Trade Liberalization and Global Governance by the World Trade Organisation - Coursework Example

International Business Management Globalisation has resulted in the transformation of the way in which international trade is governed and the manner in which governments can control trade across their borders. Trade liberalisation and the World Trade Organisation accords have meant that it is increasingly becoming more difficult for national governments to impose tariffs on trade in order to assist domestic industry and to control the domestic market. Trade liberalisation has also meant that markets around the world have become more competitive and industries have to compete on efficiencies, modern methods of production, sound management and the utilisation as well as the development of skills. Governments, therefore, have to use more sophisticated means of extending assistance to the domestic industry and such assistance is required to produce results in the form of a viable industry because it is unfair to the national taxpayer or the consumer to continue to suffer if domestic industry cannot compete at least in the domestic market, if not the global markets. Although there are provisions in the WTO Safeguards Agreements which, because of their broad language, may be used by a national government to impose tariffs if the domestic industry is likely to suffer serious injury, such loopholes are likely to become more difficult to use in the future because of new consensus that is already emerging to close them. Hence, national governments have to assist domestic industry by providing direct and indirect subsidies through management assistance, export assistance, skills development, assistance with research & development as well as information gathering and dissemination. Governments have to do much more then merely enacting legislation if a nation is to continue to have a viable domestic industry. This brief essay takes a look at what a national government can do in order to assist domestic industry in the era of trade liberalisation. Introduction In an era of international trade liberalisation, there is intense market competition for goods and services because manufacturers and service providers from all over the world try to sell their manufactured products and services in a national market. As a result of the global movement towards trade liberalisation, nations are required to progressively reduce their tariffs to permit market access to producers and suppliers from all over the world. Such access means that the domestic industry is required to compete with the products and services of international manufacturers and service providers on quality, price and availability. National competitive advantages such as cheap or skilled labour, availability of cheap raw materials or traditions of excellence in design can enable international suppliers to provide better products or services then can be provided by the domestic industry. International competition can, therefore, threaten the viability of domestic industry which may have been viable without such an economic competition (Chan, 2002, Ch. 1 – 5), (Breslin, 2002, Ch. 1), (Casey, 2003, Complete) and (Globalization 101.org, 2000, Complete). Domestic government, on the other hand, may decide to support and shield an industry from such an onslaught in an attempt to give it time to modernise and become more competitive because the livelihood of many of its citizens depends on the industry or perhaps because there is a possibility that such an industry can become competitive and viable in the long term. International producers may also try to act unfairly and dump their products on the local market at lower prices then the cost of production in an attempt to capture the local market and drive out other competitors. In such a situation, there are remedies available to the domestic government to take action in the World Trade Organisation and impose domestic import duties on the overseas producers who may have been dumping their products in the local market. The decision to impose dumping duties is usually taken after a petition is received from the local industry which is being affected by the dumping action, or it can be the result of the home government’s own investigations. However, this is a situation in which adverse trading practices are being followed by a supplier. Many a times, a government may want to protect local industry which is experiencing difficulties despite the fact that all other suppliers are acting in an ethical manner. Clearly, it is not possible to continue to support industry that is likely to remain uncompetitive because such an action is likely to prove to be a waste of the domestic taxpayer’s funds and can only provide a temporary respite to those employed or otherwise associated by the industry. However, attempts can be made to modernise the industry, educate and provide new skills to workers or provide modern equipment for manufacturing. The home government may decide to assist an industry directly or indirectly through subsidies or tariffs. Whatever steps may have been taken in order to assist a domestic industry, the management is only given time and financial assistance in order to run the industry in a more competitive manner. Ultimately, the industry will have to stand on its own feet in the competitive world, because the pressures to liberalise international trade are becoming more intense every day (Egli, 2000, Complete), (Barfield, 2001, Ch. 1 – 4), (Friends of Domestic Industry, 1830, Ch. 1 – 2) and (Shaffaeddin, 1998, Complete). In this brief essay, an attempt has been made to take a look at some of the measures which a domestic government can take in order to protect domestic industry from the full brunt of international commercial competition. Measures which a Government may take in order to Protect Domestic Industry In practice, even in the era of free trade, trade cannot be free from government intervention. Broadly speaking, a government may use tariffs or subsidies in order to assist domestic industry which is proving to be uncompetitive. Government subsidies such as favourable tax treatment or directed credits may be used to enable domestic industry to modernise or otherwise align itself better to the requirements of the market by enhancing quality, providing cheaper manufacturing or better marketing. Subsidies generally provide superior products for the consumer at reduced government revenues. Tariffs can also be imposed, but these are very much less likely to be acceptable to foreign governments in a free trade era. Tariffs are taxes that are imposed on