Globalization can be defined as the increasing interdependence of countries due to increasing integration of trade, finance, people and ideas in one global market place. The main elements of this integration are international trade and cross-border investment flows.
Globalization came into effect after World War II, but its growth has accelerated since the mid 1980s due to two factors namely: reduction of transport, communication and computation costs due to advances in technology, which has facilitated companies to have different stages in the line of production in different countries; and increased liberalization of trade and capital markets, due to the lack of government intervention to foreign competition through import tariffs and nontariff barriers (Hoekman, 2004).
Free trade has been promoted by the establishment of various institutions such as the “World Bank, International Monetary Fund (IMF), and General Agreement on Tariffs and Trade (GATT)” (Hoekman, 2004).
It has been observed that globalization has had a considerable effect on the economic growth of East Asian economies like Hong Kong (China) and Singapore, though the same cannot be said for a majority of the sub-Saharan African nations. Such instances of imbalances between globalization costs and benefits for different groups of countries and the world’s economy have sparked hot topics in development debates.
The world trade organization
The world trade organization (WTO) is another institution that was established in 1995, to promote free trade in place of protectionism. Its role is to administer and liberalize international trade, and it took effect under the Marrakech Agreement, which replaced the General Agreement on Tariffs and Trade (GATT), founded in 1948.
Only about 3% of the world’s population is not represented in the WTO, which has 153 members. The WTO is governed by a ministerial conference, which meets after every two years, while the general council is responsible for the implementation of the conference policy decisions and assumes an administrative role (Deardorff & Stern, 2002).
Functions of the WTO
The formation of the WTO was beneficial in expanding the scope of the GATT. It was now able to take in a large number of nontariff policies, and operate based on consensus of its members. WTO acquired a greater coverage than GATT, but it also became stricter.
One of the significant differences between the two is that while GATT allowed flexibility for countries to sign at will various agreements on various issues such s subsidies or customs valuation, the WTO operates as a single undertaking, where all provisions apply to all the members (Deardorff & Stern, 2002).
Other significant changes in the WTO applied in the settlement of disputes and surveillance of functions. A negative consensus rule was adopted in the settlement of disputes, which required all the members to oppose the findings in a dispute settlement to block adoption of reports. The creation of the trade Policy Review Mechanism allowed the secretariat to acquire more transparency functions.
The fact that WTO rules apply to all members is an appealing concept especially to groups that intend to introduce multilateral disciplines on various subjects including: environment and labor standards; competition and investment policies; and animal rights (Deardorff & Stern, 2002).
There are some groups that have raised concerns regarding the multilateral rules, since the adoption of particular rules may cause negative effects on the ability of governments to regulate domestic activities and deal with market failures.
The key purpose of the WTO is the creation of codes of conduct for member governments, from the exchange of trade policy commitments during the negotiations; whereby it acts as a forum for international cooperation on policies related to trade (Deardorff & Stern, 2002).
Challenges faced by the WTO
One of the challenges observed within the first decade of the establishment of the WTO was the need to mobilize support to confront determined and increasing attacks from outside groups and individuals. These attacks were based on the belief that organization lacked democratic accountability. In addition to this, the WTO was observed as a front for multinational corporations and dehumanizing capitalist values.
Another significant challenge was in its efforts to mobilize its resources to meet the onslaughts. The WTO had it institutional viability jeopardized by internal constitutional flaws that were influenced by the pressure to legislate new rules. The WTO dispute settlement system was not allowed to add or diminish the existing rights and obligations of its members (Barfield, 2001).
Individual countries also face some challenges, due to the increasing technological and economic integration. An example is the United States, which is faced with the problem of balancing a defence of national sovereignity against grants of authority over economic and social policy, to the WTO and other international organizations.
This implies that the US needs to devise domestic political mechanisms that provide greater democratic accountability, in view of the decisions affecting US international obligations (Barfield, 2001).
Basic principles of the WTO
While the WTO does not define the outcomes, it sets the rules of the trde policy game, based on the following five principles.
Non-discrimination
The two main components are the most-favored-nation (MFN) rule, which demands that a product manufactured in one member country be treated in a similar manner to another similar product from any other country; and the national treatment principle, which demands that foreign goods that are satisfactory to the border measures imposed, be treated in the same way,”in terms of internal (indirect) taxation as competitive domestically produced goods” (Hoekman, 2004).
