Consider How We Can Identify and Asses the Economic Benefits - Essay Example

This paper aims to analyze the various different kinds of policies used by the WTO in implementing free trade and who benefits from those policies and how. First we establish historically where the need for free trade came in being. For this purpose we first provide an economic point of view of the benefits of free trade and a counter point of view. We analyze how free trade was evolving before the creation of the WTO and provide a background to the WTO and how it came to be formed we then analyze how the functioning of the WTO has propelled free trade. We then pin point the beneficiaries of the current implementation and failure of the policies of the WTO. The Need For Free Trade At the end of the Great Depression and World War II it was concluded by experts worldwide that WWII had been a result of the Great Depression. The Great Depression it seemed had been fuelled by protectionist policies of nations which hindered the free trade between countries. This new found wisdom led many of the world’s leading economists to revisit the theory of Comparative Advantage by David Ricardo. And stemming from this theory was the concept of free trade. This means allowing countries to produce what they produce best or what they produce in the least worst fashion when compared to other nations and trade with other countries for the rest. The trade between countries however should be free of tariffs and quotas. At least that is what free trade promotes at its essence, allowing the perfect ease of goods and services across borders for greater efficiency and ultimately higher standards of living. The focus on trading the surpluses free of restraints is intended to maintain the comparative advantage that nations enjoy. E.g. taking a simple example of two countries country A and country B. Assume that there are only two economies in the world and there are only two goods wine and butter. If country A can produce wine at $100 a barrel and butter at $10 a brick and country B can produce the same at $90 and $12. Now assume that both countries have resources worth only $1000 and resources can be used for either wine or butter production interchangeably. Without trade both countries would produce both goods. Assume they allot equal resources to producing both goods. i.e. $500 to each. Then country A produces 5 barrels of wine and 50 bricks of butter and country B produces 5.5 barrels of wine and 41.6 bricks of butter. However if both produce only what they produce best i.e. country A produces butter better and country B produces wine better and trade the surplus then A produces 100 bricks of butter and B produces 11.1 barrels of wine. Both are more than the combined products of both countries previously and the world has more of wine and butter at cheaper costs of $90 and $10. This is the benefit of comparative advantage. Now however if country A puts a tariff of $10 on each wine barrel the price of wine will be $10 and since this goes to the country A’s government the cost of producing the wine barrel increases to $100 for country B. Now the cost of producing wine in A or B is same. So B has lost its comparative advantage and will produce less wine at a higher cost. This is how tariffs/sanctions distort international trade. In reality, things are not so simple. Our model helps explain the theory of comparative advantage and how it is affected by tariff and non tariff barriers but in the real world a lot of other factors are at play. For one thing there are many more countries than just 2, even the WTO has atleast 153 members. Second, there are many products not just 2. Third, resources are not exactly substitutable between the production of different goods and the theory of decreasing returns to scale is ignored in our example. And finally, not all decisions in international trade are made based on economic logic. Many decisions are guided by political motives, lobbying actions, etc. In a world where trade has become so inter connected with national decisions, it has become extremely difficult to separate trade from politics. Even the WTO cannot completely nullify the effects of politics because it is made of nations who base their decisions depending on political agendas. The Benefits of Free Trade A strong proponent of free trade of goods and services, J. Bhagwati in his book Free Trade Today outlines the benefits of free trade to both developed and developing nations. He also pinpoints that while free trade of goods and services might lead to poverty reduction in India and China ever since their economies opened up; a deep integration of the global economy is not necessarily a solution to all of international trade’s problems. His argument for free trade of goods and services rests on the theory of comparative advantage. As competitive prices dictate how resources should be allocated between different goods and services countries can specialize in the production of those items where they have a clear cost advantage over other nations. Further he answers questions of fair trade as an alternative to free trade and how free trade leads to a social and environmental degradation of society. He argues that fair trade is not the answer as the root causes of social injustice should be addressed and then fixed rather than using trade action to solve everything. To the second issue he points out that the WTO is perhaps not the right forum to discuss issues of labour standards and environmental degradation and other bodies such as the International Labour Organization should address such issues (Bhagwati 2002). In his book Free Trade under Fire, Douglas Irwin talks about the evolution and benefits of free trade and the role the US has played in advancing globalization. He feels that protectionist policies have a detrimental impact on employment directly by raising production costs for these industries. For him protectionist policies do not protect the domestic industry rather they distort the mechanisms of international trade and create hurdle for international trade to achieve its true potential. To him, free trade is the answer to help developing nations reach a higher standard of living, he points out that rather than focusing on an abdoluste advantage in the production of one good, developing