Free Business Essays - The World Trade Organisation (WTO) is the only international organisation dealing with the global rules of trade between nations
The World Trade Organisation (WTO) is the only international organisation dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible (www. wto.org). The fundamental principal of WTO is to help producers of good and services, exporters, and importers conduct their business and to improve the welfare of the peoples of the member countries.
Since 1945, there has been a steady reduction in tariffs and other barriers to world trade, largely due to the work of the General Agreement on Tariffs and Trade (GATT) (Daniels, J.D., 2001). GATT was an international treaty signed in 1947 and designed to limit government restrictions on trade, so prevalent during the first part of the 20th century. The guiding principle of GATT was each signatory country agreeing not to make unilateral tariff increases, thus preventing the outbreak of tariff wars. As well as restraining the imposition of further tariffs, GATT provided a framework to liberalise trading activity.
A tariff is a tax on imported goods, designed either to raise revenue for the host government or to protect local industry from more efficient foreign competition (ACCA Paper 3.7). Tariffs are generally regarded as detrimental to economic welfare as they may prevent consumers from enjoying sometimes higher quality goods. They push up cost of productions such as materials and components. They may also protect domestic industry although this may be justified as a short-term tactic to gain breathing space at times of severe Balance of Payment (BOP) difficulties, or in the medium-term when it is desirable to nurture an ‘infant industry’.
There have been eight rounds of world trade negotiations since the formation of GATT, resulting in general tariff reductions. The last three of those rounds are formally know as the Kennedy Round (1967), the Tokyo Round (1979) and the most recent the Uruguay Round (1993). Kennedy and Tokyo agreed to cuts in tariffs of around a third each, and Uruguay by some 40%. The Uruguay round was important for two main reasons; firstly, the tariff cuts agreed by the 115 countries were the most audacious and comprehensive to date. Secondly, it created a new body, the WTO.
The multilateral trading system embodied in the World Trade Organization has contributed significantly to economic growth, development and employment throughout the past fifty years. International trade can play a major role in the promotion of economic development and the alleviation of poverty. WTO recognises the need for all consumer to benefit from the increased opportunities and welfare gains that the multilateral trading system generates.
The WTO has 140 members as at 2001, with each member having equal rights and responsibilities. WTO membership imposes greater obligations on countries to observe the GATT rules and makes it more difficult for governments to use subsidies as an alternative to tariffs and other means of protections to national industries. Prior to the establishment of WTO, developing countries in GATT enjoyed all the GATT rights but were exempt from most of its obligations to liberalise trade. As a result developed countries tended to make tariff reductions in sectors that served their interests but, unsurprisingly, gave little in return to developing countries. WTO has phased out all such special treatments for developing countries.
The WTO also set up a new mechanism or settling disputes with more power to enforce rulings over non-tariff barriers then previously existed. In 1997, three items of unfinished Uruguay business were completed involving agreements to lower trade barriers in financial services, information technology and telecommunications. The Uruguay Round also resulted in the formation of the General Agreement on Trade in Services (GATS) to be policed by the WTO. It covers basic services such as health care, education, water supply, infrastructure, such as public transport and postal services, cultural services such as films and broadcasting; and finance, retailing and tourism
Fears over GATS are one of the reasons why the WTO and more broadly, the role of the MNC’s, which allegedly benefit from it, have attached much criticism in the early 2000s. The World Trade Organization has made a great deal of progress in opening world trade markets. However, the organization has recently come under fire for its actions. The Global Trade Watch is one organization that is a vocal critic of the WTO (Daniels, J.D., 2001). The main criticisms were:
1. Protectionism by developed countries is greater than that by developing countries, a reflection of the Uruguay Round’s removal of more concessions from developing countries that from developed ones. However, in 2001 developing countries actually had higher tariffs, 21 per cent on average, than developed countries (8 per cent)
2. It is wrong to require developing countries to dismantle trade barriers when these still exist in developed countries. But any reduction of trade barriers will raise economic welfare by allowing specialisation.
3. Export from developing countries fail to grow because of protection in developed countries. But in reality, weak trade performance by poor countries is due partly to failure to restructure their economies and partly due to their own protectionism.
While social policies, particularly environmental and labour standards, are not new to trade policy discussions, they are likely to have a more prominent role in the years ahead for the new World Trade Organization. Many developing countries perceive the entwining of these social issues with trade policy as a threat to both their sovereignty and their economies, while significant groups in advanced economies consider as advancement in the role of WTO.
