffs and measures such as import bans or quotas that restrict quantities selectively. Since the creation of the GATT, there have been eight rounds of trade negotiations to progressively abolish these barriers, the undergoing ninth round being the Doha Development Agenda. Predictability through binding and transparency The predictability of international trade will guarantee a continuous stability. Therefore WTO encourages its members not only to lower trade barriers but also not to raise new barriers. When a country opens its market for products or services, it is considered as binding its commitment. However a country can change its bindings but only after a round of negotiation. Promoting fair competition With this principle WTO insists on the point that the organization is not aimed to ultimately establish free trade. WTO allows tariffs and some form of protectionism. Its true aim is to establish an environment with the help of specific rules to favor fair trade. These rules are for example the rule of most favored nation, national treatment or rules on dumping and subsidies. Encouraging development and economic reform Finally, WTO's last principle encourages development through flexibility for developing countries to implement WTO rules and special assistance and trade concessions in favor of these developing countries. (World Trade Organization, Principles of the Trading System) However as much as we can consider these principles being the best ground for efficient and fair trade, the reality is otherwise as we can see through the example of the Multi Fibre Agreement On January 1st, 2005, the Multi Fibre Agreement (MFA) expired. The MFA was a measure taken regarding the world trade of textiles and garment from 1974 to 2004 which imposed quotas on the amount that developing countries could export to developed countries. The WTO admitted that the MFA was a special regime outside the GATT rules and that WTO members have committed to remove those quotas by 1st January 2005 When the quotas from a country like China was reached, importers turned to less competitive suppliers located in countries that had spare export quotas and whose only advantage was low wage. Today, the less competitive developing countries are not called as back up because countries willing to import textile can only be supplied by one and only exporter, the most competitive: China. The importance of China in the textile market has not its boundaries set within developing countries. Since the beginning of 2005, imports of textile from China have exploded forcing Northern countries to take counter measures. The answers varied from countries to others. Foreseeing the predictable issues linked to the liberalization of the textile market, the United States implemented a product-specific safeguard mechanism that allows WTO members to restrict temporarily growth in specific textile and apparel imports from China through 2008 which was agreed when China joined the WTO in 2001. (CSIS, New Era Opens in Global Textile and Apparel Trade). This safeguard imposes quotas on 7 categories of Chinese textile production and limit to 7.5% annual growth of imports in each restricted categories. The European Union (EU) on the other side did not want to adopt such severe measures and preferred bilateral negotiations with China. The precautious steps taken by the EU have certainly caused the situation that the member countries have faced throughout the year and led to a crisis during the summer. This dramatic situation for the European Union textile sector, led in May 2005 to an EU proposition of WTO consultation with China on different textile categories. The WTO did not have to intervene because China sought an agreement with EU members which led to the signing of an Agreement in Shanghai last June. This Agreement defined new quotas over the increase of importation from China to EU for the years to come. Chinese exportations should only be increased by a minimum of 8.5% and a maximum of 12% per year until the end of 2007. (Commission and China patch together textile quota deal, Euractiv). In the meantime 80 Million Chinese textile items were shipped before these new quotas were decided and were blocked at different ports in the European Union and led to another crisis. The items remained blocked for three months before the EU and China could reach an agreement. Finally, in September during the annual EU-China summit, both parties found a solution to this issue: half of the 80 Million items should enter the European Union without a license and the other half should be considered as a part of the 2006 quotas. So, why did the European Union allow that a certain amount of items would enter the market The reason is simple: international trade. The European Union with the dismantling of the Multi Fibre Agreement is forced to accept the "invasion" of textile from developing countries and comply with the rules of trade of the WTO. However the European Union is not forced to accept the destruction of its textile market without reacting. That is the reason why the EU asked for WTO consultation on Chinese product categories. Though the EU asked for the help of the organization, the matter was finally solved by an agreement between China and EU members. Again, we could ask ourselves why. To answer this question, we have to go back to David Ricardo once again and talk about competitive advantage. International trade is not unilateral. It is not only China that exports goods to the EU, but also the EU that exports to China. In consequence, even if it is a crucial matter for the EU to preserve its textile industry and market, the members also considered that the EU has other competitive advantages, different from China's. The EU has an economic interest in