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Role of the World Trade Organisation in Managing Global Trading Regime

4580 words (18 pages) Business Assignment

24th Nov 2020 Business Assignment Reference this

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1. Introduction

One defining feature of the post-war period has been a strong rise in the international flows of goods, services, and investments. This trend has been part of the broader economic globalization that characterized the global economy in this period. Economic globalization refers to the higher levels of integration and relationship among countries in terms of economic dimensions like trade, investments, multinational companies, financial flows, and labour movements. As some measures of economic globalization, IMF (2008) notes that “The value of trade (goods and services) as a percentage of world GDP increased from 42.1 percent in 1980 to 62.1 percent in 2007”, “Foreign direct investment increased from 6.5 percent of world GDP in 1980 to 31.8 percent in 2006”, “The stock of international claims (primarily bank loans), as a percentage of world GDP, increased from roughly 10 percent in 1980 to 48 percent in 2006”, and “The number of foreign workers has increased from 78 million people (2.4 percent of the world population) in 1965 to 191 million people (3.0 percent of the world population) in 2005”. So, flows of goods and services, investment, and banking flows increased significantly in the post-war period, showing the extent of the economic globalization.

While economic and trade globalization dynamics have displayed a general trend of increase over the last four decades, there is some recent volatility in these dimensions. The global financial crisis of 2008 and 2009 has created a structural break in the trade dynamics (Baldwin, 2009; Ahn et al., 2011; Gopinath et al., 2012). International trade declined significantly during the crisis. It recovered in the subsequent years; however, it stagnated as a ratio to GDP in the following decade. So, the rising trend of international trade disappeared in the recent period. One can argue that trade segmentation due to regional trade agreements, and trade war concerns between the US and China play some role in the stagnating international trade flows (Ghemawat, 2017). Overall, it can be argued that the post-war period has been characterized by strong trade increases and economic globalization, while the last decade witnessed some stagnation on these dimensions.

Based on the above discussions, this note examines the role of the World Trade Organisation (WTO) in managing the global trading regime and to what extent has the WTO been successful in achieving trade liberalisation since its inception. Towards this aim, the following section examines the post-war global economic order, the role of Bretton Woods institutions in this order, and the evolution of the GATT/WTO in this process. In this way, the crucial role that the WTO plays in the global trade regime is displayed. Then, the trade liberalization effects of the WTO are discussed in detail. These analyses indicate that the WTO is a central player in the global trade regime, and it was successful in the trade liberalization and integration of developing countries, especially China, into the global trade structure. However, further progress was stalled in the early 2000s during the Doha Round of negotiations as the developing countries argued that many of the new trade measures did not offer enough benefits despite possible large costs. Then, the global financial crisis in 2008 and 2009 was another factor limiting further trade integration globally. Therefore, currently, the WTO and world economy face major challenges in terms of international trade and economic globalization. 

2. The Post-war Economic Order, the GATT/WTO, and the Global Trade Regime

 The world economy experienced different economic cycles and globalization dynamics in the last two centuries. The period between 1840 and the First World War witnessed a strong rise in international trade flows. Figure 1 shows that the exported goods as a share of world GDP increased from less than 5 percent to close to 15 percent. This period is called the first wage of globalization (Artis and Okubo, 2009). However, with the First World War, the economic and political volatility in the inter-war period (such as the collapse and re-establishment of the gold regime and the Great Depression), and the Second World War, international trade as a ratio to world GDP declined below 5 percent (Irwin, 1995). As a related factor, Bordo (1993) notes that trade protection (including higher tariff rates and other non-tariff measures) increased in this period. 

Figure 1: Trade Globalization (Exported Goods/World GDP, %)

Source: Ortiz-Ospina et al. (2018).

This background of collapsing international trade and the need to establish a more stable global economic order formed a suitable environment for the establishment of international organizations aimed at managing global trade, aid, current account, monetary policy, and exchange rate dynamics. Through the negotiations among advanced countries in Bretton Woods, two international organizations and one international agreement were formed (Krueger, 1998). The International Monetary Fund (IMF) has been responsible for the management of international financial order, current account imbalances, external debt, exchange rates, and the coordination of monetary policy. The World Bank (WB) has been responsible for the management of international aid, economic reconstruction, and development. On the dimensions of international trade, there was also an initial intention of establishing an international organization called the International Trade Organization (ITO). However, the relevant talks between the US and the UK did not lead to a common understanding. While the US proposed higher levels of free trade integration, the UK insisted on keeping some of the preferential trade terms it obtained in the previous decades. This discrepancy was an obstacle in front of establishing an international organization responsible for managing global trade regime (Santana, n.d.).

