The role of the world trade organization

The creation of World Trade Organization, during the Uruguay round in 1994 is a hallmark of the global trade liberalization process, which promotes broad international trade policy changes in an effort to reduce international trade barriers and establish a multilateral framework for trade in services and protection of trade relate intellectual property rights.

It represents a critically important multilateral forum which cooperates closely with International Monetary Fund and the World Bank. At WTO’s first Ministerial Meeting, in Singapore in 1996, member countries agreed to create work groups to discuss and study the relationship between trade, competition and investment policy disciplines, transparency in government procurement and trade facilitation. (HOEKMAN_EVERET)

The current WTO trade negotiation round, the so called Doha development round commenced in 2001 with an objective to further reduce trade barriers and facilitate trade in developing countries as a part of a broader agenda set forth by the United Nations. (BELAY).

Aside from reducing the use of trade distorting policies, the scope of Doha development round aimed at strengthening the development relevance of the WTO, yet negotiations broke multiple times and finally stalled in 2008. As of 2011 many issues surrounding the Doha Round remain widely unresolved. Coming to an agreement on the international level has proven to be a daunting task.

All three main constituents of the national income: factor prices, factor quantities and production technology, are influenced by the trade liberalization process. (PARIKS) The effects of the fluctuations of these factors is a rather sensitive issue given the fact that in 2004, 36 countries depended on a single, and 52 on two commodities for more than 50% of their export revenues. (BELAY)

In order to maximize benefits, the trade liberalization should be accompanied with sound governmental policies and capacity building. It is also a political act whose implementation requires a good deal of political skill. (_MCCULLOCH_CIRERA)

Economic choices of a country represent an outcome of a political process and as such usually reflects narrow economic interests and special interest groups. International trade agreements help governments to overcome various interest groups that frustrate unilateral reform. (HOEKMAN_EVERET)

The main focus of interest groups: the special trading rightsfor developing countries (STD),represent a defining feature of today’s multilateral trading system. These preferences represents an impediment in the process of trade liberalization, notably for most-favored-nations (MFN), since liberalization diminishes the value of established preferences that coupled with fears of “preference erosion” lead opposition. (HOEKMAN_EVERET)

One of the main obstacles in the Doha round of negotiation was to get to an agreement that the international trade should lead to development for all involved. Although many concerns were voiced during the ministerial meeting, SLAS reports that developing countries felt their voice is not heard, accusing industrialized countries for promoting their interests without much care for what the developing nations need to improve their standard of living. (SLAS)

The standard of living and poverty also lay under a direct influence of trade liberalization through it’s impacts on prices of liberalized goods, impacts on profits, employment and wages, and through its impact on government fiscal revenues. (_MCCULLOCH_CIRERA)

In the book XXX with various studies, HOEKMANN and OLAREAGGA point out that detailed country studies in the volume support the conclusion that an ambitions outcome from the Doha round may significantly help in reducing the incidence of poverty. (HOEKMAN_OLARREAGA)

On the other side, the largest group of WTO critics are concerned with the impact WTO policies have on the prospects of economic development in poor countries. (HOEKMAN_33) For example, even though the 1995 WTO Agreement on Textiles and Clothing required abolition of all quantitative restrictions on textile trade by 2005, the barriers to trade still remain high. (HOEKMAN_EVERET)

Such failures in the implementation of promulgated policies have raised sharp critique on account of the WTO and its inability to secure an agreement and necessary commitment to address the political constraints that promote the usage of trade policy instruments within member nations. (HOEKMAN_33) The institution became a subject of significant controversy, veiled by the large scale anti-globalization protests that follow WTO Ministerial conferences.

Despite the abouve concerns, many authors agree that there is a strong association between economic growth and trade expansion which is in large part moved by the WTO. (HOEKMAN_33) Yet, as this paper will show, WTO lacks mechanisms needed to implement the outcomes of the negotiations. (LAIRD)

Developing countries face significant internal problems that impede the process of trade liberalization, namely: poverty, domestic distortions, unrest and institutional weakness

While there is a general agreement that about the long term benefits of trade liberalization, various concerns surround the possible short-term effects of liberalization and the costs of implementing the DOHA agenda.

