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May 05 2009| Filed Under Economics
The World Trade Organization (WTO) was created January 1, 1995, and it has been
a source of controversy ever since. The birth of the WTO was more of a
continuation than a truly new creation. Its predecessor, the General Agreement
on Tariffs and Trade (GATT), shared its lineage with Bretton Woods-inspired
bodies like the International Monetary Fund (IMF) and the World Bank. The idea
behind these organizations is that impartial politicians could create a more
efficient global economy than the chaotic interaction of free market forces.
(The WTO sets the global rules of trade, but what exactly does it do and why do
so many oppose it? Learn more in What Is The World Trade Organization?)
Politics and Trade
In theory, members of the WTO gain access to each other's markets on even
terms. This means that no two nations can have sweetheart trade pacts without
granting the same terms to every other nation, or at least every other nation
in the WTO. However, some critics argue that in practice, the WTO has become a
way to force politics into trade causing long-term problems.
One problem that many WTO critics point to is apparent concessions the
organization has made to its charters. The most striking example is the system
of tariff brokering that takes place through an organization designed to reduce
barriers to trade. The WTO rules allow a nation to protect certain industries
if the removal of tariffs would have undesirable side effects, which include
the loss of vital domestic industries. Food production is one of the most
common, but steel production, auto production and many others can be added at
the discretion of the nation. More worrisome is a push by developed nations to
have labor effects job loss, reduced hours or wages added to the list of
reasons for justified tariffs. (For everything you need to know - from the
different types of tariffs to their effects on the local economy - check out
The Basics Of Tariffs And Trade Barriers.)
The War on Tariffs
A tariffs is a general tax levied upon all purchasers of a particular product
and it can have negative side effects. The proceeds from the tariff end up in
government coffers. This raises revenue and may protect domestic industries
from foreign competition. However, the resulting high price of foreign goods
allows domestic makers to raise their prices as well. As a result, a tariff may
also work as a wealth transfer tax that uses public money to support a domestic
industry that is producing an uncompetitive product.
So, while unwinding the tariff might hurt the workers in that industry, it
could lessen the burden on everyone else. The WTO has gotten into the business
of brokering tariff agreements, which has opened it up to criticism.
What's in a Name?
Anti-dumping measures and restrictive quotas are simply tariffs by another
name, even though they are treated differently by the WTO. While the WTO can
boast that the number of international tariffs has fallen since its inception,
many reductions have been balanced by the introduction of these "stealth
tariffs". (Everyone's talking about globalization, but what is it and why do
some oppose it? Read more in What Is International Trade?)
Operating Behind the One-Way Mirror
Many critics of the WTO also contend that the organization has struggled with
one of the basic goals it set for itself: transparency. Even in one of its main
functions - settling disputes through negotiation - the WTO is infamously
opaque when it comes to revealing how settlements were reached. Whether
settling disputes or negotiating new trade relations, it's rarely clear which
nations are in on the decision-making processes. The WTO has been attacked from
both the left and right because of this reticence.
The left sees the WTO as the henchman of a shadowy clique of stronger nations
forcing agreements that allow them to exploit less developed nations. This
clique uses the WTO to crack open developing nations as markets to sell, while
protecting their own markets against weaker nations' products. This view has
its points, as the most economically powerful nations seem to set the WTO
agenda and were the first to pass anti-dumping acts to protect favored domestic
industries while also opposing similar actions by less powerful nations. (To
examine this further, check out The Globalization Debate.)
Unloved, Unneeded, Unwanted
Free market proponents attack the WTO on the grounds that it's an unnecessary
entity. Rather than making complicated and heavily politicized agreements
between nations on what they can and can't protect, free market thinking
suggests that trade should be left to companies to work out on a deal-by-deal
basis. They believe if the WTO were really designed to encourage trade, it
would force member nations to drop all protective measures and allow true free
trade, rather than facilitating tariff negotiations.
Just Desserts
In the end, the countries using the WTO to protect their own industries may
only hurt themselves if it causes their own industries to become more
inefficient without true international competition. According to economic
theory, a lack of competition takes away the incentives to invest in new
technology, keep costs under control and continually improve production because
the domestic company will simply be able to inflate prices to just under the
tariff-set price of foreign goods. In the meantime, the international
competitors will only get leaner, hungrier and better at succeeding in spite of
barriers. If this cycle continues, the international competitors could emerge
as the stronger companies, and consumers may choose their products on the basis
of quality, perhaps even paying a premium over domestic goods.
The Bottom Line
There is a dark side to the WTO. For years, critics protested that the WTO was
a way for nations to engage in trade, wars and raids on underdeveloped nations,
and considered it an unnecessary and expensive layer to the natural market
forces of international trade. While it's debatable whether the organization is
useful economically, the WTO is very important politically. Subsequently,
governments - with or without citizen support - will likely continue to support
the organization.
by Andrew Beattie
Andrew Beattie has spent most of his career writing, editing and managing Web
content in all its many forms. He is especially interested in the future of
search and the application of analytics to the business world. In addition to
being a long-time contributor to Investopedia.com, Andrew has been working on
ForexDictionary.com.