The negotiation process ended in the adoption of an agreement, i.e. the General Agreement on Tariffs and Trade (GATT). This agreement was signed by 23 members in 1947. Some features of this global trade regime were reciprocity (concessions are matched between countries), non-discrimination (all members benefit from the Most Favoured Nation (MFN) status with no discrimination among members), freer and more predictable trade (the intention of decreasing tariff rates continuously, less use of non-tariff barriers, and providing predictability on trade policies), and flexibility for developing countries (like special provisions etc.) (Malhotra, 2003). The process of trade talks and tariff reductions took place in the rounds of negotiations. The GATT had 7 such rounds which were the Geneva round in 1947, the Annecy round in 1948, the Torquay round in 1950, the Geneva round in 1956, the Dhillon round in 1960 and 1961, the Kennedy round in the period of 1964-1967, and the Tokyo round during the period of 1973-1979. These rounds involved a focus on reducing tariff rates. The initial structure of the GATT did not take the considerations of developing countries much into account. Until the 1960s, few developing countries participated in the relevance processes.

However, with the establishment of many new developing countries due to the collapse of colonial regimes, the number of developing countries increased, and the need to integrate them into the global trade regime emerged. In this context, Malhotra (2003) states that “In 1964, when the United Nations Conference on Trade and Development (UNCTAD) was created to reform the GATT, efforts were made to make the system more acceptable to developing countries, including by incorporating a clause on trade and development” (p.50).

With the integration of developing countries into the system, the GATT started to produce more detailed and differentiated agreements on tariff rates and non-tariff issues. For example, the Tokyo round during the 1973-1979 period, more rigorous conditions were established for non-tariff barriers; however, these measures were binding only the countries that adopted them. Similarly, developing counties were not required of reciprocity to the advanced countries, and their development levels were taken into account in the negotiations (Malhotra, 2003). Regarding the success of these negotiation rounds, Irwin (1995) examine the impact on the rise of real exports relative to the real GDP of member countries. As seen in Figure 1, the exports to GDP ratio increased from 5 percent at the end of the 1940s to around 15 percent at the beginning of the 1980s. Understandably, the macroeconomic developments like the oil crisis and the collapse of Bretton Woods monetary system in the mid-1970s, and the debt crises of the early 1980s decreased the GDP growth rates and resulted in the short-run stagnation of exports to GDP ratio. Irwin (1995) notes that the GATT process was very successful in terms of eliminating trade barriers. The average tariff rates declined from around 40 percent at the end of the war to around 5 percent by the mid-1990s. Malhotra (2003) also note that compared to the initial 23 members of the GATT, the membership increased to 146 countries in 2003, thereby covering around 97 percent of the world trade. Therefore, it can be argued that the GATT and the WTO have been crucial players in the global trade regime.

One significant turning-point in the global trade regime was the negotiations in the Uruguay round that started in 1986. These negotiations extended the coverage of trade agreements significantly. According to Malhotra (2003), “Industrial countries sought to extend the GATT system to cover additional areas of international economic relations, and on their initiative, it was urged to place negotiations on goods on one track and negotiations on services on another. The agreement was that developing countries would negotiate on the new issues of services, Trade-Related Aspects of Intellectual Property Rights (TRIPS) and Trade-Related Investment Measures (TRIMs). In return, they would get better market access for exports of goods” (p.50). Under such detailed conditions and trade agreements, it emerged that the existing framework of the GATT would be insufficient to accommodate and manage the new structure. Therefore, the Uruguay round resulted in the establishment of the World Trade Organization (WTO). All parties became members of the new organization.

