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Overview
The World Trade Organization is the sole global body that deals with fairness in trade among nations. It designs rules to ensure that large economies and small economies are at par in economic growth. However, its policies and propositions are not popular with most nations.
Its aims are to facilitate demand and supply by ensuring that producers of goods and services find a way to export their products and those that do not produce find a way to import what they need. Through its membership, World Trade Organization facilitates two major world forums. The Doha Development Agenda is a trade negotiations forum.
It is designed to achieve groundbreaking reforms in the manner in which world economies conduct their trade. The forums agenda is to inject revised rules and to improve the international trade system through systematic introduction of minimal trade restrictions. It was officially launched in Qatar in 2001. Ministers of respective countries tasked with commerce, trade, and sometimes finance attend the forum.
Each minister goes to the table to air their countries views. The Doha development agenda covers around 20 critical areas of world economy, which include agriculture, services, imports, exports, intellectual property, among others.
World Trade Organizations advocacy for free global trade has not been popular with majority of the nations. Although free trade has many benefits as opposed to closed trade, many countries perceive free trade negatively and bring down any attempts at making the world economy free of national and regional barriers.
For example, in 2003 during the talks that were held in Caucun Mexico, the world witnessed massive protests. This was the third ministerial meeting with the same agenda: trying to break the deadlock that had been experienced in the last two sittings since the first round in Qatar.
The second major forum facilitated by World Trade Organization is the World Trade Forum. This forum seeks common ground on how countries can work together in tackling common global problems that go beyond the need for economic integration. This includes the need for development in major areas such as education. Major economies and their leaders normally attend it.
They review goals and targets such as millennium development goals. This forum is generalist compared to the Doha round of negotiations. However, it is important to note that they both champion for a more developed world, which caters for the need of everyone. The following principles guide WTO.
Principle of Non-Discrimination: It requires a WTO member to apply similar trade conditions while transacting with all WTO members. It simply implies that the WTO members should treat other in a favorable manner. In addition, if a favor is extended to one member of the WTO in a certain transaction, similar treatment should happen to any other WTO member in case of a similar transaction.
Reciprocity: This principle advocates for nations to do mutual things to each other. For example, reduction of transaction tariffs should be mutual and equal in measure. Markets should be freer on both sides of the spectrum. Barriers restricting such trade should effectively come down to enable more trading for mutual growth and benefits.
Predictability: World Trade Organization proposes that any agreements arrived at should be binding and long-term. Any member should not decide arbitrarily to change any terms or conditions.
This gives confidence to members, investors, governments and any other stakeholders. It is a good ingredient to promoting healthier relations and growing economies. The subjects that touch on this principle include market-opening commitments, tariff rates, and trade barriers.
Beneficial to Less Developed Countries: This is a critical principle. However, in recent times and in the past many developed countries have misused this principle. It proposes that underdeveloped countries should enjoy special privileges when dealing with economically strong economies.
This will enable them to enjoy greater visibility and flexibility in the marketplace. At the start of the supposed agreement, it helps these economies to adjust to the current economic environment. Adjustments include sensitization of its citizens and structural changes, which may be much easier for the big economies.
Competitive and Fair: The WTO strongly advises that a fair and level playing field should exist for all nations. Every country should fairly compete and universal human standards upheld. It discourages unorthodox practices such as arbitrary dumping of obsolete products to third world countries.
This practice common among the developed countries is inhumane and self-seeking. It also goes against United Nations Charter. Others include unfair export subsidies and cheap products development to gain market share.
If free trade is beneficial to nations, why does it face such hostility? Why is it that since its formulation in 2001, Doha round of negotiations did not record any milestones until 2011? Does it mean that since the major economies had been experiencing massive growth in their economies before 2011, they did not find it necessary to include other nations in their trade? These pertinent questions depict large economies as greedy.
They also point out the greatest lacuna in these talks where majority of the nations with the vote are large economies that want to shelve the interests of others.
This paper will analyze the benefits and disadvantages of free trade and look into the reasons why efforts geared towards this are hampered. Additionally, this paper will critically analyze the state of the global economy and reasons for the current state in light of existence of an idealistic free trade among nations.
State of the Global Economy
Since the World War 2, political disintegration has been on the rise. There is currently more than three times the number of independent countries than there were at the end of the war. Political disintegration has sometimes been credited with innovation as countries strive to come up with ways to fund budgets, increase security, and be relevant to its citizens.
Consequentially, political disintegration has led to economic disintegration. Although some economists argue that this leads to innovation in respective countries, as noted above, majority are of the opinion that integration of fiscal, economic, and monetary policies that are geared towards the benefit of all nations have far-reaching benefits than the former.
The global economy can be classified as irregular clusters of self-seeking political and economic integrations, which offer minimal, if any, benefits to the less performing economies. The political and economic integration of Euro Zone is a perfect example. These countries have curtailed sovereign fiscal policymaking and delegated that to the European Union.
