Case Study Analysis: World Trade Organization
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Executive Summary
This paper entails a review of the role of the World Trade Organisation (WTO) in facilitating the development of global trade. Through the analysis, it emerges that the WTO has played a significant role in the development of global trade. First, the WTO has facilitated global trade through the establishment of trade policies and such measures as policies that require member states to eliminate tariff and non-tariff barriers. The elimination of trade barriers has in turn facilitated free movement of goods and services. On the other hand, integration of Trade Facilitation Agreement has contributed towards the elimination of non-tariff barriers such as documentation and minimisation of border procedures. The WTO has further integrated the Special and Differential treatment agreement hence promoting trade between the developed and the developing economies. Conversely, the comprehensive trade dispute resolution mechanism adopted by the WTO has promoted cooperation between member states by eliminating discriminatory trade practices. In spite of its contribution, the WTO is limited with reference to its capacity to litigate against trade disputes. This calls for member states to improve the WTO’s dispute resolution capability.
Introduction
Global trade or international trade refers to the exchange of goods and services between countries (Constantinescu, Mattoo & Ruta 2015). Global trade has experienced cyclical performance over the past few decades, as evidenced by the incidences of economic boom and depression (Francis & Morel 2015). The 2007-2009 global financial crisis is one of the notable economic events that have recently affected global trade. According to Francis and Morel (2015), the crisis slowed the growth in global trade experienced during the pre-crisis era. Constantinescu, Mattoo and Ruta (2015) state that the rate of growth was less than 3% compared to the 7.1% growth experienced during the pre-crisis period. Stimulating trade recovery requires integration of optimal trade facilitation practices (Kituyi 2013). The premise of the current paper is to review how the World Trade Organisation (WTO) contributes to development of global trade.
Discussion and Analysis
International trade constitutes a vital component of the global economy (Arthur, Stoner & Wankel 2007). Its relevance arises from its role in promoting economic growth hence eliminating poverty. Moreover, international trade fosters international cooperation, which is an essential element in achieving sustainable economic growth. For example, cooperation between countries engaged in international trade stimulates exchange of knowledge and information, which is crucial in enhancing the entrepreneurial spirit. Arthur, Stoner and Wankel (2007) are of the opinion that ‘transfer of existing knowledge can be more important than the creation of new knowledge in fostering increased productivity and improved economic growth in the least developed countries (p. 154). However, the success of international trade depends on the effectiveness with which the requisite trade mechanisms have been established. Different agencies such as the International Monetary Fund and the World Trade Organisation have been established in an effort to promote international trade. In this section, we shall examine how the WTO has contributed to the development of international trade.
Brief background of the WTO
The WTO is an international body comprised of 163 countries that regulates trade between member states through the creation of trade rules. The organisation was established in 1995 as a replacement to its predecessor- the General Agreement on Tariffs and Trade (GATT) (World Trade Organisation 2016). Baldwin (2016) underline that ‘the WTO presides over a rule-based trading system based on norms that are almost universally accepted and respected by all its 163 members’ (p. 95). The WTO has over the past decade experienced considerable challenges in its quest to promote international trade. This is evidenced by the long duration taken in concluding negotiations and multiple cases of missed deadlines (Hufbauer & Cimino 2013). Member states have not also made any significant deal relating to trade liberalisation or trade rules since 1999 (Hufbauer & Cimino 2013). This has led to development of uncertainty regarding the WTO’s capacity to promote international trade. The challenges encountered by the WTO in promoting global trade have culminated in the concurrent establishment of different mega-regional trade groups across the world (Michaely 2014). Some of the notable trade groups include the European Union-Japan Free Trade Agreement, the Trans-Pacific Partnership, the Regional Comprehensive Economic Partnership (RCEP), and the Trans-Atlantic Trade and Investment Partnership (TTIP) (Hufbauer & Cimino 2013).
Trade facilitation
Irrespective of the challenges encountered over the past 12 years, the WTO has played a remarkable role in facilitating development of international trade. One of the notable achievements relate to the elimination of trade barriers that in turn hinders global trade. In eliminating trade barriers, the WTO has focused on eliminating both the tariff and non-tariff barriers (Heydon 2011). Tariffs, which include the levy charged on imports, are some of the major barriers that hinder international trade (Matsushita 2011). On the other hand, non-tariff barriers include the policy measures adopted by a country in an effort to limit international trade. Examples of non-tariff barriers include trade quotas, import licences and subsidies. These trade barriers increase the cost of international trade (Sourdin & Pomfret 2012).
