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World Trade Organization (WTO) as the name suggests, is the organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
Discussion so far suggests that in an ideal world we should all promote free trade as it increases efficiency and benefits consumers. But the world is not ideal. There are some problems with free trade and hence need for protecionism–
It’s clear that trade can not be totally free in a not so ideal world. Countries need some policy levers to allow domestic industries to grow and diversify their economies. Also there’s need for a watchdog/referee who can adjudicate when other countries start cheating.
In spite of all the benefits of trade, we all know countries regularly resort to measures which discourage trade (especially imports) to protect domestic industries <hence called protectionist measure> even though they might hurt consumers <problem of silent majority v/s vociferous minority discussed in chapter 2 of economic survey>
Tariff barriers- custom duties which make imported goods costlier than domestically manufactured goods <it’s imposed to earn revenues for the govt, protect interest of domestic industry>
Non tariff barrier– Here countries do not impose custom duties but retard flow of trade in other ways.
Quantitative restrictions- Crude way of doing it is imposing quantitative restrictions on goods imported <quotas, say only up to 100 m tonne of sugar can be imported> or making licenses compulsory to export goods to home country or that only certain licenses can import goods or embargo <banning trade of certain goods with certain countries>
Standards setting and administrative delays– But countries now employ sophisticated ways to retard flow of trade. Customs official can simply delay clearance of cargo <hence trade facilitation agreement> or can set standards <product using child labor/ environmentally degrading techniques will not be allowed, the problem with TPP> or simply cheat by providing export subsidies or domestic subsidies.
Two kinds of trade barriers that are allowed for protection of health, safety, environmental protection but are often misused
But both the measures specify that standards must not be arbitrary i.e they must be scientific. Also they should not be discriminatory.
WTO’s role is to reduce these barriers to trade, set rules of the game and adjudicate when one member country accuses other of cheating.
Headquarter: Geneva, Switzerland <where are the HQs of IMF and World Bank? Answer in comments>
Members: 164 <Afghanistan the most recent member> < latest member of IMF?>
1) Most favoured nation (MFN) rule
2) The National Treatment Policy
National treatment means that imported goods should be treated no less favorably than domestically produced goods <after the foreign goods have entered the market> and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards, discriminating against imported goods)
<There were many agreements agreed and ratified, but we found only some which are important for us, so let’s analyse them in brief>
It deals with the provision of subsidies, and the use of countervailing measures to offset injury caused by subsidized imports
Definition of subsidy has 3 basic elements:
All three of these elements must be satisfied in order for a subsidy to exist SCM applies to non-agricultural products.
It follows the traffic lights approach and classifies subsidies in 3 categories: <scroll up and look at barriers to trade infograph gain>
Subsidies with high trade-distorting effects, such as export subsidies, and those that favour the use of domestic over imported goods are prohibited. [If suppose, Brazil gives subsidy to its product Exported to India, Then India can ban such items from country]
Subsidies that are not specific to an enterprise or industry or a group of enterprises or industries are non-actionable.
[No action at all – actionless]
The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose results entered into force in January 1995.
Objectives: same as broad objectives of WTO
Mode 1: Cross-border supply – There’s no movement of natural persons, no legal presence Eg- an architect can send his architectural plan through electronic means
Mode 2: Consumption abroad – movement of natural perosns to avail services elsewhere, eg.- a tourist using hotel or restaurant services abroad
Mode 3: Commercial presence – legal presence in another country, eg.FDI, joint ventures
Mode 4: Presence or movement of natural persons – here movement of natural person to provide services , eg. India techies going to USA
It’s clear India wants liberalization in mode 1 and mode 4 <our BPO industry plus software industry, techies going to US> while developed world want liberalization in mode 3 <100% automatic FDI>
Let’s understand all 4 modes with an example
The Agreement on Trade-Related Aspects of Intellectual Property Rights, sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members.
3 Main features of Agreement includes –
Set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights
Dispute settlement –
The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO’s dispute settlement procedures
The new rules and commitments apply to:
1)Market access : various trade restrictions confronting imports
2)Domestic support: subsidies and other programmes, including those that raise or guarantee farmgate prices and farmers’ incomes
Under this, Subsidies are categorized into 3 boxes –
<Like in India farmer is supported for specific products and separate support prices are there for rice, wheat etc. An example of Amber box subisdy. On the other hand income support is uniformly available to farmers and crop doesn’t matter, Green box>
What is De-Minimis provision?
3) Export subsidies:
Special safeguard mechanism (SSM)
Special and Differential Treatment (S&D)
Special treatment under WTO to Developing and least developed countries. Special safeguard mechanism (SSM) is a demand under this.
A few more points before concluding the topic
Plurilateral agreements – For the most part, all WTO members subscribe to all WTO agreements. After the Uruguay Round, however, there remained four agreements, originally negotiated in the Tokyo Round, which had a narrower group of signatories and are known as plurilateral agreements <contrast with multilateral agreements>
Single Undertaking Principle – Nothing is agreed until everything is agreed. Negotiations proceed simultaneously, not sequentially, and all Members must accept all the results
Dispute Settlement Process