World Trade Organization: Why It is Necessary in International Trade Essay
World Trade Organization: Why It is Necessary in International Trade
International Trade can be viewed as a voluntary exchange of mutual advantage in that countries engaged in trade take and give something beneficial in return to their trading partners. While international trade is thus conducted voluntarily, the World Trade Organization has emerged in the international system raising questions as to its necessity in the global trading system. This paper is thus an effort to answer why the WTO is considered necessary in international trade given that the trade in between countries is conducted voluntarily in exchange of mutual advantage.
The World Trade Organization is considered as necessary in international trade because the organization establishes rules and structures for international trade that provide security and stability for nations’ commerce (Kaplan, 2005). Without the WTO, for example, countries may impose unilateral policies that can prove detrimental to other countries such as can be recalled of the protectionist policy imposed by the United States during the Great Depression.
Such policies, while formulated to protect domestic products and national interest may destabilize the commerce of other countries and even the implementing country (Gusmorino, 1996). Without the World Trade Organizations, countries will be free to impose trading practices and policies that can be detrimental to the interest of other countries. More powerful countries are more likely to devour smaller economies in international trading competitions as more powerful and influential countries would be freer to impose their will unilaterally on their smaller trading partners (“The 10 Benefits”). The situation will thus result to an imbalance in the international economy with greater of the world’s wealth remaining in the hands of the already affluent countries.
The World Trade Organization is considered as necessary in international trade because it protects and provides opportunity to smaller and developing economies that can be otherwise crushed in a trading competition with developed and powerful countries. Smaller economies will have difficulty competing in the international market for reason that international trade competition can be dominated by powerful and rich countries such as Japan, Canada and the
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United States. Small countries have difficulty catching up with their competitors because “small countries do not have much to offer trading partners by way of market access concessions thereby limiting the extent to which they can seriously engage in, and reap benefits from, the reciprocal bargaining” (Mattoo & Subramanian, 2004). Smaller countries with smaller economies also oftentimes emerge as losers because of the difficulty in keeping pace with the advancements and innovations of highly developed countries such as the United States. This situation in the international market, where the less affluent can be easily devoured by the markets of the strong and powerful necessitates the presence of an organization that will oversee fair treatment of all competitors (“Trade, the”). As such, the WTO would be necessary because through it, the interest of the smaller economies are better protected and even advanced. The organization does this by providing non-discriminatory opportunity for all member states through its most favored nation treatment. The WTO has also been continuously restructured so as to be able to cater not only to the demands of the bigger player but also to cater to the needs of the less affluent countries. The WTO also provides more opportunity to the lesser and developing economies in that smaller countries can enjoy increased bargaining power. Thus, giving them the assurance that they will not be left behind in a trading competition against powerful and developed countries, allowing them to take advantage of global trading.
The World Trade Organization is considered as necessary in international trade because it helps prevent, mitigate and even negotiate disputes between countries over trading issues. Without the WTO, stiff competition in the international market can turn into disputes and may even result to more serious conflicts such as in the form of political war. The WTO has a structure of policies and regulations that entails conformity among member states establishing acceptable norms in the conduct of international trade. This can prevent instances where countries will curtail trading rights and opportunities of another country because no policy has been set up. Through its set of policies, the WTO prevents the emergence of disputes and issues
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which would have emerged from unregulated trading relations. David Ricardo proposed that worldwide wealth is maximized if states engage in international trade specifically according to their comparative advantage. However, with the growing popularity of free trade and globalization, more countries offer similar products that they consider to have their comparative advantage resulting to stiff competition and even friction in the international market. It is therefore inevitable that disputes will arise. Without the World Trade Organization, countries facing trading frictions may not be able to settle the problems themselves as other means of “settlement” may be resorted to. This situation may lead to more serious disputes and conflicts. The WTO is necessary in that it provides a venue for countries to report violations; establishes sets of agreements and rules through which countries are subject to abide; and provides an opportunity for countries to negotiate their disputes thereby preventing more serious conflicts and war . The WTO has proven to be such an effective intermediary between countries in conflict regarding trade issues. Since 1995, for example, around 300 disputes have been handled by the organization, more than half of these have been settled harmoniously which otherwise could have led to more serous political conflict (“The 10 Benefits”).
The World Trade Organization is considered as necessary in international trade because it lowers trade barriers through negotiation thereby promoting and supporting trade liberalization and preventing protectionist policies that can be disastrous to the international economy. The rules established by the WTO also ascertain that trade is free and fair. With a liberalized trade, more nations and even consumers can benefit. Free trade allows countries to specialize in the goods or services in which they have a comparative advantage. In a system of interdependence where countries should trade the good in which it is best at producing and abandon the good in which it is worst at producing, specialization will occur. Specialization will consequently result to lower operational costs and increased productivity. Thus, countries will be able to take advantage of their efficiencies at the same time benefit from the efficiencies of another country.
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Free trade also improves the profitability of many local industries by allowing them to get better deals in purchasing their supplies of raw materials and other capital goods thus helping them reduce costs of production. Free trade will also enhance and promote innovation in that equal footing in a multilateral market will compel manufacturers and economic players to offer better deals and newer innovations to the consumers. In addition to the benefits of free trade, history also shows the disastrous effects brought about by raising trade barriers. The enactment of the Fordney-McCumber Act in 1922, which raised the average import tax to some 40 percent prompted retaliation from European governments but did little to improve prosperity in the United States (“Smoot-Hawley Tariff Act”). The passage of the Smoot-Hawley Tariff Act which raised the already high tariff on over 20,000 imported goods also provoked a storm of foreign retaliatory measures. The Smoot-Hawley Tariff Act is attributed by many for worsening the Great Depression of 1929 (“Smoot-Hawley Tariff Act”). After its passage, many countries adopted “beggar-thy-neighbor” duties, a measure where one country seeks to gain at the expense of its trading partners thus exacerbating the situation of the world economy while reducing global trade. Through the World Trade Organization, protectionist policies of states can be prevented which would have otherwise solicited reciprocated protectionist policy from other trading nations, endangering the economic balance in the international system.
World Trade Organization is necessary in international trade because it discourages protectionist policies that can result to conflict in between nations as exemplified by the current problem between China and Japan. The friction started in April 2001 when Japan instituted provisional safeguard measures on three agricultural products mainly imported from China. China has retaliated by imposing special tariffs on cars, mobile phones and air conditioners imported from Japan (Kwan, 2001). Such situations that have emerged because of protectionist measures can be dealt with by the WTO through its principles in safeguard measures.
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Gusmorino, Paul Alexander (1996, May 13). “Main Causes of the Great Depression”. Retrieved November 21, 2006, from http://www.gusmorino.com/pag3/greatdepression/
Kaplan, Eben. (2005). ‘The World Trade Organization.” Retrieved November 21, 2006 from http://www.cfr.org/publication/9386/world_trade_organization.html?breadcrumb=default
Kwan, C.H. (2001). “Turning Trade Friction between Japan and China into a Win-Win Game”. Retrieved November 21, 2006 from http://www.rieti.go.jp/en/columns/a01_0003.html
Mattoo, Aaditya and Subramanian, Arvind. (2004, March). “The WTO and the Poorest Countries: The Stark Choices”. Retrieved November 21, 2006 from http://www.cgdev.org/doc/event%20docs/The_WTO_and_the_Poorest_Countries.pdf
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“Trade, the Doha Round and Poverty Reduction”. (2006, August). Retrieved November 21, 2006, from the World Bank Group Website: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20040979~menuPK:34480~pagePK:34370~theSitePK:4607,00.html