Sourdin and Pomfret (2012) define trade facilitation as ‘reduction in trade costs, which include the different between the cost of domestic and international trade other than those costs related to traditional trade policy instruments such as imports’ (p. 3). The WTO has significantly contributed in reducing tariffs amongst member states in different regions across the world as illustrated by table 1 and graph 1 below. This outcome has been attained through the integration of negotiation amongst member states to reduce trade barriers (World Trade Organisation 2016a).
Table 1
Graph 1
Graph 1 shows that the WTO has facilitated a significant decline in tariffs amongst member states in different regions. Member states have a duty to adhere to the trade agreements and negotiations by adjusting their trade policies to fit within the agreed limits (World Trade Organisation 2016b). Elimination of trade barriers such as tariffs has stimulated free flow of goods and services amongst member states (Dyck & Neubert 2008). After its accession to the WTO in 2002, China outlined its commitment to undertake annual reduction in the rate of tariff. Within the first year, China reduced the tariff rate from 15% to 12% (The Office of the United States Trade Representative 2006). The WTO restricts member states from raising the tariff rate above the set bound rate. Apart tariff binding, the WTO has also integrated a comprehensive set of non-discrimination norms (Michaely 2014). China was further obliged to eliminate the import quota system that the country had implemented under the closed economic regime. For example,China had a duty to eliminate import quotas on different items such as cameras, video recording materials, watches, and motorcycles imported into the United States by January 2005. China ensured that this requirement was duly complied with (The Office of the United States Trade Representative 2006).
In its commitment to facilitate global trade by eliminating trade barriers, the WTO member states enacted the Trade Facilitation Agreement (TFA). The rationale of formulating the TFA is to enhance the ease with which member states conduct international trade by making border procedures efficient and simple (Organisation for Economic Cooperation and Development 2015a). According to the World Trade Organisation (2016b), the Trade Facilitation Agreement stipulates the requirements that member states should integrate in order to accelerate the movement, release, and clearance of goods. The TFA further specifies the measures that member states should adhere to in order to promote cooperation between the relevant trade authorities such as the trade customs (World Trade Organisation 2016). On the basis of this aspect, the WTO has contributed to trade facilitation by improving trade logistics. Saslavsky and Shepherd (2014) is of the view that trade logistics play a vital role in enhancing trade in the contemporary globalised economy. Saslavsky and Shephert (2014) opine that ‘better logistics performance enables firms to move goods across borders quickly, cheaply, and reliably’ (p. 979).
Implementation of the TFA has led to reduction in the cost of trade through development of global value chain (Organisation for Economic Cooperation and Development 2015). Francis and Morel (2015) identify lower tariffs and falling transportation cost as some of the factors that enhanced the expansion of international trade. Reduction in tariffs acted as an incentive hence motivating member states to engage in international trade. This culminated in development of a strong global value chain (Francis & Morel 2015). However, reduction in the cost of trade varies depending on the degree to which the member states implement the TFA and the countries’ economic performance. A study conducted by the Organisation for European Cooperation and Development (2015b) showed the implementation of the TFA will contribute to reduction in the cost of trade by a margin of 12.5% and 17.5% globally. However, the cost reduction will vary depending on whether a country implements the TFA fully or on limited basis. Table 2 and graph 2 below shows the projected decline in cost of trade depending on the extent of TFA implementation (Organisation for European Cooperation and Development 2015b).
|
|
Cost reduction depending on implementation of Trade Facilitation Agreement |
|
|
|
Full implementation |
Limited implementation |
|
Low income countries |
14.10% |
11.70% |
|
Lower-middle income countries |
15.10% |
12.60% |
|
Upper-middle income countries |
12.90% |
12.10% |
Table 2
Graph 2
Source: (Organisation for European Cooperation and Development 2015a)
One of the trade facilitation measures expected to have remarkable impact on global trade entail improvement of trade formalities such as streamlining border procedures, simplification of trade documents and automation of border processes (Organisation for European Cooperation and Development 2015a). These adjustments are expected to stimulate international trade among the member states irrespective of their level of income.
