World Trade Organization Role in International Business

Introduction

The steady increase in the interactions between countries and people, a process known as globalization, resulted in a steady increase in the volume of trade among nations. This coupled with the observed shift by nations from trading solely with their traditional trade partners to including other varied nations over the past decades has significantly influenced the operating environment for the international trading community. Owing to the variance in national policies regarding trade, there arose the need to set up an international organization to govern trade and tariffs so as to ensure fairness and mutual benefits (Bromley 2004).

One such body charged with dealing with trade rules between nations is the World Trade Organization (WTO). This international body which presently has a membership of 153 countries boasts of being the only global organization of its kind and as such, yields tremendous power and influence.

Economists agree that international trade is one of the means through which development can be perpetuated and poverty eradicated and the WTO purports to do just that by promoting air trade amongst nations (Dobson, & Jacquet 1998).

While membership to the organization is voluntary, many countries feel obligated to join the organization due to the benefits that can be reaped. There exist various sentiments concerning the role of the WTO with some seeing it as a body set up to further the interests of the richer nations and others as the vehicle through which prosperity for all can be achieved. This paper argues that the WTO is of utmost importance and help to the international trading endeavours. The paper shall set give a comprehensive discussion as to the benefits and setbacks of WTO membership so as to reinforce the assertion that the WTO is mostly beneficial.

A Brief Historical Overview of the WTO

The agreement which led to the formation of the World Trade Organization was signed in Morocco and came into effect on 1 January 1995 officially marking the birth of this international trade regulator (Bromley 2004, p.75). As of today, the WTO has 153 members and a number of other countries have applied for accession into the organization. However, the WTO was not a new entity as such but rather; it was formed as a result of the agreement reached by the signatories of the General Agreement on Tariffs and Trade (GATT). WTO’s primary purpose is to administer the agreements and other commitments made by its member counties (Cooper 2006, p.2).

WTO represented a major advancement from the previous multilateral trade treaty GATT. GATT was formed in 1948 and had the primary objective of reducing or completely doing away with tariffs which were seen to be a major impediment to international trade (Ranjan 2007). However, GATT lacked a well defined political framework for negotiating and implementation of the rules that the member states had to abide by. In addition to this, Bromley (2007 p.77) contends that developing countries were suspicious of the organization which they perceived to be a “Rich Nation’s setup”. The developing nations (who constituted a significant majority of the organization’s membership) often opted to air their grievances through other trading systems out of the GATT greatly undermining the organization.

Of special interest was the GATT’s procedural feature of decision making which greatly undermined its formally democratic nature thus making the organization to be perceived by the developing nations as an organization which only furthered the interests of the richer nations. The GATT exhibited flexibility in bargaining and deal-making whereby members could opt out of binding terms. The WTO builds on the organizational structure that had been developed under the GATT but more significantly, WTO rules apply to all members indiscriminately thereby creating a greater sense of equality amongst the members (Hoekman, Mattoo & English 2002, p. 39). This is in line with the core principle and concepts behind the formation of the WTO which was non-discrimination and greater market access for all member countries.

Benefits of WTO

The benefits of the WTO to the international trade efforts can be looked at in the context of the specific benefits that the member states enjoy as a direct consequence of their affiliation to the organization. Many a nation describe the WTO as being beneficial to the economic interests of the countries in question due to the many benefits that can be gained as a result of being a member of the WTO.

Hartridge, a director with the WTO asserted in a paper presented at a WTO conference in 2000 that the agreements reached at in the WTO provide for every means by which goods and services can be traded and are not limited to cross-border trade as with the GATT agreements but rather delve into the borders of the member trades influencing the freedom exercised by the importers and safeguarding their movement. Simply put, the WTO’s influence goes beyond that of the traditional trade organizations, whose powers were mostly limited to the borders of the other nations. This is of great benefit to international trade since intricate issues which may be of consequence are also covered.

The agreements which established the WTO stipulated functions of the organization amongst which was for the WTO to cooperate with the World Bank and the International Monetary Fund (Sampson 2005, p.290).

The reason for this move was to achieve greater clarity in the affairs of global economic policy-making. The rationale behind this agreement is that the economic well being of countries is interconnected. As of today, most of the world economies are just recovering from the recent credit crunch which threatened to cripple entire establishments. The economies of the world rely on trade finance from various sources so as to undertake their trading activities (Summers 2000). However, due to the worsened economic situation, access to trade finance has been greatly reduced and capital shortages continue to plague the global finance system. Auboin & Meier-Ewert (2003) demonstrate that the effects and potential damage that may sprout from this condition are indeed enormous.

