The World Trade Organization - Essay Example

The World Trade Organization Advantages and Disadvantages of Joining and How it can be Transformed The world trade organization (WTO) is often accused of benefiting richer nations to the detriment of poorer ones. Discuss both the advantages and disadvantages of joining the WTO and suggest ways in which it could be transformed to help developing nations. Introduction The Global trading, as an end-result of globalization, is ruling the world economy today. Established back in 1995, the World Trade Organization (WTO) deals with the “legal trading rules and regulations between two nations regardless of whether it is a global or near-global level.” (World Trade Organization, 2008) As part of the General Agreement on Tariffs and Trade (GATT) negotiations, WTO has been officially given the responsibility to monitor the national trading policies the occurs around the world aside from the handling of trade disputes and the enforcement of the GATT agreement which considers lowering down the tariff rates and other possible physical and non-physical barriers that could significantly affect the free trading in the world market. (The Columbia Encyclopedia. 6th Ed., 2004) For this reason, WTO is considered to be the backbone of globalization. Considering the on-going trading between developed and developing countries, WTO is often accused of benefiting richer nations to the detriment of poorer ones. For this study, the advantages and disadvantages of joining the WTO will be discussed on this essay. Prior to conclusion, recommended ways in which the WTO could be transformed positively in terms of being able to help developing nations will be tackled. Advantages and Disadvantages The main theoretical argument in promoting the advantages of the WTO is that it leads to greater competitiveness, lower prices, and higher economic growth. But these benefits of free trade are usually experienced by the developed world and at the expense of the developing world. In other words, free trade costs the poorer nations heavily to benefit the richer ones. The WTO however would say that free trade is also advantageous to the developing countries by being an important ‘engine of growth’; in the short term there are problems but in the longer term the poorer nations also benefit from positive growth. Lowering tariffs has the effect of liberalising trade and removing barriers. Trade liberalization is the main aim of free trade agreements (DFAT). The WTO aims to deregulate the private sector with “the mutual consensus of governments all over the world” (Horiya, 2005) and standardize international interests. Goods and services can then flow freely between countries. As such, the WTO is one of the main engineers of globalization but unfortunately at the expense of the poorer countries. After researching on the advantages of the WTO, further points are identified as follows: WTO provides a ‘framework’ for encouraging international trade and resolving trade disputes. If handled properly this can help in establishing peace between them too and preventing conflicts over trade. Standard trading rules make it easier to understand and apply agreements, and avoid the need to engage in complex negotiations. The principles increase certainty and efficiency. The can also prevent corruption. Prices of goods and services tend to be lower because of greater competition and lower cost of production. Range of goods and services tends to be greater so ultimately customers also have greater choice. Goods that cannot be produced in one country can easily be obtained by importing. If we look at the example of China, it struggled hard to join the WTO in 2002 so that it could reform its economy and help it progress further. This helped China to open its economy to the world and at the same time to develop its economy to become the success it is today. In fact, after the accession, “a turning point occurred in the economic growth” (Bao, 2006) of China. It experienced rapid economic growth. However, China is also witnessing a greater rural to urban migration and urban unemployment as a result of its WTO accession (Zhai, 2002), and a gap in the growth of different industries. In practice, developing countries have faced numerous problems. For example, those currently enjoying reduction in preferential margins as a result of various schemes can suffer from ‘substantive tariff preference erosion’ (Mustafizur, 2006). The WTO dispute settlement system is also not without its problems. Despite significant improvements at the Uruguay round of GATT, the system is “still reliant in important respects on the consent and initiative of the parties to the dispute” (Ijaz, 2007) Consequently, developing countries face especially financial difficulties to participate in dispute settlement proceedings. In the infamous ruling against India and Brazil in the latter part of the 1990s, it was found that industrialised countries could bend WTO rules to support their own industries (Raghavan, 1999). In an econometric study at the University of Paris involving an empirical analysis of the WTO dispute settlement system (Besson & Mehdi, 2004), result suggest that due to its technical nature and lack of resources of developing countries, developing countries are less