The WTO has played an indirect role in role in stimulating international trade by facilitating development of internal regulatory mechanism between member states (Shaffer 2015). Despite the fact that the WTO emphasises on non-discrimination amongst member states through incorporation of the binding rate, the WTO does not limit a member state from developing its own internal regulatory mechanism in order to adequately protect its citizens (Shaffer 2015). A member state that might be of the view that products imported from less developed countries does not meet the specified internal standards has the discretion to pressurize such a country to comply (Shaffer 2015). Shaffer (2015) assert that ‘this aspect is illustrated by the European Union implementation of internal standards aimed at controlling fish imports from the Great Lakes region in Africa’ (p.5).
The development of the European Union internal control mechanism was necessitated by increase in cases of fishermen in Africa using poisonous substances such as cyanide in the fishing process (Shaffer 2015). The affected countries initially considered escalating the issue to the WTO but later considered ensuring compliance with the regulations set by the European Union countries in order to maintain the trade relations. However, to do this, the Great Lakes region countries in Africa implemented a comprehensive mechanism aimed at controlling their domestic fishing industry with the assistance of the European Union in order to eliminate the unethical practice (Shaffer 2015). Therefore, the WTO’s approach of limiting its capacity to control international trade between member states has contributed to development of internal regulatory mechanisms hence fostering the growth of international trade.
The WTO has further facilitated development of global trade through integration of the Special and Differential (S&D) treatment agreement (Yanai 2013). In spite of the fact that the WTO operates under the principle of sovereign equality, which stipulates that all member states must be treated equally, the WTO has relaxed this principle by formulating the S&D treatment agreement. The rationale of relaxing the equality principle is informed by recognition of the existing differences amongst member states with regard to economic strength (Hallaert 2013). Under the S&D treatment agreement, the developed countries are obligated to offer the less developed preferential treatment. The S&D treatment agreement has created an opportunity for preferential treatment on the Less Developed Countries (LCDs). This preferential treatment has enhanced the ease with which the LCDs are integrated into the WTO’s trade system. Therefore, the WTO has enhanced trade between the developed and the less developed countries, which would have been substantially difficult under the sovereign equality principle. The WTO fosters implementation of the S&D treatment through three main provisions. The first provision requires the developed countries to provide the LDCs preferential market access (Yanai 2013). Second, the developed countries are required to offer the LDCs technical assistance and any other support that might be required. The last provision entails modulation of commitments (Hallaert 2013).
The WTO has further contributed in the development of global trade in the 21st century through integration of the Aid-for-Trade Initiative. Lammersen, Hallaert and Roberts (2010) assert that ‘the Aid-for-Trade Initiative is concerned with assisting developing countries increase export of goods and services, to integrate into the multilateral trading system and to benefit from liberalised trade and increase market access’ (p.1). Through this initiative, the WTO has been able to offer technical and financial assistance to the less developed and developing countries hence facilitating their capacity to engage in international trade. The WTO has stimulated mobilisation of funds from the developed to the less developed countries (World Trade Organisation 2016). Commitment to the initiative has increased remarkably over the baseline period of 2002-2005. In 2008, the Aid for Trade grew by 62% compared to the 2002-2005 baseline average (World Trade Organisation 2016). Graph 3 below illustrates the growth in the level of Aid for Trade between 2002 and 2008.
Graph 3; Performance of Aid for Trade between 2002 -2005 baseline period and 2008 in million US$
Source: (World Trade Organization 2016)
Implementation of the Aid for Trade initiative has facilitated global trade across different regions. The less develop regions have experienced the highest growth due to increased provision of Aid for Trade as illustrated by graph 4 below.
Graph 4; Regional distribution of Aid for Trade
Source: (World Trade Organisation 2016)
Graph 4 shows that Asia and Africa have experienced the greatest support with regard to improvement in economic infrastructure and development of productive capacity compared to Europe and the Americas region.
