Business Environment-8 Institutions for sustainable economic globalization: World Trade organization 1

The past experience Till the second world war, there were ups and downs in international trade. Uninterrupted progress in trade was not possible because: (1) There was occasional trade war. The countries which imported more and exported less blamed the trading partner for trade imbalance. They often resorted to high tariff to protect their interests. The trading partners retaliated. This resulted in frequent trade wars. 2

The past experience (2) There was no institution to address the problem of payment imbalance stemming from trade imbalance. (3) There was no institution to enforce standards and to comply with fair trade practices. (4) Financial instability contributed to political instability which resulted in major wars like two world wars during and

Bretton woods Conference Two important initiatives were taken to build durable peace in post war world. UN was set up to address political issues. Bretton woods conference was held in 1944 to establish order in economic sphere. The conference identified three areas for international cooperation. They recommended the creation of three institutions: 4

(1) IBRD which later was known as World Bank for providing cheap credit for infrastructure and development (2) IMF for ensuring smooth functioning of international payment mechanism (3) GATT or General Agreement on Trade and Tariff to address the problems of trade. WTO is the natural offshoot of GATT. 5

Two main agencies of global economic surveillance 1. WTO 2. IMF 6

WTO WTO is a successor of GATT. Discussions on trade reforms were conducted in rounds of discussions. Between 1947 and 1994, there were eight rounds of trade negotiations. In the initial discussions, the emphasis was on tariff reduction. WTO was established by Uruguay round ( ). However, trade negotiations were not completed after Uruguay round. Doha round is now conducted within the framework WTO. It started in Nov. 2001, the deadline was 1January 2005, it is still continuing. 7

WTO There are many faces of WTO. It is an organization for liberalizing trade. It is a forum for governments to negotiate trade agreements. It operates a system of trade rules which govern the ground rules of international commerce. It is also a tribunal to settle trade disputes 8

Major Functions of WTO Major functions of WTO are: 1.Negotiation of Trade Agreements 2. Implementation and monitoring of trade agreements 3. Dispute settlement 4. Building trade capacity 5. Outreach 9

Trade Agreements The major agreements on which WTO are based as follows: 1. Binding tariff cuts. The proportion of imports into developed countries from all sources facing tariff rates of more than 15% will not be more than 5%. 99% of tariffs in developed countries were bound and cannot be changed easily. In case of developing countries, 73% of tariff was bound. There was a 40% cut in tariffs of industrial products from an average of 6.3% to 3.8% 10

Tariff Agreements 2. General Elimination of Quantitative restrictions. No prohibitions or restrictions other than duties and taxes through quotas. Imports and export licenses shall be instituted. 11

Trade agreements 3. Removal of non-tariff barriers A. Elimination of import licensing, Licensing is discouraged, cannot be reintroduced without notification showing justification 12

B. Valuation of goods (tariff value) cannot be arbitrary and must be in consonance with trading practices, C. Preshipment Inspection. Preshipment inspections should not be a barrier to trade 13

Trade Agreement D. Rules of Origin. The Rules of Origin Agreements require WTO members to ensure that their rules of origin are transparent and they do not have restricting effect on trade. 14

Trade Agreement 4.TRIM (Trade Related Investment Measure). It bans local content requirement for foreign investment or making export mandatory for corresponding import of a foreign investor. 15

Trade Agreement 5. Anti-Dumping Actions. If a company exports a product at a price lower than it normally charges in its own country, it is said to be dumping the product. The WTO agreement allows government to act against dumping by imposing penal duties. 16

Trade Agreements 6. Subsidies. Subsidies are required to be withdrawn within a time-frame to provide a level playing field for all competitors. These are prohibited subsidies. There are actionable subsidies where relief can be sought through dispute settlement process and through countervailing duties after due process 17

Trade Agreement 7.Safeguards. Safeguards refer to temporary actions to restrict import of a product if its domestic industry is injured or threatened with injury caused by a surge in imports. Criteria has been laid down for measuring seriousness of injury. 18

Trade Agreements 8. Safety and standards. Article 20 of GATT allows governments to act on trade in order to protect human, animal or plant life or health, provided they do not discriminate or use this as disguised protectionism. In addition, there are two specific WTO agreements dealing with food safety and animal and plant health and safety and product standards in general. 19

Trade Agreements 9. TRIPS (Trade Related Intellectual Property Rights). The countries undertake to enforce intellectual property rights. However, some transitional facilities were allowed for developing countries. 20

2.Implementation and monitoring of agreement This is done in two ways. First, all trade related laws, rules and regulations are submitted to WTO. Second, these are reviewed by specialized committees. Any violation of trade laws are detected and submitted to various forums for redress. 21

3. Settlement of Disputes Stages for settlement 1. First state- consultation between the states for sixty days. 2. Second stage. If consultation fails, the complaining country may ask for a panel within 45 days. It is appointed by Dispute Settlement body of WTO The panel has to be finalize their recommendations within six months. The recommendations are placed before dispute settlement body for approval. Unless a consensus of the committee rejects it, it becomes binding. 22

Third stage: Appeal. Either side or both sides may appeal against a panel’s finding. Each appeal is heard by three members of a permanent seven member appellate body set up by the dispute settlement body. The normal time limit for appeal disposal is 60 days which may be extended to 90 days. Final stage. IF the decision is not implemented by time given by WTO, compensation will have to be paid to affected country. IF compensation is not paid, Dispute Settlement body may be moved for trade sanction such as suspend trade concession and obligation. 23

4. Building trade capacity and outreach WTO helps the developing countries to develop trade capacity. It also maintains regular dialogs with NGOs who are concerned with trade. 24

Advantages of WTO 1. Free trade cuts cost of living. 2. Free trade promotes growth 3. WTO eliminates trade war and encourages uninterrupted trade expansion. 4. The system encourages good governance 25

Weaknesses of WTO 1. It erodes sovereignty of independent countries. 2. WTO destroys jobs and worsens poverty. 3. WTO is undemocratic. It is dominated by industrial countries. 4. Intellectual property is used to defraud poor countries. Trademark of Basmati and Neem claimed by American Companies. 5. WTO does not provide enough guarantee for environment protection. 26

Main Issues 1.Discuses the main functions of WTO. What are its main weakness? 2.Discuses the advantages and disadvantages of IMF? 27