The World Trade Organization and Free Trade - Essay Example

Lecturer: presented: Introduction The World Trade Organization (WTO) “originated from the General Agreement on Tariffs and Trade which was formed in 1947 by 23 countries” (Kose 2006), with a goal of promoting international trade through tariff reductions and encouragement of free trade amongst its members. “GATT membership kept on rising to over more than 100 countries, and in 1995 it was transformed in to World Trade Organization” (Barry 2008) which further sought to reduce barriers to international trade especially for the new entrants, mainly from the developing countries. The two treaties were significant in reducing the barriers that existed between political boundaries, thereby facilitating international trade. They played a major role in the integration of developing countries in to the multilateral trade. Their trade diversified through the flexible rules created under the treaties. The WTO aims at promotion of business involving importation and exportation of goods and services amongst members. According to (Barry 2008), “80% of the WTO members are from the developing countries”. They have been joining the organization at an increasing rate since 1995 and at present, the number has risen to 140. They derive a variety of benefits from being members of the organization, which on the other hand has enhanced liberalization of the domestic market, thereby facilitating economic development. The developing nations are currently classified as complete and active members of the bilateral trading arrangement. They are usually free to make claims due to their obligation for making concessions. Their demands are usually given the first priority due to the fact that they comprise the majority of the WTO members. This essay is a critical evaluation of the extent to which the WTO has benefited the economic growth of developing countries by enabling them to engage free trade. Some aspects of free trade have been discussed. Free Trade The trade that is conducted between nations with minimum restrictions has played a significant role in boosting economic growth within developing countries. It has led to the establishment of free trade areas, which helps them in minimizing the cost of trade through market expansion. Tariffs and restrictions in terms of quotas are usually minimal in the free trade area. More over, countries within the free trade area are allowed to trade with other countries outside the system due to non-existence of a common policy in regard to trading outside it. The WTO has been successful in promoting free trade, significantly enhancing economic growth. According to the World Bank, the developing countries that minimized trade barriers thrived in economic growth in the 1990s, with “real income per capita growing at 5% per year, compared to those that maintained trade barriers, whose per capita income grew at an annual rate of 1.4%” (Stiglitz, 2000). The economic development is attributed to the liberalization of trade, leading to economic reforms in developing countries. Enhancement of economic growth in these countries was achieved through the principle governance and macro-economic policies that resulted from trade liberalization. According to Mishkin (2005) “openness is linked to key macroeconomic and governance policies that enhance growth”. The WTO’s efforts to promote free trade were successful in creating a strong market for products from developing countries. The international welfare gains were projected by the World Bank to have been acquired largely by “the developing countries, which were more than 90% of the total gains” (Stiglitz, 2000). This was attributed to the removal of barriers that hampered international trade in agricultural products. Barry (2008) notes that, “import tariffs were reduced with subsidies for exportation and supporting domestic ventures were at 2% and 5% respectively”. Free trade has helped developing countries in their bid to reduce foreign debts. Many are able to generate income that is far much above the amount of foreign aid that is usually set aside by the developed nations in the G-7 nations. The removal of trade barriers by developing countries led to a rise in the income gains that the World Bank projected to be around “$142 billion, which is more than the projected 2005 G-7 assistance to the developing countries” (Stiglitz, 2000). Promotion of free trade by the WTO has enhanced access of developing countries to global markets. The internal division of labor becomes significant for the developing economy since it presents an opportunity for it to take advantage of relocating resources to the areas with high potential for productivity (Barry 2008). There is usually a high degree of specialization in terms of production and exportation of the most profitable goods and services. Effective production is usually achieved when a country utilizes its relative advantage in the international market. Free trade has enhanced globalization which has facilitated economic growth in developing countries in various ways such as technological transfer which brings in market’s best practices in to the developing economy. The Foreign Direct Investors tend to be innovative and possess high levels of experience in various developed and developing economies where they have invested in the past. Domestic managers and supervisors learn from the foreign investors, some management practices such as techniques for risk management as well as production and supervisory techniques (Mishkin, 2005). The domestic industries benefit from the information gathered by foreign investors who have access to plenty of information concerning production and marketing through their foreign subsidiaries as well as in research and development. This enables the developing economies to make the necessary reforms in order to cope with the changing marketing environment, leading to economic growth. Many third world countries have received agricultural technology from developed countries, which has enabled them to produce for export purposes. They usually market their produce in the developed economies. Technology has also facilitated research and development, which allows researchers to collect data with ease, in the developing countries where research is still minimal. This is usually enhanced by