Trade dispute
The WTO has contributed to development of global trade through integration of a comprehensive dispute settlement mechanism (Shaffer 2015). Despite the importance of liberalisation in stimulating international trade, occurrence of self-interest amongst the member states cannot be ruled out. Such self-interest behaviour might jeopardise the established trade relations (Bechtel & Sattler 2015). According to Shaffer (2015), ‘the WTO provides leverage favouring export-oriented business over protectionist ones’ (p.4). The WTO has stipulated a set of rules that define what constitutes legitimate behaviour in international trade between member states. The rules are stipulated under the Disputes Settlement Understanding (DSU) (World Trade Organisation 2016). The WTO has entrenched a formal procedure used in resolving disputes relating to the legitimacy of trade barriers that member countries might impose (Bechtel & Sattler 2015). A member state that might suspect that the trade policy of a particular country with whom it is engaged in bilateral trade is in violation of the negotiated trade agreement may seek assistance of the WTO. Hallaert (2013)asserts that this move is necessary if the two countries fail to reach a solution with regard to the source of conflict. Under such a circumstance, the WTO may intervene by establishing a panel of independent experts to assist in resolving the dispute. By the end of 2012, the DSU had been applied by governments in resolving 454 disputes involving trade policy violation (Bechtel & Sattler 2015). Therefore, the WTO plays a fundamental role in shaping international trade amongst member states by fostering development of non-discriminatory norms (Shaffer 2015). Through this approach, the WTO has essentially nurtured competition between member states with regard to development of competitive products. The WTO continuously monitors the behaviour of member states and informs the member states regarding the trading policies integrated by other member states. Thus, the WTO facilitates the development of optimal international trade relations (Shaffer 2015).
In spite of its contribution in promoting development of international trade relations, Bechtel and Sattler (2015) affirms that litigation by WTO in resolving trade disputes is limited by the fact that the WTO does not have adequate capacity to enforce the rulings made by the panel on the basis of the DSU (). The gap in enforcing compliance with the ruling is hindered by the fact that the WTO operates as a member-driven organisation and does not have resources to enforce violators to comply (Macrory, Appleton & Plummer 2005). Therefore, WTO’s effectiveness in offering remedy to trade violations is limited to authorisation of member states to comply but has no power to ensure compliance. This presents a significant gap that requires to be addressed in order for the WTO to succeed in promoting development of international trade.
Conclusion
The analysis reveals that the WTO has played an essential role in promoting the development of international trade. The WTO has achieved this goal through integration of effective trade policies, measures and agreements. Amongst the notable aspects relate to elimination of tariff and non-tariff barriers that hindered international trade amongst the member states such as simplification of border procedures and reduction in the rate of tariffs. Secondly, incorporation of the Aid for Trade initiative and S&D treatment agreement has fostered trade between the LDCs and the developed economies. The S&D treatment agreement has increased market access amongst member states. Conversely, the Aid for Trade initiative has stimulated trade in the less developed countries through establishment of the requisite trade infrastructure, integration of effective regulatory mechanism and strengthening the countries’ trade capacity. Furthermore, integration of a comprehensive trade dispute resolution mechanism has fostered trade by eliminating discriminatory trade practices between countries involved in bilateral trade.
Recommendations
Despite the enormous contribution of the WTO in fostering development of global trade, its effectiveness can be enhanced by taking into consideration the following aspects.
- Trade dispute resolution capability; currently, the WTO capacity to resolve dispute involving violation of the stipulated regulations such as tariff requirement is only limited to authorising the country that violates the regulations to comply. However, the WTO does not have the power to ensure that the country actually complies, which indicates that the agency’s litigation capability is significantly limited. To improve its efficiency, WTO’s dispute resolution should not be limited to administration and surveillance. On the contrary, it is imperative for member states to consider increasing the WTO’s legal power in resolving trade disputes. This move will play an essential role in enhancing the effectiveness of the WTO rule-based system.
- Monitoring; under the current system, WTO provides member states an opportunity to develop an internal regulation mechanism. This aspect has strengthened the internal control mechanism in different sectors especially amongst the less developed countries. The developed countries pressurize the less developed countries with whom they are involved in bilateral trade with to comply with the additional requirement. However, it is imperative for the WTO to be involved in monitoring such internal control mechanisms so as to eliminate cases of discriminative trade practices.
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