Increasingly, the World Trade Organization has become the governor of world trade. It is a freestanding organisation of 140 nations, beholden to no one but its members; parallel to the UN but granted power unprecedented in history. The WTO can set trade rules and order stiff penalties against member nations that break them. If the European Union, for instance, should refuse to import US hormone-laced beef, the WTO can rule that this is a "non-tariff barrier to trade." A WTO panel can decide there is no proof of health risk, and that the EU is using the ban as a ploy to protect domestic cattle production or to trade with preferred partners. The US and WTO then negotiate how much US trade in banned beef is worth in dollars, and allow the US to apply "sanctions" (really high tariffs)--to Italian hams, Belgian chocolates, or French truffles, for instance, equal in value to the lost exports. Although the sanctions supposedly punish offending nations, small producers who had nothing to do with the hormone/beef dispute can suffer.
WTO has also had a major influence in shaping the flow of Foreign Direct Investment (FDI). FDI often brings the recipient useful technical and managerial knowledge (Daniels, J.D., 2001), and vital contacts in world markets, as well as money. But an FDI partnership requires a big investment of time and effort, especially on the investor's side. This will tend to narrow the scope of FDI to large projects in relatively large recipient countries (which can offer the investor a correspondingly big market for its output). Of all the companies or activities in developing countries that could make good use of foreign capital, comparatively few are currently in a position to attract FDI. The role of WTO in removing tariffs has aided the flow of capital into many developing countries of the world, which were previously not viable investment options for multinational enterprises.
The United Nations Conference on Trade and Development (UNCTAD) predicts that China may for the first time overtake the United States to become the largest Foreign Direct Investment (FDI) host country in the world. According to preliminary estimates released, world FDI inflows in 2002 will decline by 27 % to about $ 534 billion. UNCTAD experts hold the view that the uncertain economic situation and weak stock market are undermining business confidence, with a sharp impact on cross-border mergers and acquisitions and corporate investment expansion plans. Completed cross-border mergers and acquisitions in the first nine months of this year fell by 45 % and the decline was particularly drastic in the United States, the largest recipient of FDI in 2001. An UNCTAD report said that these developments, especially the substantial decrease in FDI flows into the US, may conceivably lead to China supplanting the US this year as the single largest recipient of FDI inflows worldwide. FDI growth in China continued its momentum at an estimated $ 50 billion, and inflows will probably set a record, said UNCTAD.
China’s December 2001 membership in the WTO created substantial opportunities for US companies seeking to expand into China’s vast market, and for significant reforms within China at all levels of government. However, the benefits of the Chinese membership into WTO are reliant on China successfully implementing its free trade commitments. However, there have been compliance issues in relation to commitment to grant market access to certain bulk agricultural commodities through the use of tariff-rate quotas (GAO-03-461). Therefore, China’s entry to the WTO has led to increase monitoring and enforcement responsibilities for the US government.
Because China’s economy is in a transitional stage from a non-market to a market economy, and because China’s commitments required China to make extensive changes to its trade regime, WTO members, and specially the US, pushed for entry package to include commitments creating a transitional review mechanism. This is a mean of monitoring China’s compliance to its obligations to other WTO members. This is important because it will establish a multilateral monitoring mechanism that allows WTO members to better understand Chinese trade practices and for members to communicate their expectations to China.
The Chinese WTO membership has affected its trade policy with much Pacific Rim countries. The Pacific Rim countries have a Regional Trade Agreements (RTAs), namely Asian Pacific Economic Cooperation (APEC) organization: An organization of 18 Asian nations that attempts to reduce trade barriers between their nations.
Australia’s profile as a trading nation means that it has strong interest in ensuring that the international trading regime of the WTO is open, equitable and enforceable. Australia’s impressive economic performance during the past decade is due to sound macroeconomic policies as well as structural reforms that have reinforced past unilateral trade liberalisation. Australia has remained largely dependent on commodity exports and manufactured imports. Most of its merchandise trade is conducted with APEC partners, with some reinforcement of trade with East Asia in the weak of the Asian crisis. However, the trade conditions have been strengthen with China now joining the WTO.
However, Australia has maintained its preferential trading arrangements with New Zealand and other countries in the South Pacific, Canada, and developing and least developed countries (under the Australian System of Tariff Preferences). Recently, more emphasis has been placed on exporting the prospects with Japan, Korea, Singapore, Thailand, China, as well as regional relations through the closer economic partnership linking, hence, trans-Pacific regional agreement.
