The World Trade Organization (WTO) is the only global international organization

Question

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.

Its member governments run the WTO. All major decisions are made by the membership as a whole, either by ministers (who usually meet at least once every two years) or by their ambassadors or delegates (who regularly meet in Geneva).

The WTO sites many reasons why trade is beneficial for nations and people. Let’s explore some of these reasons.

(Links to an external site.)Links to an external site.

Answer the following questions:

How does the WTO promote peace? (Look in #9)

How does free trade reduce the cost of living? (Look in #1)

By how much does the WTO estimate incomes increase because of the implementation of the 1994 Uruguay Round of trade agreements? How can this additional income help offset the losses by some workers who may be displaced because of foreign competition?

Explanation / Answer

Part A Answer-

The World Trade Organisation trading system provides a forum for countries to thrash out their differences on trade issues, which helps promote peace.

The following are the 10 benefits the WTO website lists:

1. The system helps promote peace.

2. Disputes are handled constructively.

3. Rules make life easier for all.

4. Freer trade cuts the costs of living.

5. It provides more choice of products and quality.

6. Trade raises incomes.

7. Trade stimulates economic growth.

8. The basic principles make life more efficient.

9. Governments are shielded from lobbying.

10. The system encourages good government

Disputes resolved peacefully

The WTO says salespeople are usually reluctant to fight their customers. In other words, if trade flows smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely.

What's more, smoothly-flowing trade also helps people all over the world become better off. People who are more prosperous and contented are also less likely to fight.

As trade expands in volume, in the numbers of products traded, and in the numbers of countries and companies trading, there is a greater chance that disputes will arise. The WTO system helps resolve these disputes peacefully and constructively.

Decisions in the WTO are made by consensus. WTO agreements are negotiated by all members, approved by consensus and ratified in all members' parliaments.

The agreements apply to everyone. Rich and poor countries alike have an equal right to challenge each other in the WTO's dispute-settlement procedures.

Around 300 disputes have been brought to the WTO since it was set up in 1995. Without a means of tackling these constructively and harmoniously, some could have led to more serious political conflict.

Part B Answer-

Benefits of free trade

Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade.

Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods.

In more detail, the benefits of free trade include:

1. The theory of comparative advantage

This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialise in those goods where they have a comparative advantage.

2. Reducing tariff barriers leads to trade creation

Trade creation occurs when consumption switches from high-cost producers to low-cost producers.

Part C Answer-

To address the problems with agricultural trade, delegates to the Uruguay Round which lasted from 1986 to 1994, managed to craft an agreement focused on three policy areas that came to be referred to as “pillars:”

1. Market access for imports which required the replacement of non-tariff barriers with equivalent tariffs that were to be lowered by 36% over six years (24% for low-income countries over ten years) and a number of other trade policy constraints.

2. Export subsidies which were to be reduced by 36% in value and 21% in volume over six years.

3. Trade-distorting domestic support as measured by an Aggregate Measure of Support (AMS) which was to be reduced by 20% over six years. Policies that are not thought to have an impact on trade are placed in a “green” box and not counted in the AMS. Likewise policies that might be trade-distorting but are complemented by restrictions on output or input use to offset the distortionary effects are also exempt (“blue” box). Policies placed in the “amber” box are counted in the AMS and are subject to reduction (WTO, 2015).

Initial expectations for the URAA were relatively modest. Most analysts thought there would be only limited impacts on actual trade flows but noted that it was an important accomplishment to finally bring agriculture fully into the multilateral trading system (Diakosavvas, 2004; OECD, 2001). Beyond the URAA, the SPS allowed resolution of some long-standing frictions related to manufacturing processes and common practices in animal agriculture (Hobbes, 2014).           

World agricultural trade as measured by the real value of exports increased about 150% between 1995 and 2011 (author’s calculations based on data from FAOSTAT, 2015, deflated with the World Bank Manufacturers Unit Value index). Not all of this increase, of course, can be attributed to the effects of the URAA as many other phenomena that occurred over this time period, such as income and population growth, for example, also affected the evolution of world agricultural trade. To sort out the different influences on agricultural trade, economists rely on statistical models. A few years after the URAA was adopted, there were a few efforts to use such models to conduct ex post evaluations of the impact of the agreement. For example, a session at the annual meetings of the Agricultural and Applied Economics Association formerly known as the American Agricultural Economics Association (AAEA) in 1999 brought together speakers who examined evidence on the effects of the agreements (Anderson, 2000; Sumner and Lee 2000; Thompson, Herrmann, and Gohout, 2000; Glauber, 2000; and Martin, 2000). The authors of these studies found that the URAA had begun to have some limited positive impacts on agricultural trade but noted that many of the provisions of the agreement had not been fully implemented and called for continued efforts to further reform agricultural policies. Daikosavvas (2004) and OECD (2001) also found that the early effects of the URAA among the members of the Organization for Economic Cooperation and Development (OECD) were quite limited. Note that in 2011, the OECD accounted for about 62% of world agricultural exports (FAOSTAT, 2015).

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