A credit crunch affects both the exporting and the importing and as in the case experienced in the 1990’s by Indonesia, countries can experience a complete freeze on importing and exporting activities (Bank Indonesia 2001). Bearing this in mind, the availability of trade finance, even if only on a short-term basis is a major concern to the international trading communities since it can mark the difference between a meltdown of the market or a graceful recovery from the same. International organizations, including the WTO, undertook several initiatives as a means to secure trade finance especially in circumstances of financial crises (Auboin, Meier-Ewert 2003, p.1).

As can be seen from this brief discussion, the WTO aims to avert the effects that may arise as a result of the drying up of trade finance during periods of crises. Its cooperation and coordination with monetary institutes like the IMF is core to the rebuilding of failing economies which is the case in the current credit crunch crises. This is a very important role of the WTO in promoting international trade since nations can proceed with their importing and exporting roles unhampered by lack of trade finance.

Left to their own devices, most countries would adopt protectionist measures which would only serve their national interests even if at the cost of the international community. As discussed above, the year 2008 witnessed a global financial crisis which sent most of the world economies into recession. These crises saw world leaders make commitments to try and reverse the situation. Mattoo and Subramanian (2009) report that despite these commitments, many countries proceeded to take up a measure to protect domestic companies. For example, Russia which has already been cited as highly subsidizing the petroleum cost for its local populace imposed a number of import tariffs.

France, on the other hand, created special funds to aid French companies and prevent them from feeling the brunt of the economic crisis. The United States, in particular, came up with the highly publicized state aid to protect the automobile industry. All these examples highlight the various measures which independent countries can undertake to protect their own interests. While these activities are beneficial to the individual country’s interests, they are detrimental to international trade efforts. Without the WTO as a facilitator of the implementation and administration of agreements reached by nations, these protectionism actions would be rife therefore greatly hindering trade amongst nations (Tai & Lee 2009, p.11).

Before the accessioning of a nation to the WTO, certain requirements must be met. One of the terms of being a member is that the member country avail access for courier and distribution services for exporters (Abnett 2002, p.14). This is an especially important issue since some political establishments have taken to the monopolization of the service industry in their nations. The General Agreement on Trade in Services (GATS) which is one of the key components making up the WTO stipulates rules that cover international trade in services.

Hence once a country is a member of the WTO, it is obliged to make specific commitments on access to their domestic markets by foreign suppliers (WTO Website). The China situation is one of the more recent cases whereby accession to the WTO forced the otherwise monopolistic government to allow private foreign investors in the almost explicitly government-controlled Chinese courier services (Abnett 2002, p. 14). This improves service provision due to the competitive forces at play as well as fostering the growth of international trade.

Export subsidies can be defined as payments made by the government to act as incentives for producers in the local scene to export goods. Schluep and Gorter (2002, p.2) affirm that the European Union and the United States employ taxpayer-financed export subsidies to promote the local production and subsequent exportation of dairy products. These export subsidies are given in a bid to boost the various nations exporting powers. Export subsidies lead to the distorting of trade as the real value of the goods is not known.

They also have the effect of giving unfair advantage since producers from countries which implement subsidization will be able to sell their produce at reduced prices thus hurting the other counties who cannot compete favourably. It is for this reason that the WTO has always set out to remove or at the least significantly reduce the prevalence of exporting subsidies by governments. Members of the body have to comply with rules that hinder them from rampantly providing export subsidies thereby leading to benefits and free trade for all. The WTO, therefore, acts as a vehicle for advancing the interests of all countries.

In all international relations, there exist contentious issues on which nations fail to come up with a common ground. The trade scenario is also prone to this and as such, there needs to be a mean to address the various contentions. The Uruguay Round talks saw to the formation of a dispute settlement body which was charged with the mandate of dealing with disputes involving WTO member states (Cottier, Mavroidis & Blatter 2003). This dispute settlement body is made up of every representative of the WTO and has the authority to make binding rulings. By use of this body, The WTO acts as a dispute resolution apparatus and nations seeking redress channel their grievances through it (Rourke 2007 p.148).

This body has rules in place that all member states are legally obliged to follow hence a well set legal framework through which disputes can be resolved. In 1999, the USA and New Zealand had a dispute with Canada concerning its dairy policy which allowed for consumer financed export subsidy thus distorting the milk prices. The dispute was resolved by the WTO dispute settlement Panel thus restoring harmony among the nations. As such, the WTO promoted international trade among the warring parties since it reached a conclusion which was agreeable to all.