communication technology as well as reduced costs and improved transport services. On the other hand, technology has also enabled merchants to deal with perishable commodities beyond due to advancement in preservation techniques. Goods can be transported shipped for many days to far destinations in foreign markets. Flowers and sea food are some of the perishable commodities that the developing countries export, whose success is attributed to technology transfer resulting from free trade (Sloman and Sutcliffe, 2004). This is one achievement of the WTO in promoting economic growth in developing countries. Free trade has also enhanced the formation of partnerships, whereby companies can outsource labor as well as production modules in order to reduce the cost of production, as well as utilize the most appropriate technology from foreign countries. Consequently, the supply chain becomes more divergent (Raymond, 1999). Private investors engage in technological research and development within the developing economies. Logistics have been made easier especially through communication technology. Quality control in the production process has been made more effective, and therefore goods are produced according to international standards and therefore they are acceptable in the global market. Production of quality products creates demand for the goods in foreign markets (Zhao, 2005). For example, there is a rising demand for Chinese products due to advancement in technology which has enabled the companies to produce quality goods at reduced prices. Developing countries that have not opened up for free trade are known to be moving at a slow pace in economic growth. Economies such as China and India amongst others are growing at a high rate due to engagement in free trade (Mishkin, 2005). Free trade promotes economic growth in developing countries in the sense that it tends to introduce competition in the existing market system, compelling the domestic industry to become more effective in production in order to be competitive in the market. This helps in alleviation of monopolies within the developing economy economy, which may not be effective enough to satisfy the local demand. With this competition, industries tend to be innovative in order to keep their products a head of the other competitors, which eventually leads to production of high quality goods in the developing economy thereby increasing the demand for their goods (Barry 2008). Introduction of foreign capital in to the financial markets of a developing country raises the accessibility of finances locally, thereby lowering the cost of capital while raising liquidity. This motivates local entrepreneurs to invest in the domestic market thereby promoting economic growth. An example of this is where developing economies allowed foreign capital in to their markets. Zhao (2005) states that, “On average dividend yields fall by 2.4 %, while the growth rate of investment increases by 1.1 % when foreign capital is introduced.” The developing economy is also boosted by the employment opportunities that are offered by the foreign investors. The World Bank defines “the countries that have acquired the competitive advantage in production of particular products as the new Globalizers” (Stiglitz, 2000). A research in these countries established that from 1993 to 1998, “there was a 14% decline in the number of people who lived in absolute poverty, dropping by 120 million” (Raymond, 1999). On the other hand, competition that arises in the market through entry of foreign companies and products tends to reduce the total revenue of the existing industries. They therefore tend to introduce more capital in to their businesses in order to counter the reduction in revenue accrued. Since all the capital needed is not available locally, they solicit capital from financial institutions outside the economy. External financial systems will only provide assistance to borrowers from an economy that has the capability of solving problems of asymmetric information. Local industries are therefore compelled to advocate for reforms that improve the performance of the financial system of a developing economy (Geoffrey, 2004). The acquired capital by local industries adds to the size of the financial sector, which promotes economic growth in the developing country. Raymond (1999) observes that there has occurred a radical change in the economic system over the last thirty years in the developing countries, which is attributed to free trade. These changes have brought about cheaper lending rates, and currently, they are able to borrow sufficient capital at reduced rates than they could before the changes in the financial system. Risks are now shared globally, and alliances have been formed between many countries in order to augment business between them. These are benefits that have been derived from free trade. Monetary systems in developing countries are better than before in terms of financial management because of the experience gained through their involvement in international business (Rajan, 2005). Free trade has enhanced the conversion of natural resources of developing economies in to utilizable products. In most cases, investors from developed countries provide the equipment, skills and finances for extraction. The product is made available locally at a reduced price. This has led to advancement in economic growth of many developing countries that possess mineral resources. Foreign companies in developing economies remit taxes to the government, thereby increasing its total tax collection (Mishkin, 2005). Free trade has led to globalization of financial institutions, leading to introduction of credit facilities to local investors. If their rates are favorable or lower than those of local financial institutions, customers will tend to seek the services of the foreign institutions. This leads to a change in the working of the local financial institutions which resort to promoting their products in order to attract more customers. They tend to lend money to their customers in a profitable way in order for them to uphold their business. With lending comes the need for risk assessment. This culminates in reforms within the financial institutions of an economy that enhances profitable lending. Such reforms are beneficial to the economy, and can help in the