In future, this was expected to continue until the recent Euro Zone crisis that was brought about by reckless borrowing by some members. There is minimal economic integration world over since most large economies are interested in vesting their interests at the expense of smaller economies. This brings a wedge of sharp mistrust and spawns half-baked integration with minimal benefits.
Examples of treaties that may not be effective include NAFTA, COMESA, EAC, among others. The fact that countries can easily pull out of these economic bodies reduces their credibility and waters down their efforts. Hence, the world economy is closely guarded with minimal freedom to conduct trade.
Additionally, there is minimal fairness in the game with countries that can produce goods cheaply illegally exporting these products to countries that produce them at a higher cost. This essentially kills trade.
Since the financial crisis started in the United States and quickly spread in other nations, many countries have restrained their need to import in an effort to appear to support their ailing economies. This was particularly informed by falling employment levels in many countries. Many lobbyists would criticize government if it imported any goods or services that could be produced locally.
This forestalled growth in free trade and countries continue to be wary. For example, in South Wales, when the government imported police uniforms and firefighters gears from an Australian firm, there was mass ridicule from lobbyists and citizens.
This has been the case in United States, Europe and a host of other countries. Hence, these efforts to concentrate on growing national economies and protecting them have led to the traditional artificial barriers that restrict free trade.
Advantages of Free Trade
Free trade may not be a fair trade but it has many benefits. Governments erect restrictions that restrict movement of goods and services between countries. Governments do this through use of subsidies and tariffs to hamper free trade. Normally, this is aimed at protecting domestic production from international competition. However, free trade has its benefits.
First, it allows countries to specialize in production of goods and services that they have comparative advantage. This specialization brings about efficiency, economies of scale, and increases output, which results in increased production. Second, free trade leads to an increase in productivity and a higher domestic output by increasing efficiency of resource allocation.
In addition, it increases competition, which leads to innovative ways of distribution, marketing, and technology. Third, the increased competition allows goods and services to trade at the lowest costs and gives producers reason to produce quality. Hence, customers experience quality. It also allows customers to have a variety of goods and services.
Fourth, free trade results in foreign exchange gains associated with the exchange of hard currency. This exchange allows the domestic country to pay for imports without having to exchange the money, which can be costly at times. Lastly, introduction of free trade generates employment to the domestic population.
This is because it allows economic resources to be shifted to the more productive areas of the economy, which leads to more demand for exports. The resultant effect of free trade is economic growth and development. Higher incomes and higher growth rate in economy increases living standards of citizens. Domestic industries increase production levels and enhance efficiency in productivity.
Disadvantages of Free Trade
Although there are many advantages, many disadvantages are put forth by conservative governments, lobby groups, and some economists to scuttle the efforts towards a free trade. First, free trade creates a domestic dependence on global markets. This creates a domestic economic instability associated with inability to control majority of the markets and prevailing forces such as demand, wars, and recessions.
Second, the global market does not offer a level playing field. A country may produce a certain commodity cheaply at a surplus and, to avoid losses, dump it in a country that produced the same commodity at a higher cost. Many countries find it hard to compete when such conditions prevail. Additionally, the nature of goods a country produces may not auger well in trying to find a favorable balance of trade.
For example, countries that produce agricultural related commodities experience unfavorable terms of trade. This results in lower export income and subsequently a large national debt. Third, it is in the interest of nations to protect their upcoming industries. This may not be possible if they are constantly facing competition from already established firms.
Hence, developing economies may find it more conducive to close trade and allow growth of its industries. Lastly, there are other disadvantages such as protection from environmental pollution by external firms and protection from a possibility of structural unemployment.
Tradeoffs of Integration
Introductory Case
The European Union is the single biggest economic and political integration since the Soviet Union. Europe had embraced industrial revolution and there was high industrial development across the region prior to the World War II. The war brought the economy of Europe into waste, with many of its industries destroyed.
During the period of 1945-1990, many of the countries in Eastern Europe fell into the communist hands of the USSR. United States came in sought to help save the European economy under the Marshall plan; it aided the western part of Europe and helped in building the economy.
By the 1980s the communist nations were rapidly falling while the economies of Western European countries were increasingly gaining power, this is attributable to the support of the USA.
With the help of America, many of the western nations moved to link together through economic integration. They formed the European Union that increased trade among them through shared infrastructure.
They agreed on a common currency (the euro) and made trade agreements that set their economies on the path to recovery. This was unlike the Soviet Union, which had wanted to continue scuttling efforts of recovery in Europe to its advantage.
Britain had been weakened by the Second World War hence it could no longer support countries in Europe like Greece and Turkey. It thus sought the intervention of the United States. The united states were strongly opposed to communism and to avoid European economies from falling in the hands of the soviet union they provided financial aid and also played a major role in stabilizing the civil wars at the time.
Americas intervention through the Truman doctrine saved the nations from soviet communisms in effect saving Europe from foreign policy failures and military humiliation. America believed that once a country falls into communism it would also weaken the neighbors as there would be minimum interaction due to diverging trade systems.
Their support was evident when the Soviet Union pressured Turkey over the Dardanelles Strait concessions that would have allowed invasion from the west, through enunciation of the Truman policy. USA helped Berlin with supplies and food when Stalin attempted to barricade West Berlin in a bid to take control.
