“An imperfect World Trade Organisation is better than no world trade organisation.” Discuss with reference to ongoing protectionist policies and the impact of these in the relation of developed economies and lesser-developed economies (40 points).
As a result of the Bretton Woods Conference in 1944, countries across the globe had mutually agreed upon setting up a General Agreement on Tariffs and Trade (GAAT) in 1947. Around 40 years later, a new round of trade negotiations-the Uruguay Round-were launched in 1986. These sought to introduce major reforms into how the world trading system would function. The treaty negotiated during the Uruguay Round, the GATT treaty of 1994, established the WTO-the international institution to govern trade.
The World Trade Organisation (WTO) is a place where the various member governments meet, to try and sort out the problems they face with each other in relation to their trade. The WTO agreements that are negotiated and signed by the majority of the world’s trading nations, forms the heart of the WTO.
The defining characteristic of WTO is that it is:
A forum for the member nations to negotiate trade agreements.
An organization for liberalizing trade.
A place where the trade disputes of the member countries are settled.
The member countries face many problems regarding the reduction or elimination of any impediment to trade (like import tariffs, other barriers to trade) and agreeing on rules & regulations governing the conduct of international trade (e.g. antidumping, subsidies, product standards, etc.). The WTO here acts as a facilitator to get these problems solved and provides a forum for negotiation amongst the member countries.
At the London Summit held on 2 April 2009, the G20 countries promised that they would not raise any new barriers and would also minimize any negative impact on trade and investment of policy responses to the crisis. The systemic risks of a resort to protectionist policies are generally recognized by world leaders. The extensive resort to protectionism in the 1930s as well as the one in the early 1980s recession (like the export restraints for cars, quotas on textiles and steel) illustrate that if some major countries put in place measures to close domestic markets, the risk of others following is high. What is most important is that all major trading partners hold the line and maintain open markets.
For example if the US decides to close its automobile market to imports, the Chinese, Japanese and European automobiles Industry, worth US$ 80 billion would be affected. It is highly probable that the Chinese, Japanese and Europeans would decide to close their markets to American planes, cranes and chemicals, all this worth US$ 120 billion. The effect that such moves could cause would be devastating. And this is why isolationism, even “smart” isolationism as some are advocating, is a recipe for global slump. And therefore an attempt to resist protectionism and avoid an aggravation of the current crisis becomes imperative today.
In the present scenario it is necessary is to coordinate the domestic stimulus packages, to cooperate in addressing global challenges and to think of using the least harmful trade policy instruments, instead of the protectionist measures adopted by the individual countries which are unlikely to help in the recovery efforts.
This is where the WTO’s mechanism of Trade Policy Review is essential. It provides WTO members with a forum for discussion on how best to use their trade policies to help the recovery, while allowing a thorough scrutiny of trade-distorting measures.
In fact, trade and the Doha Round have a place of their own in global efforts to revive the economy. Open trade flows have a role in maximizing the G20’s efforts to stimulate the global economy. At the same time, the Doha Round is the most effective way to further constrain protectionist pressures by reducing the gap between bound commitments and applied policies.
A new CEPR-World Bank e-book reports that protectionism is not yet a problem, but argues that the “fateful allure of protectionism” is a threat. To counter the threat, certain key concrete steps should be taken to reinforce the global trade and financial architecture.
Bridging gaps in the global trade/financial architecture. The absence of international rules in the global trade policy allows discrimination to be pursued without any checks. Therefore, a number of policy areas that fall within the ambit of the trading system, including public procurement, service-sector trade and investment, and the spillover effects of subsidy programs need prompt action.
WTO disciplines. WTO disciplines have played a positive role in constraining protectionism. The primary role of the WTO is to set the rules of the trade and to lock-in the policies of members. We need to have policy framework to limit the ability of governments to increase tariffs or agricultural subsidies in the future, send a strong signal of the international community’s commitment to keep trade and investment flowing and help countries resist pressures for protection when they begin their expansionary policies.
Investment in public goods to improve transparency. Comprehensive and timely data on policies and international transactions (e.g., trade flows in services; sales by foreign affiliates) is required. Similarly sophisticated databases on subsidies, procurement and services trade and investment would greatly improve transparency which would act as a critical input into the defence against protectionism.
There is a possibility that if all WTO members raised their currently applied tariffs to today’s WTO ceilings, tariffs worldwide would double. At the same time, world trade could then shrink by up to 8 per cent, reducing global welfare by up to US$ 350 billion. Conversely, if the rates being negotiated in the Doha round were to be implemented, tariff ceilings would be reduced considerably and the savings for economic operators could amount to over US$ 150 billion annually. It is here that WTO has a key role to play in the global economy.
The developed countries dominate the major part of the world trade. According to a survey only 17 countries control 72% of the world trade. The developed world continues to insist on free trade and services and that a developing country bring down the tariffs in order to ensure fair competition between local and imported products. Simultaneously, the developed world itself continues to follow protectionist policies in the case of agriculture to safeguard its costly products against cheaper foodstuff from the developing world. The WTO needs to discuss this inherent contradiction in intention of the various countries.
The various layers of global economic interdependence ensure that ‘trade’ played a role in transmitting demand slumps and finance shortages even though it didn’t trigger the crisis. But trade can also be an important vector of recovery so long as an open trade regime is maintained. It is here that WTO would play a major role in the world economy’s revival. It could so happen that there could be situation specific limitations in the role played by WTO. But that does, in no way, undermine the crucial role the WTO has in protecting the interests of the developing world against the developed world’s protectionist moves, resolving disputes in an amicable fashion and promote free trade and commerce. But that An imperfect World Trade Organisation is better than no world trade organisation