Lecture 6 - The World Trade Organisation

Question 1

Why do we need a WTO?

Answer 1

The WTO is a market system which is a powerful device for raising living standards and it allows:
- specialisation according to comparative advantage so resources are used efficiently
- Economies of scale
- competition-induced efficiency: national markets are too small for efficiency in many industries hence global market access is needed

Question 2

How does the WTO deal with governments facing pressure to restrict imports, especially from weak industries?

Answer 2

• In response to the pressure to restrict imports, governments are likely to take a short term view and protect the industries by blocking the imports
• The WTO has a dispute settlement system which includes expert review and recommendation
• There are sanctions of higher trade barriers against offenders of these rules

Question 3

How has the WTO overcome the governmental pressure of restricting imports?

Answer 3

• The dilemma is that protecting new industries may help industrialisation in developing and emerging economies (D&EE) but it undermines the open trade system from which all benefit
• D&EE account for 50% of world trade now compared with 33% when the WTO was formed 15 years ago

Question 4

When did the WTO takeover management of the international trade system?

Answer 4

The WTO took over management of the international trade system from GATT in 1995
(General agreement on tariffs and trade)

Question 5

What two functions did GATT have?

Answer 5

1- Establish and implement an agreed set of trade rules
2- Conduct regular rounds of trade negotiations to lower trade barriers

Question 6

State the WTO principles

Answer 6

1- Non-discrimination: same treatment for all members: Eg. Most favoured nation, national treatment
2- Transparency: Use tariffs, not administrative barriers
3- Reduce trade barriers progressively/reciprocity
4- Multilateral/negotiate, not unilateral action
5- Fair trade - no dumping etc
6- Special and differential treatment for developing countries

Question 7

How is WTO membership obtained?

Answer 7

WTO membership is obtained by negotiation. WTO scrutiny occurs to see if a country is eligible, then they start trading bilaterally with main trading partners, and then multilaterally

Question 8

How does the WTO work by?

Answer 8

WTO works by consensus, one country can block an agreement

Question 9

Is the WTO a success?

Answer 9

Yes:
1- It has helped trade grow approximately 6% a year since the 1980s
2- It is a respected institution: Its rules and dispute settlement system helps to resolve trade quarrels quickly and there are consequences for those who break WTO rules
3- It has helped avoid and provided protection in economic crisis - trade fell by 12% in 2009 but has now generally recovered to a pre crisis level

Question 10

What are the concerns about the WTO?

Answer 10

1- Some WTO are still abused such as dumping
2- It has failed yet to get a significant reform in agriculture
3- The rapid increase in bilateral trade agreements threatens to sideline the WTO
4- There are massive trade imbalances
5- There are worries that a slowdown in trade growth may lead to an increase in trade barriers

Question 11

Explain the Rose (2004) research suggesting why the WTO is not a success

Answer 11

Rose (2004) challenged the trade impact of the WTO: his gravity model analysis of total trade failed to detect a trade expanding effect of a WTO membership

Question 12

Does regional integration conflict with the WTO?

Answer 12

• Legally, no as WTO rules allow members to form FTAs and CUs
• But article 24 stipulates that they should be:
• formed speedily
• cover substantially all trade of the participants
• Trade barriers should not be raised against non-members (any increases must be compensated)

Question 13

Does the EU CU follow WTO rules?

Answer 13

Yes, the EU CU follows WTO rules but many others do not

Question 14

Explain the drawbacks of opening world markets

Answer 14

• There is a danger that the world market will be divided into trade blocs which could be a recipe for conflict
• Bhagwati’s spaghetti bowl effect states that a large number of trade agreements at bilateral or regional among countries makes trade rules very complex and less transparent. This can hurt globalization at a multilateral level

Question 15

What are the benefits of opening world markets?

Answer 15

• Opening up world markets could help avoid a few protectionist countries holding up global liberalisation
• Optimists argue that Bhagwati’s spaghetti bowl of bilateral agreements could coalesce into open trade