This enabled Europe to maintain control of its cities from the Soviet Union. Were it not for the vast amount of aid America gave to Europe, European economies would have fallen further with the Soviet Union invasion during the cold war.
Tradeoffs of Integration
There are two types of integration: economic and political integration. The above case highlights the tricky nature of political and economic integration especially when carried out at the same time. The European Union is a classic case of economic integration with a measured political integration.
For example, it is possible to travel from some countries to others without a visa and it is a legal requirement is some countries within the euro zone. Economic integration is a major challenge to the national fiscal policies, the existence of some economies without straining and the entry of new members in the euro zone. These challenges are highlighted below.
Social and Political Challenges
A close look at Portugal and Spain who were late entrants into the European Union depicts profound developments in those two countries. Since entering euro zone, Spain has recorded a favorable economic climate highlighted by increased trade within Europe, access to European budget, and favorable infrastructure. However, many pundits believe that the inclusion of Spain and Portugal was not purely for economic reasons.
The European community strives to ensure that they have a functioning democratic union, with a common military purpose and a common defensive approach. Some economists argue that there cannot be a functioning economic integration without a political integration of some kind.
This is because many economic policies are spawned from political decisions. Hence, it follows that many Euro Zone countries do not have the political free will to make decisions as others may have.
The attached cartoon depicts a situation where a policymaker is considering two extreme options. The government of Greece had been borrowing money from the European Union members and from its citizens to fund expenditure budgets. It reached a point where the government was unable to meet its obligations and this resulted in a budget and debt crisis. The options were quite limited for the Greece government.
This is because they were not allowed to make hard financial decisions independently. Hence, the extreme options were to pull out of the Euro Zone and renege on debt payments to Germany and other big lenders or to abide by the demand from Euro Zone members to cut budgetary spending in exchange for a bailout agreement.
The bailout agreement, too, had many obligations. This includes the need to curtail government spending. This means the government will have to cut loose a massive working population from its structure. The other option will be to tax the Greek nationals more to meet the required budgetary requirements.
If Greece were independent from Euro Zone, the options would have been limitless. For example, the countrys central bank would have devalued the countrys currency. This would have facilitated more foreign investments and shored up the balance of exchange. Additionally, more money in circulation would have increased peoples spending and hence spurred economic growth.
However, all these fiscal decisions are tied to the Euro Zone fiscal structure. It is imperative to note that Greece was considering pulling out of euro zone. This meant that it would treat Euro Zone members as any other country outside euro zone. The reason this was an attractive way out is the short-term benefits.
For example, the country would immediately cease from having to consider Euro Zone members in its imports before going for any other option. Hence, the country would import essential commodities cheaply from countries in Asia, Africa, and Americas. Additionally, the countrys fiscal policies would be independent of any rules and regulations.
However, Greece would face trade barriers from even the closest neighbor and its exports would face a major lag. Hence, it would be hard to continue exporting goods to immediate neighbors. Additionally, it would be hard for Greece to be reaccepted into euro zone. The other countries will build a lasting mistrust in Greece. All these would have political, social, and economic consequences on Greece.
Legal Consequences
A country that enters into an economic integration has to abide by the rules of the integration. In the case of euro zone, all countries are required to align their agricultural, economic, and industrial legislation with the requirements laid down. Additionally, financial policies of a country must be in line with the European community. It is also mandatory to have certain taxation regimes and to have certain tariffs and subsidies.
Additionally, a country aligns its budgetary requirements with those of other countries in the euro zone. A country is also restricted from conducting business with another country if it can conduct that business with a country in the European community. All these are legal consequences that come with integration elsewhere.
One of the reasons why trade integration treaties do not work is because most countries do not take the integration seriously. In addition, the structures in place to ensure that these rules are adhered to watered down by the fact that a country has the free will to pull out at any time.
Poor Members
Poor members are one of the major reasons why economic integration is hard. Poor members feel like they are alienated and are not enjoying similar benefits as the rest. This had threatened the very existence of Euro Zone in the 1980s. These disparities include par capita income, infrastructure developments, education levels, productivity, and employment.
All these led to trade imbalances and hence poor countries were feeling the brunt. Efforts were made to harmonize this and some years later a fund specifically designed to address these problems was set up.
These structural policies systematically advocated introduction of new provisions that would make social and economic cohesions a common goal. Most integration treaties do not go to that extent. This means that in the end, most poor countries that are hungry for domestic development pull out. Eventually, the ability of the integration to continue working is severely scuttled.
Conclusion
From the above analysis, it is evident that a country that enters into an agreement with other countries significantly reduces its sovereignty. Depending on the nature and level of integration, a country may also enjoy a number of benefits.
Hence, a country trades off by weighing the option of giving up certain privileges to gain some advantages. The treaty has to be formed with good intentions. Failure to do that may result in its immediate crumble. For example, an effort should be made to ensure there is fairness that caters for the poor countries so that all enjoy fruits of integration.
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