11 International Economic Institutions: WTO

Manpreet Arora

 

1. Learning Outcome:

 

After completing this module the students will be able to:

  • Meaning of International Economic Institutions.
  • Main International Economic Institutions.
  • GATT
  • What is WTO
  • Working, function, organization, role of WTO in World Economy

 

2. Introduction 

 

In this ever more globalized situation, companies require to be globally competitive and aggressive in order to survive and sustain. It has become important for every student to assimilate knowledge and understanding of different countries’ economies as well as the factors which are affecting these nations while trading globally. Businesses have gone beyond their national boundaries and that is why the relevance of international business and the organizations or institutions governing trade globally is constantly increasing.

 

It’s quite necessary to understand the meaning of international economic institutions and the international organizations which are dominating the world trade. WTO, popularly known as World Trade Organization (WTO) and its contribution towards the international business is very pertinent topic towards learning about International Business.

 

WTO is one of the three biggest international organizations that formulate and coordinate world economic policies. WTO places among the most significant role in promoting free international trade .It is, in fact, an umbrella institutions that cover the agreements made during the Uruguay Round, which was the preparatory platform before the launching of WTO. The said round was also based on the General Agreement on Tariffs and Trade (GATT), which we will discuss too in this module. In this module we will try to understand various International Economic Intuitions and role of WTO in the global scenario.

 

3. International Economic Institutions 

 

There are certain principal international economic institutions which act as foundation  and provide structural support of the world economy. There are various international institutions which not only provide funds to the developing nations but also assist them to achieve a level of development. Major important one’s are IMF (The Fund), World Bank and Development Banks like Asian Development Bank. The countries who have accepted to be the members of such international institutions are largely affected by their membership norms. Their economic policies and financial decisions are largely influenced by these economic international institutions. These international institutions provide funds to the member countries for several reasons and assist them timely e.g IMF provides not only financial support but it also provides them technical assistance to the member countries. There are universally three principal international institutions which have assumed a greater and a larger role to play in the world economy. All three originated in wartime planning for a better economic future these are:

 

1.  The International Monetary Fund

2. The International Bank for Reconstruction and Development (World Bank) and

3. GATT the General Agreement on Tariffs and Trade now WTO World Trade Organization

 

The WTO emerged out of the General Agreement on Tariffs and Trade (GATT) in 1995; the key role of WTO is to act as a forum or a platform which negotiates on trading rules at international level. Moreover it serves as a mechanism for dispute settlement on various trade issues.

 

On the other hand the World Bank and IMF help the developing countries during times of economic crisis or they deal with those countries which seek additional foreign exchange resources. The membership of IMF is presently 188. The fund works in order to ensure stability of international monetary as well as financial system. The mandate of IMF states its objective as promoting exchange rate stability, growth of international trade as well as helping and assisting the member countries to solve and resolve balance of payment position. Since its establishment IMF is working as central institution of International monetary system. With 29 countries as its members initially it started its financial operations in 1947. Which was the result of Bretton Woods conference of nations held in 1944.

 

The highest body of IMF is its Board of Governors. Each member country has to appoint a governor and an alternate governor. Day today decision making is done by an executive board. This has 24 Executive Directors and a Managing Director as a chairman. The basic purpose of IMF is to promote, foster and encourage international cooperation by consultation as well as collaboration on the international monetary issues. Its fundamental objective is to promote and expand international trade in the world economy. By contributing to boost international trade it helps to encourage high levels of employment opportunities in the member countries. It takes steps to maintain orderly exchange arrangements among the member countries for promoting exchange rate stability.

 

IMF also helps to eliminate all those foreign exchange restrictions in the international markets which hamper the international trade. The prime function of IMF is to lend to its member countries at the time of crises. If the member countries suffer balance of payment problems then IMF provides them loans so that they can restore to the equilibrium position and come out of the crises for a balanced structural growth of their economy. The financial assistance of IMF is provided to the economies to rebuild their depleting international reserves at the time of their downfall. It also helps them to sustain out of the situations arising out of devalued currencies and contributes towards payments of their necessary imports. The loans are generally provided out of some arrangements which are the necessary stipulations or the conditions which a country must fulfill in order to get an access to the loan. The arrangement if is approved by the executive body the loan is disbursed in a phased manner. The financial assistance by IMF is tailored according to the need of the member countries. All those economies which are Low Income Economies can borrow at concessional rate of interests under the Poverty Reduction and Growth Facility.Other type of lending is done through various other schemes like Stand By arrangements, the Extended Fund Facility, the Supplement Reserve Facility and Compensatory Financing Facility etc.