Agricultural Negotiations Breakdown

* As od 2011, issues brought up in the Doha agenda remain unresolved.

Agricultural policies represent one of the most controversial issues in the Doha agenda. Multilateral negotiations broke down in 2001, in an audacious attempt to reduce and ultimately eliminate all forms of export subsidies and trade distorting policies.

Since agriculture represents the main source of national income for many developing countries, it is also a key sector for nearly all poverty analysis. (_MCCULLOCH_CIRERA) Given the fact that the majority of south and east Asian and African population lives in rural areas, depending heavily on agriculture, various trade barriers and protection policies in agriculture are at the same time an active tool of discrimination against poor countries and people that are dependent on rural economies.

The examples of this discrimination can be striking. SLAS cites a former chief economist of the World Bank, Nicholas Stern, who while speaking about different trade barriers used in the developed world has said that “the average European cow receives around $2.5 a day in subsidy… the average Japanese cow receives around $7 a day… while 75% of the people in Sub-Saharan Africa live on less than $2 a day.” (SLAS)

Further coordinated progress in reducing the trade-distorting policies in agriculture is deemed as central to the development prospects of many countries, including the credibility and relevance of the world trading system. (HOEKMAN_EVERET)

The main costs of needed interventions arise from the policies that developed countries impose on the developing countries. (_MCCULLOCH_CIRERA) Aditionaly the developing countries that indirectly benefit from OECD domestic support policies that give them preferential access to protected markets are facing incentives for further support of farm interests at the cost of less global integration. (_OZDEN_REINHARD) Although many studies have confirmed the role of lobbies, rather little is known about the exact structure, patterns and interest groups engaged in influencing farm policies. (_GAWANDE)

It is the OECD agricultural policies that result in negative effects on developing countries and a “discriminatory bias” in the trading system. (HOEKMAN_EVERET) IMF has suggested that if all the trade restrictions on agriculture were to be removed, there would be an increase in world welfare from $100 to $125 billion, a fifth of which would be gained by developing countries. (SLAS)

So, the main interest of the developing countries is to acquire improved access to the markets of developed countries, coupled with eliminating high levels of domestic and export subsidies in developed countries. (_MCCULLOCH_CIRERA)

In an attempt to understand the internal inaction toward abolishing subsidies MESSERLIN noted that total net transfers from consumers and taxpayers to farmers in OECD countries represented 37% of their total revenue in 1986 till 1988. After the implementation of all Uruguay round commitment on agriculture, by 2003, the percentage had fallen only to 32% of their total revenue. The largest part of this financial support is accrued by large and rich farmers and landowners, while noting that small and poor farm households gain relatively little.

Yet when viewing those transfers, one needs to take into account that they amount to only a small share of total economic activity in OECD countries, so that their marginal cost that can be attributed to the taxpayer is not large enough in order for the opposition to agricultural subsidy policies to gain momentum.

Furthermore, in his analysis of the political economy of agricultural trade policy in the US, GAWANDE notes that fore mentioned farm policies arise as an outcome of a political process. GAWANDE stresses out the importance of thoroughly understanding the underlying political processes and their effects on further trade liberalization, both for developing and developed countries. (_GAWANDE) As Rodrik argued from a critical stance, trade liberalization has always lacked significant domestic political support. (RODRIK)

The Balance between Developed and Developing Countries

Despite globalization and free trade, the world poverty is still increasing. The share in the world trade attributed to least developed countries remains insignificant and various concerns voice out that the developed countries are continuously forced into noncompetitive situations.

The effects that trade policies have on some developing countries vary widely; often the preferential access for certain products benefits the producers in one, at the expense of producers in another developing country. . (_OZDEN_REINHARD)

The biggest challenge for developing countries lays in getting the developed countries that impose the biggest global distortions to remove their detrimental policies, to agree to multilateral rules and procedures which promote development and to provide additional aid for trade. (HOEKMAN_33) Trade negotiators represent export interests which are on their own unlikely to gather sufficient political support needed to facilitate liberalization and development. (HOEKMAN_33)