With the establishment of the WTO, the new organization has been the central player in the global trade regime. However, the new extensive measures adopted in the Uruguay round created much debate on their effects, especially for developing countries. For example, Wilkinson (2014) argues that while the GATT and the WTO seem to promote free trade for all, in practice they benefited the advanced or industrial countries more. The measures mostly included the manufacturing goods, which industrial countries have a comparative advantage and developing countries are major importers. Therefore, the relevant tariff reductions in manufacturing goods created larger benefits for advanced countries. On the other hand, the trade negotiations did not include the agricultural sector, where the developing countries had a large comparative advantage and export potential. So, the advanced countries protected some of their sectors. Moreover, the negotiation process was somewhat biased in the sense that due to the principal-supplier condition, many developing countries were not able to participate in the negotiations (Wilkinson and Scott, 2008). While the Uruguay round produced some gains for the developing countries such as concessions in agriculture and textiles, new measures on the services (GATS), investment (TRIMS), and property rights (TRIPS) were mostly in the benefit of advanced countries.

Such arguments are also advanced by another study. Wade (2003) argues that the measures adopted in the Uruguay round restricted the development capacity of poor countries significantly. On the dimension of property rights, copyrights, and patents (TRIPS), the new measures did not remedy the problems in the US patent system, while it put many restrictions on the developing countries. A leading trade economist and an advocate of free trade, Bhagwati (2001) also sees the new measures turning the WTO into an agency of royalty collection and calls it an unnecessary dimension for the WTO. On the dimension of trade-related investments (TRIMS) many restrictions were imposed on various development policies such as local content requirements, exporting requirements, trade balancing effects, and supplying goods from local producers. Such policies were considered to limit free and fair trade. However, Wade (2003) argues that given the low economic development levels of poor countries, such policies are needed for development purposes. Once these policies are banned, the developing countries would have limited comparative advantage and policy tools to compete with the advanced countries. Lastly, on the dimension of trade in services, the advanced countries again have a strong comparative advantage in this field, and developing countries have limited development policies. So, it would be difficult for domestic companies to grow, gain economies of scale, and compete for large established advanced country firms in various sectors such as tourism, banking, and insurance. Overall, Wade (2003) argues that the Uruguay round produced an uneven global trade regime for the developing countries. Notwithstanding these arguments on the distribution of the relevant benefits, theses discussions show that the WTO has a crucial role in the global trade regime. 

The above debates on the distributional effects and developmental impact of the Uruguay round for the poor countries can be considered as a factor for the failure of the next round of negotiations that started in Doha. There was a loss of trust between advanced and developing countries, and developing countries requested the reversal of some unfavourable measures without much success. In this context, Gallagher (2008) argues that “The seeds of this clash can be found in the Uruguay Round (1986 to 1994), where a deal was struck whereby the industrialized nations traded market access to their large and growing economies for domestic regulatory changes in the developing world in the areas of investment law, intellectual property, services and beyond” (p.1). So, due to continuing clash the negotiations at the Doha round did not lead to new comprehensive measures being adopted. The global financial crises of 2008 and 2009 was another factor that decreased the interest in further trade talks. As a negative development, the Brexit decision and the US-China trade war can be considered as some backslash at trade globalization. In the case of a Brexit deal, there is the probability of the UK exiting the single market of the EU, and making trade with the rest of the world at the WTO conditions. Similarly, the trade dispute between the US and China already generated higher tariff rates and non-tariff barriers in these countries. The WTO played limited role in these recent unfavourable developments. Then, it can be also argued that the WTO’s role in the current global trade regime has been restricted to some extent with the relevant negative trade developments.

3. Trade Liberalization Effects of WTO

 The above part showed that the GATT and the WTO played a central role in the global trade regime in the post-war period. The GATT started as a small-group agreement among advanced countries, but expanded to a large number of countries, including many developing countries. Then, the establishment of the WTO and the adoption of the Uruguay round measures created a very wide coverage globally. One major gain in terms of trade liberalization in the last two decades has been the entry of China into the organization. China has been instrumental in the rising levels of exports to GDP ration globally in the last two decades. As discussed above, the GATT achieved a decrease of tariff rates from around 40 percent in the aftermath of the Second World War to less than 10 percent by the early 1990s. The WTO has been also effective in terms of decreasing the tariff rates further. Figure 2 shows the average global tariff rates after 1990. It is seen that the tariff rate was around 19 percent as of 1990, but it declined to close to 2 percent by 2015. This is a significant improvement obtained under WTO guidance. It also shows the central place the WTO has in the global trade regime. Therefore, if the trade liberalization level of the global economy is measured by the tariff rate both the GATT and the WTO looks very successful.

Figure 2: Average Global Tariff Rate (%)

Figure 3: Trade Freedom Index

Source: Nordhaus (2018).