One of the benefits of MFN is that it helps to enforce multilateral rules by raising the costs to a country of defecting from the trade regime to which it committed itself in an earlier multilateral trade negotiation. If the country desires to raise trade barriers, it must apply the changed regime to all WTO members. This increases the political cost of backsliding on trade policy because importers will object.
Another benefit of MFN is that it minimizes negotiating costs: once a negotiation has been concluded with a country, the results extend to all. Other countries do not need to negotiate to obtain similar treatment; instead, negotiations can be limited to principal suppliers.
“National treatment certifies that liberalization commitments are not offset through the imposition of domestic taxes and similar measures” (Hoekman, 2004). The prerequisite that foreign items be treated in a similar manner to competing locally produced items provides foreign suppliers with more assurance with reference to the regulatory setting in which they function.
Reciprocity
This elements looks at the negotiating process, whereby it “reflects both a desire to limit the scope for free-riding that may arise because of the MFN rule and a desire to obtain “payment” for trade liberalization in the form of better access to foreign markets” (Barfield, 2001).
For a country to confer, it is vital that the benefits from the action be more than the benefits presented by unilateral liberalization; t is the responsibility of reciprocal concessions to make sure that such benefits occur (Barfield, 2001).
Binding and enforceable commitments
The non-discrimination principle is important in ensuring that market access commitments are implemented and maintained. “The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in schedules of concessions” (Barfield, 2001).
These schedules establish “ceiling bindings”: the member concerned cannot raise tariffs above bound levels without negotiating compensation with the principal suppliers of the products concerned (Barfield, 2001). The existence of dispute settlement procedures prevents the use of unilateral retaliation.
Small countries have a great stake in a rule-based international system, which reduces the likelihood of being confronted with bilateral pressure from large trading powers to change policies that are not to their liking.
Transparency
Enforcement of commitments requires access to information on the trade regimes that are maintained by members. The agreements administered by the WTO therefore incorporate mechanisms designed to facilitate communication between WTO members on issues. Numerous specialized committees, working parties, working groups, and councils meet regularly in Geneva.
These interactions allow for the exchange of information and views and permit potential conflicts to be defused efficiently. One of the benefits of Transparency is that it reduces the pressure on the dispute settlement system, as measures can be discussed in the appropriate WTO body. A second benefit is that it ensures ownership of the WTO as an institution; if citizens do not know what the organization does, its legitimacy will be eroded.
The third benefit of transparency is that it helps to reduce uncertainty related to trade policy. Such uncertainty is associated with lower investment and growth rates and with a shift in resources toward non-tradables (Deardorff & Stern, 2002).
Safety Valves
The governments should be able to restrict trade in various circumstances. There are three types of provisions in this connection:
“(a) articles allowing for the use of trade measures to attain noneconomic objectives; (b) articles aimed at ensuring “fair competition”; and (c) provisions permitting intervention in trade for economic reasons” (Hoekman, 2004).
The underlying rationale for intervention is that such competition causes political and social problems associated with the need for the industry to adjust to changed circumstances.
Costs and Benefits of Free Trade
Member countries experience numerous advantages from unrestricted foreign trade, including the ability for their producers to access international markets via the international division of labor and foreign competition, which allow them to produce more efficiently due to specialization and the pressure to match up to international standards.
Countries that are active in international trade enjoy numerous advantages especially in terms of technology, which is influenced by their trading partners.
Active participation also carries some risks such, especially pertaining to competition in international markets, which may result in closure of the less competitive businesses.
At the same time, some nations identify the risk of over reliance on imports for some vital products, especially those pertaining to national security, such as food. As a result, many governments try to develop their countries for self reliance in terms of food production, in order to protect themselves form uncertainties that may result in the event of a war, leading to cut-offs in food imports.
The WTO acts in a manner to discourage such protectionist strategies that lead to introduction of quotas and tariffs on certain imports. The protectionist policies result in reduced efficiency in production, due to the lack of international competition.
The inability to take part in international trade results in a lack of specialization and economic stagnation. The competitive advantage of a country determines its venture into international trade, based on the size of its domestic market, its natural resource endowment, and its location, with regard to the open seas, especially due matters pertaining to transport.
References
Barfield, C. E. (2001). Free Trade, Sovereignty, Democracy: The Future of the World Trade Organization. Westport, CT: Aei Pr.
Deardorff, A. V., & Stern, R. M. (2002). What You Should Know About Globalization and the World Trade Organization. Review of International Economics , 10(3), 404-423.
Hoekman, B. (2004). The WTO: Functions and Basic Principles. The World Trade Organization , 41-49.