imported goods on their entry into the country (Egli, 2000, Complete), (Barfield, 2001, Ch. 1 – 6), (Frederico, 2004, Complete), (Howell, 1988, Pp. 1 – 10), (Katrak, 2004, Ch. 1 – 4), (Keck, 2004, Pp. 3 – 25), (Kumar, 2000, Complete) and (Photiades, 2000, Complete). Governments can assist industry to compete better by restricting imports or attempting to enhance exports. Apart from the imposition of tariffs, attempts to restrict imports can also take the form of imposition of quantitative restrictions. Quotas can be imposed in order to restrict the numbers of trade items which can be imported, thus making a quantity scarce and thereby increasing its price. This makes it possible to assist domestic industry. Tariffs can be imposed at a time when foreign manufacturers are trying to penetrate a market and these tariffs can increase government revenues. The tariffs may be lifted when there is no further requirement for their imposition or when there is a desire to enhance imports of some kind. Export subsidies can assist domestic industry export its manufactured products overseas. Most subsidies to domestic industry can be either direst or indirect. Direct subsidies can take the form of reduced taxes, grants for research and process improvement, soft loans or grants for purchase of modern equipment or assistance with the import of certain machinery or other manufacturing equipment. Indirect subsidies can take the form of providing technical assistance to industry, the training of skilled manpower, assistance in finding buyers in foreign countries for domestic suppliers through established government offices etc. However, it has to be remembered that government assistance of all kind to private industry costs the taxpayer money which could have been used for to satisfy other needs of the citizens. The cost of retaining employment for workers in uncompetitive industry by far exceeds the costs of finding them new jobs in more competitive industry. Domestic industry which has become used to receiving support from the government in the form of import tariffs, quantitative restrictions or subsidies is less inclined to try and enhance its efficiency and become more competitive. Hence, it is the duty of a government to discuss the business plans for industry prior to granting assistance because the responsibility of a government extends to the welfare of all of its citizens and not just a sick segment of the nation’s industry (Casey, 2003, Complete), (Drache, 2001, Ch. 1 – 3), (Grynberg, 2002, Ch. 1 – 5), (Katrak, 2004, Ch. 1 – 4), (Keck, 2004, Pp. 3 – 25), (Kumar, 2000, Complete), (Photides, 2000, Complete) and (Richardson, 2000, Complete). Free trade does not mean that a nation must accept that the intellectual property of its local industry can be copied and sold by manufacturers from countries which are capable of providing cheep labour. The lengths to which the United States government has gone in order to protect the intellectual property of its industries such as computer software from Microsoft, vocals and movies from American recording artists and other intellectual property such as designs has been extraordinary. The WTO accord provides for the protection of intellectual property and if governments had not taken such measures, the United States software industry will have suffered serious setbacks from cheap copying of its products in other countries. The United States has been boycotting goods to protect its domestic industry under resource conservation and environmental grounds. It has also preferred to use the Safeguards Agreements under the GATT agreement to escape from its obligations to open up its agricultural sector or the steel sector. Hence, it is possible for a country to selectively exit from its obligations to liberalize trade under the GATT and WTO accords but such actions should be carefully weighed against possible trade retaliation by other nations. Although the Doha round of WTO has sought to plug in the loopholes in the selective exit provisions in the WTO accord, it is unlikely that trade liberalisation in the agriculture sector will be permitted by the United States or European Community. This is because it is rightly believed that a country should at least be able to produce food in order to feed itself and if liberalisation in the agriculture sector were to be permitted, and then the cheep food imports from the very many countries producing cheep food will have virtually destroyed agriculture in the United States and the EU. The Safeguards Agreement of the GATT uses broad language which can be used by a domestic authority to justify aggressive imposition of safeguard measures and the imposition of safeguard measures can only be reviewed subsequently by the Dispute Settlement Authority or the DSB of the WTO if there is an application by a contracting party which has vested interests in the measures. In effect this means that by the time a review by the DSB is completed, substantial damage to the international trading arrangements and those who were trying to compete with domestic industry may already have taken place, to the benefit of the domestic industry. Domestic governments are permitted to protect domestic industry when there are sudden and dramatic shifts in trading patterns which are likely to cause an injury to domestic industry. Products which are being imported into a domestic economy in such increased quantities, absolute or relative to domestic production, are likely to cause serious injury to domestic industry and domestic governments are permitted to act to protect domestic industry in such a situation. A considerable time period usually elapses before the DSB is able to render its judgements and establishment of international flows usually follows a more natural and gradual pattern. The United States government used the exit clauses in the Safeguards Agreement to protect its steel industry when sixteen United States steel manufacturers were working under the supervision of the bankruptcy courts and although the dollar value of the steel being imported into the country had declined, the volume of imports had increased, indicating that there was a substantial inflow of cheep steel imports into the country. The ambiguity in the Safeguards Agreement makes it possible for governments to act because it is rather difficult to determine if the domestic industry is being damaged as a result of cheep imports or because it is inefficient and uncompetitive or still further if there are other causes for its decline (Afilalo, 2004, Complete), (Assuncao, 2002, Ch. 1 – 5), (Balasubramanyam, 2002, Complete), (Busch, 2002, Ch. 1 – 