nations must have a least disadvantage in producing others. Hence by producing these goods in surplus and then trading them, developing nations can use revenues from their sales and invest them back into their own economy to alleviate the current standard of living of its own citizens. Irwin also points out what many economists choose to disregard and that is the variety of goods and services that consumers are exposed to as a direct result of free trade. Any individual’s standard of living automatically becomes higher if he has more to choose from. This way he can make a more informed and satisfying choice of goods to consume. In a sense Irwin points out that not all benefits of free trade are quantitative. Another advantage he cites is the increased level of productivity and efficiency. He feels that by increasing competition the least efficient producers are driven out and only the most efficient producers are left. Efficiency here is seen in terms of costs of production. Hence as the least cost producers remain, they will charge lower prices to remain in the market. He also points out the direct correlation between growth rates and increased international trade citing examples of Chile, South Korea and India once their economies opened up. In answer to protectionist policies of quotas and tariffs Irwin spells out that quotas in effect are more costly than tariffs. Tariffs, he says, atleast contribute to the economy by bringing in revenues, quotas on the other hand, he says, not only reduce variety of goods available to consumers but also do not bring in any revenues and protect the local industry from being competitive and efficient. However Irwin is insightful enough to point out that to pin the hopes of any nation just on the idea of free trade to help its economy and all problems related to it is a bit naive. Any nation needs to put into effect policies alongside free trade for sustained development and higher standards of living. In his view then, free trade is a necessary but not sufficient condition for sustained growth and higher standards of living (Irwin 2002). Some Economists however are of the view that the move towards free trade is quite hypocritical of the developed nations, considering that they built their economies on the principles and policies of protectionism. In his book Bad Samaritans, Ha-Joon Chang provides an insight into the actions of the developed nations towards the developing nations. He points out and quite rightly so, that the factors which led the developed nations to reach an avenue to be able to practise free trade were in fact all embedded in protectionism. How then, can the developed nations expect the developing nations to swallow the bitter pill of free trade without the necessary infrastructure and economic ingredients that were present for the developed nations at similar stages of development that the developing nations face today? In a sense he argue that the developed nations are “kicking the ladder” they themselves used to climb to the top and thereby preventing developing nations from doing the same. He provides recent and historical examples to support his viewpoint. Recent examples include the US Federal Bailout after the credit crunch. Historical examples include the levying of taxes on manufacturing imports of the woollen industry of Great Britain during the time of Henry VII. These tariffs sometimes ranged from 45 to 55% (Chang 2007). Implementation of Free Trade Via the WTO The Allies felt that one of the most crucial lessons learnt from WWII was that some global organization must exist to serve to protect trade, global security and development. This included the International Monetary Fund or IMF and the United Nations or the UN. A body was supposed to be formed for protection for international trade but the International Trade Organization could never be formed and the 1947 General Agreements on Tariffs and Trade also known as the GATT served as a close substitute till 1995 when the WTO was formed. The predecessor to the WTO was the GATT. In the post WWII era, the GATT was the only international organization which promoted free trade among nations. The mechanism for promoting free trade among member nations was by requiring the member nations to discuss and negotiate the reduction of trade barriers. Once an agreement was reached then each member nation would do its part to reduce its domestic barriers to international trade. To a large part, the WTO has much of the same functions as the GATT. However it is considered much more powerful in its quasi-judicial purpose in being able to work through trade conflicts between member countries (Shukla 2002)). The GATT focused on the independence of international trade using three pillars. First was that global trade be non-discriminatory. This is mentioned in Article 1 of the GATT which establishes the status of most favoured nation among the member countries. This means that any tariff reduction between the two countries is the same as between all countries. This also meant that upon clearing customs, an imported item and a local item would cease to be different. This is stated in Article III of the GATT under the National Treatment Principle. The second pillar was that the policies for trade should be reached via mutual discussion and negotiations among the member countries. This is mentioned in Article XXVIII of the GATT. All of the GATTs policies have been reached via mutual discussion and negotiations among the member countries. In the first two decades of the GATT, six rounds of bargaining were held. The Tokyo Round was the 7th round in 1979. This round focused on subsidies and their respective duties, discrimination among foreign and local goods and the rules for dumping. In 1986 the services sector was also included in the round of negotiations including transportation, banking and insurance. This was the Uruguay Round. The third and final pillar of the GATT was that the role of the government as a restrainers of the trade of goods and services across borders should be very small. This philosophy was adopted in almost all policies that the GATT undertook. The 1990s proved to be an eventful period for the establishment of the concept of free trade among nations. The GATT was revised under the Uruguay Round of Multilateral Trade Negotiations. In 