The World Trade Organization (WTO)

Introduction

Globalization of the world economy, strengthening of relationships and interdependencies of countries, and the need for adaptation of national economies to the changes in the world economy required the coordination of economic policies of the major industrialized countries and development of different methods of cooperation and agreement, which would provide the correspondence of national policies and international stability. Against the background of numerous trade wars in the 80s, the coordinated cross-country regulations of international economic relations were a means of resolving many dangerous economic situations in the world. All this led to the creation of international organizations governing economic, as well as trade relations between the countries. The World Trade Organization is an organization created for liberalization of international trade and regulation of political and trade relations between the member states. The aim of the paper is to study the theoretical and practical aspects of the World Trade Organization. The paper discusses the basic principles of the organization, its main purposes and functions. The structure of the basic agreement and decision-making is also examined.

Background to the WTO

The World Trade Organization (WTO) is the legislative and institutional framework for international trading system, the mechanism of multilateral coordination and regulation of policies of member countries in the field of trade in goods and services, trade dispute settlement and development of standard trade documents. The WTO is the successor of the General Agreement on Tariffs and Trade. The organization started its activity on January 1^st, 1995. While the GATT regulated only trade in goods, the scope of the WTO is wider. “The role of the World Trade Organization is promoting liberalized trade” (Kern & Mads 2008). In addition to trade in goods, it also regulates trade in services and trade-related aspects of intellectual property rights. The WTO has the legal status of a specialized agency of the UN system. The WTO intends to settle political and trade relations of the participants on the basis of a package of the Uruguay Round of multilateral trade negotiations agreements (1986-1994). These documents are the legal basis for modern international trade (Kern & Mads 2008).

The Members of the WTO

The members of the World Trade Organization can be divided into two groups – founding countries and acceding countries. In accordance with the agreement establishing the WTO, founding countries of the organization became Contracting Parties – participants of the GATT (128 states), which provided lists of commitments on goods and services and ratified the Uruguay Round package. As for 2012, the WTO includes 159 countries and 25 countries have an observer status (Davey 2012).

Living Standards in Developing Countries

After the Second World War, there were nine rounds of multilateral trade negotiations. However, the ninth Doha Round initiated in November 2001 is characterized by the fact that it does not focus on the developed countries but the developing ones for the first time in the history of the WTO and the GATT. A priority area of the Doha Round is providing access to rich countries’ markets for representatives of developing countries. In addition to trade in manufactured goods, agricultural products and services, the Doha Round concerns a lot of things related to trade more indirectly – for example, the rules of governing foreign investments, intellectual property and antitrust law. The WTO provides the benefits in international trade for the developing countries. They are necessary for underdeveloped countries to join the world economy since obviously they cannot compete with developed countries on equal terms. Therefore, underdeveloped countries have special privileges. As a result, the developing countries have more opportunities to negotiate a treaty. The developing countries can advance more effectively if they take the opportunity to create alliances, in order to pool resources (Davey 2012).

Meritocracy of Workers

Meritocracy is a management method, according to which the most talented people must occupy managerial positions regardless of their social background and financial prosperity. At meritocracy, leaders are appointed from among special talents that initially had favorable conditions for achieving a high social status and recognition during free competition. According to some researchers, this method of control is successfully used in the WTO (Reis 2009).

Increase in Employment

There is clear evidence that trade increases economic growth, and therefore, economic growth means more workplaces. It is also true that at the expansion of trade, some of the workplaces are subjected to reduction. However, analyzing this situation, two problems arise. At first, there are other factors. For example, technological progress also has a strong impact on employment and productivity creating some jobs, but reducing others. Secondly, while trade increases the national income (and prosperity), it is not always conducive to the employment of workers that lost their jobs as a result of competition from imported goods. However, the situation is not the same everywhere. The average duration of the search for a new job may be longer in one country than in another country under the same conditions. In other words, some countries adapt better than others. It is partly due to the fact that in some countries the government reacts to the events faster. However, in most cases, more free trade is beneficial for employment.

The European Commission has estimated that the single market creates more than 300.000 new jobs. The simplification of customs procedures creates 21 million of workplaces, 18 million jobs in developing countries and three million in developed countries. Frequently, job prospects are better in companies involved in trade. In the United States, the work of 12 million people is connected with export. Two million of these jobs appeared in the period between 1993 and 1997. This kind of work is better paid and more secure. During the period between 1987 and 1992, the employment growth in companies – exporters was approximately 18% higher than in other comparable companies (Narasaiah 2004).

Increase in GDP and Income

Trade clearly increases profits. Trade also promotes competition of domestic producers of imported goods. However, the fact of the existence of additional income means that governments have the resources to redistribute the income of those who received more, for example, in order to help workers and companies adapt by becoming more competitive and productive in the area in which they are working or encourage them to new activities. There is acceleration of economic growth among the member countries of the WTO. At the same time, real GDP is growing. However, the WTO membership and access to the markets of member countries does not give a push to the growth of economy without corresponding institutional reforms. Studies have shown that the main obstacle for economic growth is the low quality of political and institutional stability, law and order, the legal independence of the courts, or property rights in the broadest sense of the word (Narasaiah 2004).

Elimination of Tariffs

Reduction of tariffs in the participating countries leads to improvement of distribution of domestic resources, as the reduction of tariffs encourages the countries to shift production to those industries where products are more expensive in world market prices. This effect, known as the gains from trade, is the fundamental effect of trade liberalization. In addition, companies can more easily import the newest foreign technologies. It improves the performance of economy (Reis 2009).

Elimination of Quotas

Application of the principles of the WTO improves the efficiency of foreign economic activity of the state due to simplification of the system of customs duties and other trade barriers. “The reduction of barriers to international trade is the basic function of the WTO Agreement” (Davey 2012, p. 28). As a consequence, predictability and transparency of economy attract partners and increase turnover. Non-discrimination, transparency, greater certainty in terms of trade and simplification help reduce costs of companies, enhance their operations and create favorable conditions for investment and trade.

Economies of Scale

Trade openness creates a favorable climate and conditions necessary to accelerate the pace of growth in the long term due to efficient allocation of resources, use of economies of scale and access to foreign technologies. Economies of scale can lead to costs reduction and lower prices, and hence to sustainable economic growth. Developing countries may experience specific difficulties collaborating in the world trade because of the absence of economies of scale (Reis 2009).

Foreign Trade Improvements

The trading system of the WTO helps the free realization of trade and provides the countries with a reasonable and structural mechanism to settle controversies on trade issues, thereby promoting international collaboration and stability. A striking example of the impact of trade on international security is a trade war of the 1930s. At that time, countries engaged in construction of protectionist trade barriers. It exacerbated the Great Depression and played an important role in the beginning of the Second World War. Repetition of pre-war tension in trade after the Second World War in Europe was avoided through the development of international cooperation in trade in coal and ferrous metals within the European Coal and Steel Community. It was the basis for the future establishment of the European Union (Footer 2006).

Conclusion

The World Trade Organization is a legal and institutional basis for the international trading system, the mechanism of multilateral coordination and regulation policies of member countries in the field of trade in goods and services, trade dispute settlement and development of standard trade documents. Benefits of the WTO system are proved by the fact that almost all major trading nations are members of the organization. Apart from the purely economic benefits that can be achieved by lowering the barriers to free trade, this system has a positive impact on the well-being of citizens and on social and political situation in the member states.