6), (Hoekman, 2002, Complete), (Keck, 2004, Pp. 18 – 26), (Sampson, 2001, Ch. 1 – 6), (Short, Complete) and (Richardson, 2000, Complete). Apart from using barriers to trade including tariffs, subsidies and technical assistance for industries, national governments can also use other methods in their attempts to assist the domestic industry to remain competitive. The requirements for compliance testing to local standards, food products testing to ensure that they meet local religious or dietary requirements and other similar testing requirements prior to an import permit being granted can mean that a government is in a position to get advance information about the products which are likely to be imported into the country. Such information can be useful for the local industry in attempting to pursue a policy of import substitution and trying to develop local products similar to those which are being imported at a more competitive price. The requirement of used motorcycles to be tested for road worthiness in a country has been cited as a trade barrier, but it has to be realised that a national government has a right to protect its domestic consumers (Tiainen, 2004, Pp 82 – 104). It is also important that national governments understand that the world is entering into an era where consumers want the best quality at the right prices and national governments can only assist their domestic industry by embarking on sophisticated assistance involving exposing industries to latest ideas, assisting industries in acquiring sophisticated manufacturing equipment, encouraging creativity and assisting in research. Simply imposing tariffs and handing out never ending subsidies is neither possible for the national tax-payer, nor is it desirable for a nation’s consumer. Such actions are also very likely to create an international backlash and damage the national economy even further. In order to remain competitive in the world today, it is essential that the domestic industry pursue a policy of prudent financial management, in-depth strategic planning for the global environment, vigilance in research related to the industry and the markets as well as new developments. Industry in the world today is a delicately balanced organism which needs constant fine tuning and it is the responsibility of the national government to provide a means for its people and industry to remain competitive. Unfortunately, in many developing countries, the domestic government is not playing the role that it should be in actively assisting industry to develop competitively and much more can be done to improve the situation instead of blaming free trade and the rest of the world all the time. Many governments have resorted to only legislating and not actively assisting with the result that it has not been possible to industrialise on a major scale because domestic industrialists are interested in their firms and cannot embark on risky or capital intensive ventures. Being able to acquire knowledge and information from trade data is not sufficient and it is important that such knowledge and data should be properly managed in order to formulate national policy in a coordinated manner and provide meaningful assistance as well as industry development initiatives. It is important that a government tries to force the modernization of domestic industry. In Japan, there had been a tradition of attempting to shield low productive industry such as retailing and agriculture along with declining industry such as textiles. Although such a policy is likely to be assistive of aims related to the maintenance of social stability and order, it can be detrimental to the modernisation of industrial infrastructure. Information sharing, debating and the creation of a consensus, however, contributed significantly to the industrial progress in Japan (Balasubramanyam, 2002, Chapters 1 – 5), (Chan, 2002, Ch. 1 – 6), (Hoda, 2002, Ch. 1 – 6), (Richardson, 2000, Complete) and (Roosevelt, 1956, Ch. 1 – 4). As has been previously mentioned, it must be concluded that government subsidies are a far better way of supporting domestic industries as compared to the imposition of tariffs. Not only have subsidies been found to be more effective, but they are far more difficult to protest against by foreign governments. Many nations have offered subsidies to their domestic industry in the form of grants of land or factories which were provided free of charge and energy costs are heavily subsidised with natural gas, electricity as well as other raw materials being provided at lower then the international market costs. It is, however, important to compete on the international market by providing products and services of superior quality through better marketing, management and application of technology. It has to be realised that national resources are not infinite and neither are global natural resources. Human resources too have to be provided adequate financial inputs for their growth and training otherwise these human resources cannot perform or develop. Hence it is only through effective management, initiative and enhanced efficiencies that national industries can hope to compete effectively in the future and this requires highly effective, efficient and informed national governance which is not content to merely legislate but actively involves itself in the development of industry (Smith, 2003, Complete), (Roberts, 2001, Ch. 1 – 5) and (Egli, 2000, Complete). Conclusion Trade liberalisation and global governance by the World Trade Organisation has meant that the manner in which governments used to regulate international trade has been changed. Tariffs cannot be sustained for prolonged periods because of the costs to the national exchequer and such tariffs can also result in an international backlash. Indirect subsidies in the form of government assistance to industry aimed towards the enhancement of efficiencies, quality, superior management and modernisation as well as assistance aimed at developing markets seems to be the best way to assist domestic industry compete in the world today. References / Bibliography 1. Afilalo, Ari. (2004). Not in my Backyard: Power and Protectionism in US Trade Policy. Retrieved: July 13, 2005. From: http://www.nyu.edu/pubs/jilp/main/issues/34/pdf/34_4_p.pdf 2. 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From: http://www.machiningmagazine.com/PhilEnglish.pdf 30. Tiainen, Pauliina, Jaakko Nolvi. (2004). Barriers of Free Trade in the Trade of Used Motorcycles to Finland. Turku Polytechnic. Retrieved: July 13, 2005. From: http://www.smoto.fi/uutiset/free_trade_and_used_motorcycles.pdf Read More