The Doha Declaration gave emphasis to market access and development issues, which held the key to genuine trade liberalisation from which China and other WTO members stand to benefit. Australia’s overall objectives for the negotiations were to achieve significant improvements in market access across the board in agriculture, industrial products and services. Australia’s regional trade policy complement and reinforce its bilateral and multilateral trade policy activities and objectives. An important component of this policy is Australia’s active involvement in the APEC forum. APEC’s wide ranging agenda of trade and investment liberalisation, business facilitation, and economic and technical cooperation, is central to Australia’s efforts to promote sustainable regional economic growth and development
More then 80 percent of all tariff lines are now at a rate of 5 per cent or less, with around 45 per cent at a free rate of duty. The average applied tariff rate is just 4.4 per cent (3.9 per cent for developing countries and 1.72 per cent for Least Developed Countries (LDC)). The average effective rate of assistance to manufacturing (a measure of net assistance taking into account the costs and benefits of government intervention on input, direct assistance to value-adding factors and output assistance) was estimated by the Australian Productivity Commission as 4.8 per cent in 2000-01.
1970-71 1983-84 1990-91 1996-97 1998-99 2000-01
Manufacturing 34.9 22.7 15.6 5.6 5.2 4.8
Agriculture 28.0 12.0 13.0 10.2 7.7 6.0
Source: Effective Rate of Assistance, 1970-71 to 2001-01 (per cent) www.wto.org
Finally we should examine what is likely to be the overall effect of WTO membership for China during 2002 and 2003? And how will China’s entry into the WTO affect Australia-China trade and investment? Most analysts agree that the “pain” will be worse than the “gain” for China at least until 2004. This is expected as the result of China’s agreement to begin the phase-in period for a reduction in tariffs from 21 per cent to 8 per cent, on the average, immediately after accession to the WTO (Chamber Reports). China currently has regulations in place that, in theory, fulfil many of the market opening it promised for December 2004 when it entered the WTO. But several of those commitments remain unfulfilled, while for others, most notably distribution rights, implementation remains unclear, leaving many foreign companies unable to take advantage of changes. The chart below reflects those commitments and status to date.
1. Allow wholly foreign-owned enterprises in wholesale, retail, and commission agent’s service 1. Regulations issued, but full implementation delayed.
2. Allow franchising 2. Done.
3. Allow direct sales 3. Late. Direct sales draft regulation under consideration.
4. Allow retailing and wholesaling pharmaceuticals Late. Drafting separate rules for foreign participation.
5. Allow retailing of refined fuel Late.
Chart 1.0 WTO Scorecard: China’s Year-Three Commitments
Source: The US-China Business Council (USCBC) 2005
The USCBC in 2004 conducted a survey of member company views on China’s implementation of WTO commitments to date in each member’s priority areas. USCBC members give China an average performance score of 5.0. This represents a modest improvement over last year’s score of 5.2. The USCBC asked each member company to select five priority issues from a list of 23 choices. Responding firms identified the following 11 issues as the most important. The issues have been given a weighted score to reflect their relative importance to respondents.
How will China’s entry into the WTO affect Australia-China trade and investment? Australia will benefit. The most obvious source of this is the expected increase in exports of grain to China. The planned reduction in tariffs, combined with the agreed upon quotas that are part of the TRQ system, will hopefully lead to an orderly increase so that grain prices in Australia will remain stable. The desire for global price stability in grain was a principal motivating factor in WTO approval of the TRQ system for China.
Exports of cotton and oil seeds (or the edible oil itself) are also expected to increase. Other agricultural products, and especially agricultural services, provide opportunities for Australian enterprises. Horticulture and livestock production in China will require international expertise for at least several years until globally recognised quality is achieved. Opportunities in China’s manufacturing sector exist, but are less obvious and are generally associated with large-scale production, especially motor vehicles, petrochemicals and pharmaceuticals.
Therefore, China’s membership to WTO will benefit China and other member countries including Australia in promoting growing free trade across international borders. China will become an even larger centre for global trade and production than it already is.
Source: The US-China Business Council 2004
References
1. China may outstrip US as world's largest FDI recipient, http://www.gasandoil.com/goc/news/nts24650.htm
2. GAO-03-461, First-Year U.S. Efforts to Monitor China’s Compliance, March 2003, WTO.
3. Daniels, J.D., International Business: Environments and Operations 9th ed (2001), Pearson Higher Education
4. World Trade Organisation, http://www.wto.org
5. ACCA, Paper 3.7 Strategic Financial Management, (2001) The Financial Training Company
6. http://www.chinaonline.com
7. Chamber Reports, China’s Entry Into the WTO: How Will It Affect China and How Will It Affect Australia? (2001) http://www.accci.com.au/wto.htm
8. The US-China Business Council (2005)
Bibliography
1. Radebough, L.H., Daniels, J.D., International Business, (2000), Pearson Higher Education
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