likely to win disputes for three reasons: asymmetric legal capacity, economic dependence via bilateral assistance, and international political factors. A more recent study confirms that the ‘power-based relationship’ between countries has still not been eliminated by the WTO. (Haider, 2008) The problem with the way WTO operates is that it promotes a particular economic philosophy of free trade but all countries are different in many ways and at different stages of economic progress. So they get affected differently with some gaining and some losing. In particular, WTO policies do not take into account issue such as cultural differences, social and welfare programs and worker rights. With the last one, the International Labor Organization also exists but the policies of both are not coordinated. Therefore, the WTO is seen as neglecting important issues. Also, developing countries have basic rights to protect themselves from unfair practices. Free trade also makes it difficult for new firms to set up, indeed for any firm from a developing country to gain market access (Michalopoulos, 2001, p.120), and in the short term there is likely to be greater unemployment. Thus, developing countries tend to have insufficient institutional arrangements to be able to commit themselves to WTO agreements, which cause them ‘substantial problems’. To give an example, the alfatoxin regulation in 1998 cost African exporters of groundnuts $700 million in lost revenue. (Michalopoulos, 2001, p.112) Both trading countries are more likely to benefit mutually if there is “comparative advantage in different areas of production allows both partner countries to gain as a result of specialisation” (DFTA). Conclusion and Recommendations The way in which free trade is currently being promoted by the WTO is disadvantageous to developing countries because it favours richer countries and does not involve any concern for the related social problems of developing countries. So the poorer countries lose out at least in the short term. In the longer term it appears that developing countries can also benefit in the same way that developed countries do, but economic policies must also deal with the related social problems that hinder economic progress. China’s case is an exception because it already possessed immense potential and joining the WTO was simply the trigger that enabled it to unleash that potential. India and Brazil also know how the make the WTO work for them (Taniguchi, 2007, p.330) rather than against them but other smaller developing countries are mostly exploited. This was a very brief study so a more thorough analysis is required to make any practical suggestions for transforming the WTO. Nonetheless, the study has also identified the need for the WTO to be fairer in its dealings, work closely with other related departments of the UN, become more focused by seeking mutually beneficial trading relationships rather than heavily one-sided ones, and making it easier for developing countries to participate in dispute settlement proceedings when necessary. In short, if the WTO is to really promote globalization, it must act independent of the interests of developed countries, rather it should actively strive to balance the relations. Acting in the interests of developing countries may be a stated objective (Taniguchi, 2007, p.285) but should be put into practice. The fact that two-thirds of its members are developing countries (Taniguchi, 2007, p.29) should be reflected in terms of policies and realised benefits. References Bao, Shuming and Lin, Shuanglin (Ed’s). 2006. The Chinese Economy After WTO Accession (The Chinese Economy Series). Ashgate Publishing. Besson, Fabien and Mehdi, Racem. 2004. Is WTO Dispute Settlement System Biased Against Developing Countries? An Empirical Analysis. Paper presented at the International Conference on Policy Modeling, Paris, France, June 30 – July 2, 2004. DFAT. N.d. 3 – FTAs: Advantages and Disadvantages. http://www.dfat.gov.au/publications/aus_us_fta_mon/Chapter3.pdf [Accessed 7 August 2009] Haider Khan and Yibei, Liu. 2008. Globalization and the WTO Dispute Settlement Mechanism: Making a Rules-based Trading Regime Work. Munich Personal RePEc Archive. http://mpra.ub.uni-muenchen.de/7613/ [Accessed 7 August 2009]. Horiya Mash’hoor. 2005. The World Trade Organization (WTO): Advantages and disadvantages. Yemen Times. Issue 875, Volume 13, September 2005. Ijaz Latif, Muhammad. 2007. The WTO Dispute Settlement System. Journal of Asian and African and Studies. Vol. 42, No. 5, pp. 447-459. Michalopoulos, Constantine. 2001. Developing Countries in the WTO. Palgrave Macmillan. Mustafizur Rahman and Wasem Bin Shadat. 2006. NAMA Negotiations in the WTO and Preference Erosion: Concerns of Bangladesh and Other Asia-Pacific LDCs. South Asia Economic Journal, Vol. 7, No. 2, pp. 179-203. Raghavan, Chakravarthi. 1999. Rulings against India, Brazil raise WTO bias issues. Third World Network. http://www.twnside.org.sg/title/bias-cn.htm [Accessed 7 August 2009]. Taniguchi, Yasuhei, Yanovich, Alan and Bohanes, Jan. 2007. The WTO in the twenty-first century. Cambridge University Press. Zhai, Fan and Wang, Zhi. 2002. WTO Accession, Rural Labout Migration and Urban Unemployment in China. Urban Studies. Vol. 39, No. 12, pp. 2199-2217. Read More