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 International trade can serve to provide people in all parts of the world with new products, technologies and services to improve their standards of living. New markets are opened up that provide opportunities for employment and growth, thus stimulating global economic development. But for a global economy to function properly, clearly defined ground rules are needed. That's where the World Trade Organization comes in.
Over 150 countries worldwide are members of the World Trade Organization, which is based in Geneva, Switzerland. According to the director-general, its primary purpose is to "open trade for the benefit of all." The members have empowered this international agency with broad powers over international trade, and have committed to abide by its policies and decisions.
The World Trade Organization (WTO) was established in 1995 as successor to the General Agreement on Tariffs and Trade (GATT) through the Uruguay Round negotiations. As the World Trade Organization itself points out, it is a place where member governments go to talk and try to sort out the trade problems they face with each other. The World Trade Organization was formed through negotiation, it is a place for negotiation, and everything it does is the result of negotiation.
What are the Functions of the World Trade Organization?
One of the chief functions of the World Trade Organization is to administer the 16 different WTO multilateral trade agreements, to which all members are parties. These agreements form the legal ground rules for international commerce. They guarantee the member countries important trade rights and bind governments to keep their trade policies within agreed limits.
The World Trade Organization provides a forum for trade negotiations and for settling trade disputes. It is a place where the members can get together to discuss conflicting interests and work out solutions through a neutral procedure based on an agreed legal foundation. It is also a place where the agreements negotiated in the World Trade Organization system are interpreted and applied to actual trade issues. The Dispute Settlement Panels rule on individual trade disputes between countries.
The World Trade Organization also monitors national trade policies and conducts economic research, collecting and disseminating trade data. It provides technical assistance and training for developing countries, assisting them in their accession into the international trade arena.
Principles of the International Trading System
The World Trade Organization's fundamental principle in international trade is the pursuit of open borders, to allow members to trade in a non-discriminatory manner based on the concept of most-favored nation. This means that when one country grants a special favor, such as a lower tariff or customs duty rate to another country, it must offer the same to all members of the WTO. This is what creates a level playing field and discourages unfair trading practices such as export subsidies and "dumping" -- the sale of products below cost to gain market share and beat out other competitors.
The agreements negotiated by the World Trade Organization allow exceptions under strict conditions. For example, countries can set up a free trade agreement that applies to goods traded within the group, and that favors them over goods from outside the group. Examples include customs unions such as Mercosur in South America, the Central American Common Market and the Caribbean Community. Members of the World Trade Organization can also give developing countries special access to their markets, or raise barriers against products from specific countries that are considered to be traded unfairly.
The opening of national markets to international trade is intended to encourage and contribute to sustainable development, raise the standard of living throughout the world, reduce poverty, and promote peace and stability. In keeping with these objectives, there are certain justifiable exceptions when restrictions on international trade are necessary to protect consumers, prevent the spread of disease, and protect the environment.
Another basic principle of the international trading system is that of "national treatment." This means that foreign and locally-produced goods should be treated equally within a country. This treatment also applies to services, trademarks, copyrights and patents. This equal treatment applies once the foreign goods or services enter the country, so charging a customs duty on imports would not violate the national treatment principle.
Current Developments
There have been several rounds of trade negotiations over the years, starting with the creation of the General Agreement on Tariffs and Trade in 1947-1948 and continuing with the World Trade Organization. Another round, called the Doha Development Agenda, is now underway. This agenda originally focused on lowering tariffs, but negotiations have been expanded to cover other types of barriers to trade and to cover new areas such as services and intellectual property.
The World Bank points out that the Doha Agenda, launched at the World Trade Organization's ministerial conference held in Doha, Qatar in 2001, includes reducing the maximum protection allowed on goods and services, such as reducing the legally bound tariff for agricultural products from 40 percent to 30 percent, and for non-agricultural products from 8 percent to 5 percent. Reducing tariffs on agricultural products could be especially beneficial to exporters in developing countries, which make up a large proportion of the World Trade Organization's membership.
The legally bound tariffs are the "ceilings" that limit future restrictive measures. But the Doha Agenda also includes reducing the tariffs currently applied. Here again developing countries could benefit if average farm tariffs are reduced from 14.2 percent to 11.5 percent, and tariffs on exports of manufactured goods from 2.9 percent to 2.1 percent.
Another item on the Doha Agenda is to negotiate sharp reductions in agricultural export subsidies, by up to 70 percent in the European Union and 60 percent in America.
Recognizing the needs of developing countries, the Aid-for-Trade initiative was launched in the World Trade Organization's ministerial conference in Hong Kong in 2005. The World Bank reports that according to figures from the World Trade Organization and the Organization for Economic Cooperation and Development, about $24 billion in trade-related assistance was provided in 2006.
As indicated in Mobilizing Aid for Trade: Focus Latin America and the Caribbean, a report prepared by the Inter-American Development Bank and the World Trade Organization, a regional review was held in Lima, Peru in 2007, where the focus was on shifting from policy debate to implementation. This review stressed the importance of comprehensive national and regional trade strategies, and highlighted the need for increased and effective financing.
Developing countries in Latin America and the Caribbean face challenges such as gaps in physical infrastructure, institutional weaknesses and inefficient regulatory structures. These problems can make it more difficult to compete globally. The Aid for Trade initiative involves encouraging national policies that complement freer international trade principles, providing for more effective financing by better leveraging development assistance and multilateral lending.
Content by Kevin Hagen, Associated Content for MercaTrade.com
More Resources: Trade Agreement in Latin America and the Caribbean
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