 

World Bank also originated through Bretton Woods Conference. It is the world’s biggest development funding institution.

 

It originated in 1944 as a single institution. But now it has expanded to a group of five development institutions including –

 

1. International Development Association

2. the International Finance Corporation (IFC)

3. the Multilateral Guarantee Agency (MIGA)

4. and the International Centre for the Settlement of Investment Disputes (ICSID).

 

Originally World Bank was created as a post war facilitator for reconstruction, the role now has extended to eradicate poverty. Reconstruction still is an important activity performed by World Bank.  “Poverty reduction through an inclusive and sustainable globalization” is the extend goal of World Bank and its affiliates. Recently the World Bank has set “two ambitious goals to push extreme poverty to no more 3 percent by 2030 and to promote shared prosperity and greater equity in the developing world”. The World Bank plays a pivotal role in providing financial as well as technical assistance to the developing nations throughout  the world. It is a unique institution supporting development worldwide along with aiming for reducing poverty in nations. The headquarters of World Bank is in Washington DC. It has around 120 offices worldwide. World  Bank  through its financial assistance programmes provides support in the areas of education,  health,  public administration, infrastructure,  sectoral  development,  agriculture, environmental and natural resource management. It helps the developing nations by providing low-interest loans, zero to low-interest credits, and grants to such nations. Timely it also support the developing nations by giving policy advices and technical assistance as well as know how facilitation. It also contributes by providing capacity development in those nations where they serve.

 

The World Bank works like a cooperative. Presently there are 188 countries who have taken its membership. The Board of Governors is the ultimate policymaking body and plays a critical role in putting its mission into practice. The governors are mostly the ministers of finance or ministers of development from the member nations. They meet once a year at the Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund.

 

There is a group of 25 Executive Directors, who work on-site at the Bank and the powers of the governors are delegated to this group. The five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors.

 

4. GATT to WTO 

 

There was a strong desire in the economies to liberalize trade in the world economies as a result The General Agreement on Tariffs and Trade (GATT) was born in 1948. In the Bretton Woods conference the establishment of ITO, IMF and World Bank was recommended. ITO was never  ratified by the members, in place  of ITO; GATT was  drawn as  an interim agreement to fill the gap of ITO, until the character of ITO was ratified. Thus General Agreement on Tariffs and Trade (GATT) was a multilateral agreement between various nations to regulate international trade. According to its preamble, its purpose was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” GATT was signed by 23 nations in Geneva on October 30, 1947. It came into force on January 1, 1948. This agreement lasted until the signature by 123 nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995. The prime object of GATT was to enlarge and expand international trade by introducing liberalized trade measure so as to encourage and facilitate all round economic prosperity worldwide. Various conventions were implemented in the GATT regime which governed international trade for decades.

 

The General Agreement on Tariffs and Trade established a forum for negotiations on cutting tariffs that consequently took place during decades through multilateral trade rounds. Moreover the initial negotiations resulted in an agreement which helped to establish a set of basic rules and disciplines that member countries were required to follow. It also devised a forum for dispute resolution if countries deviated from the established rules.

 

The most important and enduring of these basic rules embodied in the GATT 1947 are the fundamental principle of reciprocity and two nondiscrimination principles—most-favored- nation treatment and national treatment.

 

GATT held a total of nine rounds. In these rounds issues like reducing tariffs, anti dumping measures, non tariff barriers, pluri-lateral agreements were the major issues which were deliberated upon in all these rounds. The most ambitious of these rounds was Uruguay Round. In this round its members agreed on the fact that there is a strong need to adopt global changing patterns regulating foreign trade in the world economy. In relation to this various problems which were identified in 1982 Ministerial Declarations, the 8th GATT round which is famously known as the Uruguay Round – was launched in September 1986, in Punta del Este, Uruguay. It is stated that it was the biggest negotiating mandate on trade ever agreed. The Final Act which concluded concluding the Uruguay Round and officially establishing the WTO regime was signed 15 April 1994, during the ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.

 

5. World Trade Organization 

 

In world economy there was a strong need for a full proof and sound international body to support and promote international trade.WTO has contributed immensely towards the end of achieving these goals. If there is free international trade it can help the economies in enabling them to achieve high growth rate, improving living standards, reducing poverty, removing trade barriers.

 

With 161 members since 26 April 2015, The World Trade Organization (WTO) is an international organization which primarily deals with the rules of trade between nations. Russia became its member in August 2012 and since then almost all major trading economies are now part of WTO. The WTO came into existence in 1995, succeeding the General Agreement on Tariffs and Trade (GATT).

