Failures and benefits of free trade and the role of World Trade Organization (WTO)

Résumé du document

The free flow of international trade gained significance after the Second World War when the General Agreement on Tariffs and Trade (GATT) was tabled. The GATT was followed by the formation of the World Trade Organization (WTO) in 1995. The WTO was formed to establish rules for international trade and to have a free trade policy for international trade. The WTO allows all countries to negotiate their rights, to reduce tariffs and trade barriers, and to avoid conflicts among nations. Vietnam became the 150th member of WTO in January 2007 (Hayton, 2007). At present, there are 153 members in the World Trade Organization.

Free trade is a movement of capital and labor between countries, regions, and firms that allows having free access to international markets or to information. Free trade allows also not only trade of products or services without taxes or trade barriers such as tariffs or quotas but also applies the same rights or rules for all, without conferring advantages for some countries or the creation of a monopolistic power. With regard to the effects on the economy as a result of following free trade agreements, it can be said that free trade agreements allow for accelerating the economic growth, thanks to a greater level of competitiveness. It also enables liberalization of industries and in encouraging international partnerships. The agreements allow controlling social or environmental rights in both countries. However, the free trade is not still a reality for all countries or all industries, as each government tries to implement the best choice for its economy. The WTO tries to help the countries in this task but the complexity of the system sometimes lead to failure. As a result, there are more bilateral agreements or protectionism from government. We need to examine if this move is a good solution and the economic benefits or costs of the WTO failures. In the first part of this document, we will explain the role of the WTO, its mission, its problems and its future. Then we will explain several economic trade theories which had allowed the development of free trade. Finally, we will try to explain the benefits and the costs of WTO failures the economy.

Extraits

[...] He demonstrated and explained the comparison of the relative cost ratios existing in the both countries before trade gives the differences in comparative costs. According to the trade exchange ratios of the countries, the gains for both countries will be important but they will win not only in products' quantity and quality but also in costs and prices of products. In addition, the production and the consumption of these products for both countries will increase, thanks to the trade exchange with the other country's imports and exports of products. [...]

[...] The three major concerns about these agreements are, at first, the restriction of using the tariff protection for the developing countries that could lead to an increase in European imports and maybe could take off the beginning industries. Secondly, the governments are in a position to lose an important part of their revenue from tariffs. Thirdly, the most important issue is the effect of these agreements on the regional trade. In fact, if the goods are cheaper in Europe, the trade with the neighbouring countries will be less important. In addition, according to UN studies, EPAs could lead to compression in low and medium technology industries whereas they are really essential for successful industrialisation. [...]

[...] Furthermore, we have observed an increasing of GDP during the year of opening of trade policies for the concerned country. A lower trade barrier allows the countries to specialise themselves in one or several competitive advantages. According to economist Ricardo, when a country develops a competitive advantage; the country will have better trade exchanges with its neighbouring countries and also record a growth of its import or export economies. The opening of trade barriers also has an impact on the population of country. The biggest impact is certainly the creation of numerous jobs, thanks to the exportations or importations. [...]

[...] Other benefits for producers is to have an access to cheaper or/and better quality of raw material. This is reflected by lower cost of production and they have a possibility to have a strategy of “economy of scales”. In another case, without comparative cost advantages or economy of scales, the countries can gain benefit from trade if their demand conditions differ, i.e. according to the consumption of the population, the demand for one product for one country is not necessarily the same for the neighbour and can allow exporting it with another country in the same situation. [...]

[...] These two approaches are the benefits from free or lower trade barriers. Gains from Inter-Industry Specialisation What is Inter-Industry Specialisation? Grimwade defines it as specialisation of a country in the full range of products belonging to an industry”. Grimwade opines that gain comes from two different elements: the production and the consumption. Production gain will be derived from factors such as the better capacity for the country to use more efficiently its rare resources such as land, labour and capital. [...]