WTO as a Hindrance

Despite the many benefits that are gained as being a member of the WTO as outlined above, there exist various issues that opponents of WTO see as being adverse effects of the organizations. These issues make the trading be viewed as a hindrance to the international trade efforts that it supposes to advance. Critics argue that the body is redundant in that it has failed to achieve any significant economic gains that it promised as a result of the imposition of the various trade rules. Member states, therefore, fail to acquire the various benefits that the body purports to give them as a result of membership

While most trade organizations only address traditional trade matters such as tariffs and quotas, the WTO addresses matters such as investment policy and safety standards, matters that are at the discretion of the respective member states. This means that the member states are sometimes forced to adopt the organization policies at the cost of disregarding their national policies which are at times best for the country and its citizens (Rourke 2007, p.153).

Food safety is an especially contentious issue and can be viewed from two different perspectives. In the first one, the cost of safety takes a second seat since the organizations primary motive is to promote trade. This being the case, nations that do not to conform to high safety standards of other nations are allowed to trade on the same platform with no distinction made thereby exposing the consumer. From another point of view, nations have resulted in using the safety standards clause to refuse goods that are at par or even above the minimally acceptable international standards. This has been the case when a nation wishes to place a restriction on the imports from another country.

New membership to the WTO calls for sudden changes in economic institutions so as to be in line with the organizations specifications as well as compete with the foreign manufacturers. Chow (2002, p.391) asserts that sudden changes in countries such as China may generate a level of unemployment as companies are forced to downsize their staff so as to remain profitable or go bankrupt altogether. This status quo is bound to lead to instability which is not only undesirable but will lead to a major disruption to any trade efforts that may have been underway.

One issue which has always been a bone of contention for the WTO is its decision-making process. The then chief economist of the WTO Mr Low stated in the European Center for International Political Economy conference held in 2008 that the making of decisions by consensus and single-undertaking in multilateral negotiations was not only slow and inefficient but also elicited a negative reaction from the developing nations. This is because the developing nations are seldom a part of the negotiating process and when they are, they have limited influence on the outcome of the talks. This perception of inequality impacts negatively on international trade since there is lack of a mutual feeling of trust and respect amongst the trading partners.

The principle of Most-favored nation treatment (MFN) dictates that imports from one member state will be awarded the same treatment as imports from any other member county (Cooper, 2006). Application of this MFN principle by which all members are given preferential status indiscriminately is beneficial to only developed nations which are mostly the principal suppliers or consumers thus placing this countries in a position to benefit from the gains of the Most Favoured Nation status (Bromley 77). As such, the WTO actually hurts the less developed nations in their trading activities since they can seldom compete with the developed nations on the same footing. Small economies must, therefore, experience retarded growth while the large economies continue to prosper (Arnold 2008).

Discussion

It is evident from the arguments presented above that there are both merits and demerits that the World Trade Organization brings about to international trade. This is because most of the benefits of the WTO efforts are almost invariably tied to some negative consequence. For instance, the removal of trade restrictions by the Chinese government has seen a boom in the economy as foreign currency earning has increased, on the downside, the industries must be ready to compete with foreign establishments and this may call reduction of workers leading to unemployment and possible social instability (Crawford & Laird 2000).

The Dispute resolution mechanism of the WTO is arguably the most efficient since it is backed by all members and there exist various measures to ensure that all nations abide by the decisions reached by the panel (Sacerdoti, Yanovich & Bohanes 2006). Illegal trading activities are also prohibited by the WTO. Such measures have ensured that nations proceed with care since there are systems in place to check against any misconduct. The Most Favored Nation treatment calls for the equal preferential treatment of all members. Countries may both enjoy and be hurt by this principle. It can, therefore, be seen that whereas the motivation behind the establishment of this principle was fairness and indiscriminate treatment, the realities fail to reinforce the theory since this principle is deemed only beneficial to the richer nations.

There is agreement amongst the major stakeholders in WTO that the organization needs some amends if it is to be more efficient in its role as an international trade facilitator. Proposals and issues advanced through the Doha Rounds present the first step through which the WTO can become even more effective by introducing amends to its current practices so as to reduce the aspects which make it a hindrance to international trade (ECIPE 2008). However, all members must be willing to negotiate more flexibly bearing in mind that some costs are inevitable in the WTO’s efforts to oversee non-discriminatory and mutually beneficial trade for its members.

Conclusion

Is the World Trade Organization beneficial to international trade? The discussion provided above articulates that the WTO is (more than any other single organization) responsible for advancing the cause of free trade and development. It can, therefore, be authoritatively stated that the WTO is a credit to international trade efforts. This assertion is reinforced by the various scenarios discussed herein where the intervention by the WTO was responsible for an amicable result to an otherwise bleak situation. On the other hand, we must acknowledge that the WTO is not without its flaws.

Despite WTO been responsible for the economic growth experienced globally over the past decades, its policies are increasingly becoming questionable and amends are being called for without which membership to the organization is seen as somewhat redundant. As such, the future success of the organization as an international trade benefactor greatly hinges on the amends which will reinstate the WTO as the leading body in world trade.

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