Source: Heritage Foundation (2017).

Other ways to measure would be to look at the number of countries that liberalized their trade regimes and an index to assess the trade freedom scores. Figure 3 presents the trade freedom index estimated by the Heritage Foundation (2017). The graph shows that trade freedom increased significantly after the establishment of the WTO. The trade freedom score was 56.7 in 1995, and it increased by more than one-third to 74.8 in 2011. However, there was a very limited improvement in trade freedom during the 2010s. The relevant score just increased by 1.1 points between 2011 and 2019. This slowdown in the trade globalization is seen in the exports to GDP ratio (as shown in Figure 1) and flattening of the tariff rates (as shown in Figure 2). Overall, while the level of trade liberalization measured by trade freedom increased significantly after the establishment of the WTO, there has been some slowdown in recent years.

Figure 4: The Number of GATT/WTO Member Countries

Source: Effland et al. (2008).

In terms of the number of countries with liberalized trade regimes, the number of GATT and WTO members would provide a good proxy. While some countries become a member, they had the flexibility to adopt the relevant trade measures over time. So, the membership can be considered as a leading indicator of trade liberalization. Figure 4 presents the relevant membership data. It is seen that the initial number of member countries in the GATT was around 20, but it increased in a continuous fashion in the following decades (Effland et al., 2008). There were two jumps in the membership numbers. The first one was during the mid-1960s when newly independent developing countries joined the GATT. The second was the mid-1990s when the ex-Soviet and post-Communist countries joined the WTO.   Overall, this indicator also shows that the WTO has been effective in the spread of trade liberalization globally.

In addition to the descriptive evidence on the role of the WTO for the trade liberalization dynamics, there are also some studies that examine the relevant effect empirically. For example, Subramanian and Wei (2007) find that after accounting for special provisions granted for developing countries, the GATT/WTO membership increases the trade flows in the member counties. Dutt et al. (2013) also examine the same question but looks at both the extensive (“i.e. the change in trade due to the change in the number of trading links, counting each product shipped to a particular market as one link”) and intensive (“i.e. the average sales across all links”). The authors examine the period of 1970-1999 and find that the GATT/WTO membership matters mostly for the extensive margins. Therefore, these results show that positive effect of the WTO on the trade flows and trade liberalization. There are also some empirical studies that estimate the benefits of the GATT/WTO trade liberalization measures. For example, Salvatore (2013) estimates the total benefits of the Uruguay round to be $73 billion. The author also estimates that three-quarters of these benefits are captured by the advanced countries, while only one quarter went to the developing countries. Other studies such as Weisbrot and Baker (2004) and Stiglitz and Charlton (2006) estimated the relevant benefits of trade measures in the Uruguay round to be around $50-100 billion. So, measured in terms of the benefits from trade liberalization, the WTO seems to be effective as well. However, the distribution of these benefits becomes another important question which is not examined in the current essay. Therefore, based on measures such as the export volumes as a ratio to GDP, the trade freedom index, the average global tariff rates, and the number of countries with liberalized trade regimes, and based on the empirical estimations, it can be argued that the WTO has been successful in achieving trade liberalization since its inception. However, it should be also acknowledged that the recent years produced some major challenges (like the Brexit decision and the US-China trade war) for the WTO and the trade liberalization.

4. Conclusion

The world economy experienced the first wave of globalization in the second half of the 19th century, where trade to GDP ratio tripled until the First World War. However, the inter-war period and the Great Depression decreased trade integration to very low levels again. In order to avoid similar conflicts and instability, the advanced countries established the IMF (focusing on the international monetary system) and the WB (focusing on aid, restructuring, and development), and adopted the GATT. The GATT aimed to increase trade integration in the world through a decrease in the tariff rates and the restriction of non-tariff barriers. The relevant evidence indicates that it has been quite successful with the global tariff rates declining from around 40 percent in the 1940s to around 10 percent in the early 1990s. Then, with the adoption of the Uruguay Round, the WTO replaced the GATT. After the inception of the WTO, the exports to GDP ratio continued to increase, tariff rates declined further close to 2 percent, trade freedom index increased significantly, and the membership numbers rose greatly. So, this essay argues that the WTO played a central role in the global trade regime and achieved the trade liberalization objectives. However, the recent years also pose some challenges for the WTO and the trade liberalization.   

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