keeping China as an importer of products of different sectors. On the other hand, China decided to apply an export tariff on its textile sector to keep a good trading relation with the EU. The different measures taken by the EU and China shall be considered in terms of aggregate demand and supply to fully understand whether or not they are efficient.First of all, it may seems that regarding the quotas, the European Union may have adopted the notion of First-Come, First-Served which may lead, during the year to a fluctuation of the price and consequently the European textile sector could regain its losses during the year. (International Trade Theory & Policy, Steven Suravonic ) When measures such as quotas are taken, it has several effects on different actors of the economy such as the consumer the producer and on the welfare of the nations implied and the world welfare. In this case the Europe Union will cause a decrease of its consumer surplus but will on the other hand increase the producers' surplus and the National Welfare. However the country that suffers from the quotas will see its consumer surplus increase, because of the availability of the products in the domestic market, but will suffer from a decrease in national welfare and producer surplus. The sum of the increases and decreases will ultimately lead to a decrease of the World welfare. (ibid) Consequently the EU by using quotas will have increased the producer surplus because the price of textile inside the protectionist system would increase, and the Union welfare while scarifying the consumer surplus which is a consequence of the increase of the prices of domestic and imported textile within the Union members. This increase of the price of textile from the domestic market and imported is a consequence of the quotas. The quota will restrict the entering of textile from China causing a supply of textile not sufficient to the demand of the market. This will lead to an increase in the price of textile which will reduce demand. This will ultimately lead to a decrease of the domestic production in textile, going against the role of the protectionist measure. Assess the impact of the revaluation of the Yuan on the volume of trade between China and the United Kingdom. First, it is important to understand the reasons why China needed to have the yuan revaluated. China's currency has been fixed at 8.28 yuan to the US dollar for 10 years. However since China joined the World Trade Organization in 2001, there was a constant pressure from many of the WTO members to break that link binding the yuan and the US dollar. In direct relationship with the fundamental principles listed above, The United States, in particular, has been worried that China's cheap currency gives it an unfair advantage as it sells its goods to Western consumers. With a total trade volume at 7.87 billion U.S. dollars, the U.K. is China's second largest trading partner in the EU. The revaluation of the yuan will be a slight relief for the United Kingdom as they will not have to press for any further protectionist measures as direct consequence to the revaluation there will a slowing of the growth of exports from China, a move for manufacturers and workers who fear the competition from China to hold slightly back. Hu Jintao during a meeting with Deputy UK Prime Minister Prescott and Chinese and UK business representatives, Hu made positive comments on the important role played by these two institutions in promoting development of bilateral economic and trade relations. Hu pointed out that the bilateral economic and trade relations have witnessed rapid progress and the bilateral trade volume increased by over 60 times from 320 million US dollars when both sides established diplomatic ties to 19.7 billion US dollars last year. We can also asses that with the revaluation of the yuan, there could be a decrease of imported Chinese goods in the United Kingdom, a slightly more important exportation towards China as Chinese purchase power would reveal a little bit higher but we can also see another trend in Chinese Investment in the United Kingdom. The amount of Chinese investment in the U.K. jumped by 61% in 2004-2005 period, according to the latest report by the UK Trade & Investment (UKTI). The number of projects financed by Chinese capital increased from 23 to 37 over the past year but such projects were numbered only 11 in 2000-2001, according to the report. The hectic growth was attributed to the accelerated internationalization of the operations by Chinese enterprises and strong economic growth of China. We can therefore forecast that these Chinese investments will continue to grow thanks to the revaluation of the yuan. Work Cited Page CSIS, New Era Opens in Global Textile and Apparel Trade http://www.globalization101.org/news.aspNEWS_ID=78 EurActiv.com (October 10, 2005) Commission and China patch together textile quota dea.l http://www.euractiv.com/Article_lang=EN&tcmuri=tcm:29-143863-16&type=News Jonquires, G. de (April 18, 2005) Facing facts on China trade Financial Times Lim, Linda (February 21, 2005) China Shows the way in a Quota Free Market, Yaleonline, http://yaleglobal.yale.edu/display.articleid=5310 OECD Observer (2004) A New World Map In Textiles and Clothing http://www.oecd.org/dataoecd/43/14/33824605.pdf Ricardo, D. (1817) On the Principles of Political Economy and Taxation Suranovic, S.M. (1997-2004) International Trade Theory & Policy The Economist (August 27, 2005) Knickers in a twist World Trade Organization, Textile Monitoring Body the Agreements on Textiles and Clothing: http://www.wto.org/english/tratop_e/texti_e/texintro_e.htm World Trade Organization, Principles of the Trading System: http://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm Read More