 

“The WTO works to help international trade flow smoothly, predictably, and freely, and provides countries with a constructive and fair outlet for dealing with disputes over trade issues”. Functions of WTO (drawn from www.wto.org):

 

The main functions of WTO are following:

•   Its main function is Administering WTO trade agreements.

•   It is a Forum for trade negotiations in world economy.

•   Handling trade disputes between member countries is one of its main activities.

•   It helps in Monitoring national trade policies.

•   It provides Technical assistance and training for developing countries.

•   It provides Cooperation to other international organizations for promoting world trade.

 

All the WTO agreements are based upon achieving three main objectives-

  1. To promote, health and encourage trade flow at international level as freely as possible
  2. To attain high level of liberalization on global fore front in international trade through negotiations between major economies.
  3. To device a system or  a dispute settlements body  which  works on transparent and impartial means promoting international trade.

 

The agreements under WTO are based upon some fundamental principles which are-

  1. Non discrimination i.e. most favoured nation treatment.
  2. Encouraging healthy competition among economies leading to free trade as well as sound and full proof predictable policies.
  3. Special  and  favoured  treatment  by  providing  more  provisions  for  less  developed countries.

 

6. Organisation of WTO 

 

All the decisions under WTO are taken by consensus by the member countries. The agreements are ratified in member’s parliaments. Ministerial Conference is the highest level decision making body of WTO. This body meets once in two years. Under this ministerial conference there is a General Council which generally meets at Geneva many times in a year. The general council constitutes normally ambassadors and heads of delegation. This Council also acts as a Trade Policy Review Body as well as a Dispute Settlement Body. At the next level there are some others Councils which report to the General Council. These include-

  • Goods Council
  • Services Council
  • Intellectual Property Council

 

7. Notable points to remember: 

 

Some notable points to remember about WTO are following:

  1. The WTO is as result of negotiations, and everything the WTO does is the result of negotiations.
  2. The majority of WTO’s existing work comes from the 1986–94 negotiations called the Uruguay Round.
  3. “The WTO is a rules-based, member-driven organization — all decisions are made by the member governments, and the rules are the outcome of negotiations among members”.
  4. WTO is a body which has helped the countries facing trade barriers to lower the said barriers and through negotiations they have got an access to open markets.
  5. Under “Doha Development Agenda” which was launched in 2001 it would host series of new negotiations further in future.
  6. WTO also helps to protect consumers by supporting maintenance of trade barriers also depending upon circumstances.
  7. WTO agreements are the main outcomes of negotiations which are negotiated and signed by the big chunk of the world’s trading nations. These signed documents/ contracts give the legal ground regulations for international commerce. “They are essentially contracts, binding governments to keep their trade policies within agreed limits”.
  8. The contracts which are negotiated and signed by governments are primarily based on the objective of helping producers of goods and services, exporters, and importers  so that they can conduct their business well on the same hand it allows governments to meet their social and environmental objectives.

 

8.  Summary

 

The WTO’s working system which is prevalent is thus focusing on improving the trade flow internationally as freely as achievable as long as no undesirable side effects are there. Greater free trade helps in contributing for economic development and well-being. The working style of WTO is quite transparent where every possibility of creating the confidence of governments, companies and general public at large is taken care of. Sudden changes in the policies are avoided and policies are framed only after due negotiations and reaching at consensus. The dispute settlement body of WTO aims to solve all the disputes by adopting some neutral procedures which are based upon agreed legal foundations.

 

 

Few important sources to learn more about International Business operations:

  1. https://www.wto.org
  2. www.imf.org
  3. Cherunilam Francis (2010). International Business. Prentice Hall of India Private Limited. New Delhi.
  4. Cherunilam Francis (2013). Global Economy and Business Environment. Himalaya Publishing House, New Delhi.
  5. Levi MauriceD. (2009). International Finance. Routledge.
  6. Conklin David w. (2011). The Global Environment of Business. Sage Publications.
  7. Mithani D M. (2009). Economics of Global Trade and Finance. Himalaya Publishing House New Delhi.
  8. Cherunilam Francis (2011). International Business Environment. Himalaya Publishing House, New Delhi.
  9. Saleem Shaikh (2010). Business Environment. Pearson Education, New Delhi.
  10. Sundharam K.P.M. and Datt Ruddar (2010). Indian Economy, S. Chand & Sons, New Delhi.
  11. Sharan Vyptakesh (2003). International Business: Concept, Environment and Strategy. Pearson Education, New Delhi
  12. Cullen. (2010). International Business. Routledge.
  13. Bennett Roger (2011). International Business. Pearson Education, New Delhi
  14. Paul Justin (2010). Business Environment-Text and Cases. Tata McGraw Hill, New Delhi.