1993 the 124 countries decided upon the proposed revisions to the GATT and in 1994 these revisions were corrected. The Uruguay Round led to a more fomalized system of promoting free trade by requiring the member countries to relax or even abolish certain trade protections. The General Agreement of Trade in Services was also addressed during this time and services were included in the loop of free trade as well. The most important outcome of the era however was the formation of the WTO which was formed in 1995. The WTO has similar characteristics to the ITO were the ITO ever formed. The theoretical implications of the WTO are to promote free trade by requiring the member nations to make some economic trade offs for a more globalized economy. The GATT contains two additional clauses for subsidiary restrictions. First, subsidies on exports are not encouraged because it is a widely held economic belief that export subsidies have a magnified effect when compared to their import counterparts. Second, non tariff barriers are not allowed. This means that according to Article XI of the GATT bans and quotas are detrimental to the freedom of international trade, efficient resource allocation and comparative advantage. However, many countries have devised a way to move around the second restriction. They can do this by imposing unrealistically high quality standards for imports, aid the local industry to remove any comparative advantage imports have in terms of pricing, increase the paperwork or red tape at customs office making the entry of imports into a country very difficult, impose labelling for country of origin or requirements for certain languages or create very high performance standards. The GATT does realise the need for protecting those nations which are not yet at a level to benefit completely from free trade. Hence, the GATT allows for non tariff barriers under four situations: for national security, to curb a huge balance of payments deficit, to increase economic development and to protect local agricultural systems. The second and third reasons are created for the particular advantage of developing nations. Like any international organization made up of a large number of members, the GATT has had its fair share of disputes. Disputes arise when a country feels that the free flow of goods and services as developed by the WTO or the GATT are being decreased or eliminated as a direct result of the actions of another nation. If the panel concludes that such beliefs are actually well rounded and factual and that the involvement of policies by one country has led to the decrease in benefits of international trade for another country then the panel can give authority to the affected country to take one of two actions. Either take a defensive stance and impose trade sanctions on the interfering country or to remove or ratify concessions it made to the other nation in the first place. However, the WTO discourages trade sanctions in the sense that should a country decide to impose trade sanctions against another country, there is always the possibility of the WTO disapproval as well as ratifications to the reprimand itself. Some disputes were serious enough to warrant the creation of a dispute resolution panel. However this system was quite ineffective as nations could veto the rulings. The WTO has a more effective system of implementation. All rulings becoming binding on WTO members and have to be strictly adhered to. Failure to do so can result in limitation of benefits of memberships or revocation of membership in extreme cases. The GATT does provide certain avenues for protection of local industries. In certain instances it is found that member countries can adopt dumping practices whereby they are offered subsidies on the production of certain goods by their own governments. They then sell these goods at below competitive prices in foreign markets thereby reducing the efficient allocation of goods and services across the globe. If the importing country feels that goods are being sold at less than their fair value then the purchase of those goods can be stopped or tariffs can be levied to remove the affect of the subsidies and to protect the local industry. Somehow somewhere the GATT failed in protecting the rights the developing countries in the international arena, or so they felt. The purpose of a detailed view of the GATT is not to take a walk down memory lane but to show how far free trade has come since its inception and what work the WTO has done to promote it since its inception in 1995. The creation of the WTO has allowed free trade to reach new heights and explore new potentials. The biding ability of many of WTO’s policies will test the independence of many nations in setting their own trade policies, for both the developed and developing world. With so much at stake, sooner or later some nations will choose to withdraw from the WTO and free trade for a while rather than face the consequences of interference on the WTO’s part in their national policies. The WTO was a result of the conclusion of the Uruguay Round which lasted from 1986-1994. Located in Geneva, Switzerland the WTO is home to 153 member nations. The basic purpose of the WTO is to promote free trade via a method of negotiation and discussion among member nations. However where the GATT failed in implementation of its policies, the WTO is binding on members in the sense that failure to comply can result in reduction of benefits of membership or then cancelation of membership altogether. The WTO performs six major functions all of which work towards the promotion of free trade. First it ensures that the policies set forth are being implemented by the member nations. It does this by observing the national policies of member nations. It also aids developing and least developed nations in developing their institutional capacities so that they are better able to value their commitments to the WTO as well as enjoy the benefits of free trade to a fuller extent. It also provides technical and training assistance to countries who need it. It acts as a referee between disputing nations on matters of trade. it does this by providing conflicting nations a dais for discussion and negotiation. It also works in alliance with other international organizations for the purpose of trade