World Trade Organization

The World Trade Organization
is a multilateral body

which pops up frequently
in discussions of development economics.

Let's look at this a little more closely.

The World Trade Organization
or WTO, as it is often called,

has two primary functions.

The first is that it oversees
a series of trade agreements

which individual nations sign onto
when they join the WTO.

And furthermore, the WTO is
a forum for negotiating disputes,

settling disputes, and then
enforcing a trade dispute.

In other words, the WTO is also a court
and it has a kind of police power,

namely the ability to levy fines.

A typical WTO case involves
the United States and the European Union.

The United States has charged
that European governments

gave unfair subsidies to Airbus,
the major European maker of large planes,

and that this placed
the United States company of Boeing

at a disadvantage.

The initial ruling was
in favor of the United States

although the case continues

and the question now is whether
the European governments

have in fact stopped those subsidies.

In general, WTO cases tell countries
they need to lower tariffs,

or stop subsidizing their exporters
or, in other ways, abide by the rules

of what is considered under the agreement
to be some kind of world trading order.

A few other facts about the WTO:

As of 2012, it has 155 members
with a 156th, Russia, on the way.

These members include
the world's major trading nations.

The WTO dates from 1995 but before then

something quite similar called GATT,
General Agreement on Trade and Tariffs.

And this was constructed in the immediate
aftermath of World War II

as a way of keeping the global
trading order relatively free.

Over time, more and more nations
have entered into GATT and now WTO.

There's the Doha development round
that was launched in 2001,

and the purpose of those talks has been
to try to lower tariffs even further,

but keep in mind since World War II,
tariffs have already come down quite a bit

except for the area of agriculture
and getting further gains

on lowering tariffs at this point
actually has proven fairly difficult.

The WTO is based in Geneva, Switzerland,

and there's also a part of it which
overlooks intellectual property.

And that's called TRIPS

which is an acronym for

Counsel for Trade Related Aspects
of Intellectual Property Rights.

Let's look at some of
the general principles

embodied initially in GATT

and they have essentially been
carried over into WTO.

First is the idea of non-discrimination,
that a trade break or tariff reduction

extended to one nation should,
as much as possible,

be applied to other countries as well.

There's the idea of reciprocity,
namely that countries would

mutually bargain for greater trade
and reduction in tariffs.

Commitments are considered
binding and enforceable

and trade policy is supposed to be
as transparent as possible.

Note finally that both
under GATT and now WTO,

if a trade restriction survives WTO,

in some ways, this strengthens
that trade restriction

because it's shown it's OK
under international rules of order

and the clear example here
would be restrictions on trade

and agricultural products.

Sometimes the very process of
joining WTO can be quite important.

The process can take
a long time, 5 years or more.

And when China applied to join WTO,
they had to make a lot of economic

and legal changes
in order to be eligible.

According to one estimate,
they had to dismantle

at least 7,000 different
barriers to trade.

Russia, which is now
seeking to join the WTO,

is having to reform
its economy in similar ways.

These are considered
some of the benefits of having WTO

namely that it gives developing
nations some reason to move

towards freer trade policies.

Of course, for the same reason,
the WTO has its share of critics.

Most economists are strong
advocates of free trade

but not all commentators and observers
agree with this perspective.

And those individuals who favor
trade protectionism for developing nations

tend to be strong critics of WTO.

Over time, the WTO seems
to matter somewhat less.

The first key point is that a lot of progress
in reducing trade barriers today,

it comes in the form of
bilateral agreements

rather than multilateral agreements
for the entire world.

So, the United States and
Costa Rica may make a deal.

The United States and South Korea
or Colombia may make a deal.

But these are country to country deals
and over time we've seen

more and more progress coming
in that form rather than through WTO.

The second point is that the major
remaining areas of trade barriers

for a lot of countries
are agricultural subsidies

and sometimes tariffs,
and those seem to be persisting.

WTO has not really
been able to crack those.

Finally, there's a paper
by economist Andrew Rose

and the title of his paper is

"Do we really know that
the WTO increases trade?"

And he looked at the numbers and he argued
that there's actually an ambiguity here.

Most countries are reducing tariffs
and trade barriers over time anyway

and it's not clear that joining
earlier GATT and now WTO

makes that big a difference.

There's been a lot of debate around
this paper and economists disagree

as to what's the correct
statistical model here.

But the mere fact that a serious
paper could be written

challenging whether the WTO
makes a difference at all

is here the important point.

When you read the popular press,
when you read the critics,

you often see a quite
sensationalistic treatment

of the WTO as if it is some
major force ruling the world order

and destroying democracy and
forcing developing nations

to do all kinds of things
they don't want to do.

When you look at the evidence,
it seems the WTO really may have

some marginal impact on freer trade,
encouraging countries to join,

and encouraging countries
to get rid of their trade barriers.

But in general, a lot of
the popular discussions of the WTO,

especially the negative ones,
have an exaggerated sense

simply of how much power the WTO has.

By the way, for more
information on all these topics,

just google the words
on these various slides

starting with "World Trade Organization".

You can also read Andrew Rose's paper.

There's plenty available
about the WTO online

and if you go to news.google.com
and put in World Trade Organization,

you can see what's new
with the latest cases.