avoidance of miscalculated lending risks that can cause financial crisis, such as the banking crisis that occurred in the United States in 2007 (John, 2001). When local financial institutions support reforms in order to benefit in terms of credit facilities and profit, property rights are strengthened, encouraging foreign direct investments in the economy. This is a positive outcome of the reforms. These present the developing countries with an opportunity to market their products globally as well as making global financial systems available to them for example the World Bank and the IMF (Barry 2008). The Word Bank provides loans to developing countries in a bid to alleviate poverty through development programs. The IMF is also significant in fostering global financial cooperation, to ensure that economies maintain their financial stability, and enhancement of international trade as well as provision of employment to aid in poverty reduction especially in developing countries. The United Nations Conference on Trade and Development (UNCTAD) offers the technological support to developing countries in their attempt to get incorporated into the global financial system and to handle their external liabilities. This is an important organization that assists developing countries which are normally faced with external debts (Geoffrey, 2004). The economic infrastructure of developing countries has been improved through global economic associations enhanced by the WTO. This has resulted in a dynamic growth of the developing economies, which is necessary in attracting the rising inflows of capital and skills from the developed economies. Raymond (1999) observes that most of the developing countries that have liberalized their markets have acquired a “state of economic health especially in Asia and Latin America”. These nations usually do not require foreign aid. China and India are said to be some of the developing countries with a liberalized economy whereby the standards of living amongst the people have improved due to the opportunities presented by free trade and globalization. The WTO round of 2001 that was held in Doha is believed to have boosted economic growth in developing economies. According to (Barry 2008), “the Doha trade momentum led to an improvement of standards of living, life expectancy as well as poverty reduction”. Children are getting better education and unemployment is gradually being eradicated. The organization has enhanced economic freedom which has facilitated economic growth. Although free trade has a number of benefits to the developing economies, there are various disadvantages associated with it. It is known to pose threats to the economic sovereignty of developing countries. This mainly occurs when these countries are steadfast to a flat exchange rate, in which case, they tend not to make changes in the exchange rate. The reason for free trade is to augment the flexibility of exchange between risk-adapted rates of return on domestic resources and liabilities and those in international markets, until the domestic central depository has no margin in which it is open to establish domestic interest rates (Tobin 1998). The domestic financial system can be adversely affected if the right channels of integration in to free trade are not followed. Capital in flows and liberalization can hamper the domestic market. A worsening of the market basics leads to tentative attacks which culminate to the withdrawal of the domestic as well as foreign investors. This can adversely affect the domestic economy. Brazil and Argentina were faced by economic crisis attributed to free trade. Free trade usually creates interdependence amongst states, and deficiencies in the international market such as the unpredictable nature of capital inflows and outflows, can result in crises. More over, an economy can be affected by political and economic instability in another economy (Rajan 2005). Liberalization of the economic system makes a country to be subjected to the market discipline of foreign investors. An economy without a liberalized market has its investors monitoring the economy alone, reacting to unsteady financial fundamentals (Kaufmann 1995). The introduction of foreign market discipline can destabilize the functioning of this system, especially if the market systems are divergent. In conclusion, it is important for a developing country to have policies that make an economy open for trading and investing internationally. The WTO has been promoting these policies, leading to reductions in trade barriers amongst members of the organization. The resulting opening up for free trade has led to the integration of many economies around the world in international trade. Many have achieved a lot in terms of development in the financial sector. Financial systems become advanced when they are integrated in the international markets (Barry 2008). Most of the domestic market systems have changed due to exchange of experiences within these markets. The financial institutions that provide assistance to domestic borrowers have increased, consequently raising the probability of acquiring assistance by developed countries. Economic markets working in the international background facilitate international risk multiplicity and smooth the progress of consumption. This enhances the ability of countries to manage risks effectively to avoid problems such as recessions. Even though financial globalization is beneficial to developing countries, it is associated with bringing in new challenges to the economies. Integration of world economies through the WTO has been beneficial in terms of economic development for the emerging economies. Technology transfer has enabled them to increase their pace towards industrialization. The quality of manufactured goods has improved due to globalization of technology that has resulted from free trade. Developing economies have become integrated through the common laws and regulations that have been established through the organization, facilitating the existence of harmonious relations. The WTO has benefited the economic growth of developing countries by enabling them to engage free trade. Bibliography Barry G. (2008). Globalization and the Global Politics of Justice, Reiters Scientific Books. Frederic S. 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