promotion such as the IMF and the World Bank. The Beneficiaries In many aspects the WTO and the GATT are quite similar. The WTO maintains the GATT’s 3 point approach towards encouraging freedom in the international arena. This is done by a policy of negotiations, limiting the role of the in matters of international trade and by treating all without any discrimination. By treating all members in a non discriminate manner, the member states are encouraged to treat all foreign and local goods in a similar manner once a foreign good has passed the restrictions placed on it at the customs office. Since the GATT was unable to actually bind any member to actually implement many of its policies it was of the utmost importance that all member nations reached decision via consensus. If a policy were to be reached in a manner other than consensus other member nations could simply choose to not follow it. Here the WTO differs from the GATT in the sense that the WTO does actually have the power to bind nations to follow a certain policy otherwise face the risk of a reduction in benefits of membership or then cancelation of membership altogether. And finally, the role of the government in international trade should be one of monitor and providing the right capacities to harness and foster free trade rather than effect the outcome. This is based on the belief of many economists that when exports are exposed to tariffs the effect on international trade is manifold than when imports are exposed to tariffs. Also the use of non tariff barriers greatly affects international trade as well. (Van Marrrewijk 2002) The developing world has benefitted from recent negotiations in the WTO in two major ways. Firstly, the access to international markets has increased via an effective reduction in tariffs and non tariff barriers. Under the WTO tariffs on industrialized imports have fallen on average by 34% and new product categories are being taken into account by the developed world when considering further reductions in both tariff and non tariff barriers such as agriculture and textiles, both of which are of high interest to developing nations. Secondly, many of the policies of the WTO ensure that the developed world and international funding agencies allow for the development of the developing and least developed nations before they can be expected to open up their markets. This concept is known as the concept of less than 100% reciprocity. This means that developed nations are expected to open their markets to the developing world without expecting the developing world to do the same immediately. These allowances for time are known as transition periods. A transition period is the time between when a developing country receives help to build upon its institutional capabilities to honour the commitments to the WTO and enjoy the benefits of free trade till the time that it is actually able to do so. All in all the WTO contains 72 provisions in its policies for developing nations. Even within these provisions sub provisions lie for least developed nations. The WTO also ensured greater certainty for the developing world due to its ability to bind countries to follow its policies. This meant that developing countries could now trade in the international arena with more certainty and stability and without fear of being cast aside in the decision making process by the much economically stronger developed world. These benefits have come at cost to the developing countries. One example is of the implementation of TRIPS and TRIMS. Developing countries now enjoy the freedom to participate in and negotiate on the policies which will be set forth by the WTO. This makes sense since at least two thirds of the members of the WTO are developing nations. While the WTO has helped the developing world gain a forum for discussion regarding international trade, it seems to some that free trade has and always will benefit the developed nations more. For one thing when a developed nation enters the markets of a developing nation, the organizations are generally so huge and old that they are able to wipe out many of the domestic competition. On the other hand when a developing nation enter a developed nation’s market, the developed nation’s market is so huge that the impact of the entrance of the developed nation is relatively small. Further, while non tariff barriers are being asked to be eliminated the WTO does recognize the need for protecting the domestic industries in cases of national security, development, agricultural protection and in the case of infant industries. This has also allowed developed nations to implement protectionist policies such as quality control arguments, labour laws etc. There is also the advantage that with the recent developments in TRIPS and TRIMS developed nations products are better protected against piracy and illegal duplication. It seems then that while the developed world has opened its doors to the developing nations, the atmosphere is not as welcoming as would like to be implied (Dunkerley 2004). Throughout this paper we analyzed how the WTO benefits different countries. As mentioned the WTO is a platform for promoting international trade. The paper discusses the need for international trade and how it came into being. A detailed description of the benefits and drawbacks of free trade was provided. An overview of the evolution of free trade was provided before moving on to the failure of the GATT and a need for the WTO was provided. A background of the WTO and its policies was provided and how it came to be formed. We also analyzed its various policies. Finally we pin pointed the beneficiaries of the implementation and failure of the policies of the WTO. Bibliography Bhagwati, J. 2002, Free Trade Today. Princetion UP. Chang, H. 2007, Bad Samaritans. Random House. Dunkerley, G. 2004, Free Trade: Myth, Reality and Alternatives. Zed Press. Hudec, R. 1987, The Developing Countries and the GATT Legal System. Trade Policy Research Centre. Irwin, D. 2002, Free Trade Under Fire . PUP. Shukla, S.P. 2002, “From the GATT to the WTO and Beyond”. OUP. Trebilcock, M. J. 2005, CRITIQUING THE CRITICS OF ECONOMIC GLOBALIZATION. University of Toronto. Marrrewijk, V. C. 2002, International Trade and The World Economy. 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