Global trade reforms can also do much to attain the Millennium Development Goal (MDG) of halving poverty by 2015. Yet not all groups and individual will gain in the process, which may help in explaining why progress has been slow. (HOEKMAN_OLARREAGA)

Potential adjustment costs represent a large concern for small and poor countries which coupled with the lack of international competitiveness and supply capacity impedes further benefits from a freer global trade regime. (HOEKMAN_OLARREAGA)

Another significant problem developing countries face lays in communicating their message to the world. (SLAS) The major focus of many developing countries has been in promoting liberalization of developed countries markets for their exports. The focus has shifted from demanding the tariff cuts to requesting technical assistance in increasing exports and production. (BELAY)

Many developing countries may lose from trade liberalization, in particular from the reforms that will diminish the value of trade preferences received or import prices paid under preferential access. Notably, many poor countries that failed to diversify their economies and are dependent on preferential access to major markets may enjoy little immediate gain from further trade liberalization, especially if they also fail to improve their competitiveness and reform their trade and other domestic economic policies. (HOEKMAN_OLARREAGA)

Additionally, product standards often reflect the interests of larger developed countries which engage in mutual recognition agreements with one another, while leaving out the developing countries and thus increasing effective entry barriers. (MAINSTREAMING) ISMAIL

The Return to Protectionism

The 21st century brought the understanding that protectionist trade policies of the developed world fall on the expense of developing countries, particularly the least developed. Accordingly, various institutions changed their focus from imposing trade liberalization to developing countries to elimination of tariff and non-tariff barriers put forth by the developed countries, namely US, Canada, Japan and EU. (SLAS)

The scope of protection in recent years has been extended to previously unaffected industries such as automobiles, consumer electronics and machine tools, while increasing the share of trade subject to control within the protected industries. (MENNESS_KOL) Further, a growing range of countries became subject to discriminatory controls of their exports with a rising share of exports that are subject to control. (MENNESS_KOL)

Imports from developing countries create significant pressure on wages in developed countries as does immigration. (RODRIK) Stil, it is not the market penetration, but rather the political strength of industry representatives that advance the protection. The subsidied sectors also controls strong lobbying groups that significantly influence policy makers in developed countries. (MENNESS_KOL)

In a joint paper by the IMF and WB “Market Access for Developing Country Exports” the institutions assumed a critical stance toward the protectionist policies of the developed countries, namely US, EU and Japan. IMFWBMADCE

While focusing on various barriers to free market access in agriculture, textiles and clothing the report concludes that protection carries a high price in both industrial and developing countries, providing a detailed analysis on how subsidies in developed countries adversely affect the interests of exporters from the developing countries, making them less competitive at the same time. IMFWBMADCE

The adverse effects of OECD trade policies on growth and future prospects of developing countries are documented in numerous studies. For example, the sugar marked stands severely distorted with protection rates such that producers may receive even more than twice the sugar world market price. (HOEKMAN_EVERET)

In an effort to understand global trends of resorting to protectionist measures MESSERLIN holds the OECD members as the “the major culprits in maintaining the high levels of agricultural support that distort global markets, also notes a particular burden EU and US have as “prisoners of antiquated farm policies” dating from the 1930s. (MESSERLIN)

There is also an open question on the level of support individual final consumers and taxpayers have for trade liberalization. Consumers are less likely to support the reform, especially to oppose agricultural subsidies since they both allow them to spend less on food (MESSERLIN)

Resorting to subsidies and protectionism has become a politicaly favorable measure in the process of encountering economic crises. The last negotiation breakdown in 2008 is regarded by many to be a direct consequence of the then ongoing economic crisis. Yet as Rodrik points out, it is not the trade liberalisation but the institutions of a country that determine it’s economic performance, as well as it’s ability to successfully manage economic crises as they arise. (RODRIK)

Simply put, the Doha round failed in creating an environment of trust. (SLAS)

The resorts to protectionist measures in the light of current economic problems and inability to reach an agreement between developed and developing countries clearly show that even though the negotiation process in the Doha round enhanced the understanding between WTO members, it failed to narrow the difference in views between developed and developing countries. (HOEKMAN_EVERET)

Trade Related Aspects of Intellectual Property Rights

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) was instated at the end of Uruguay round in 1994, in an endeavor to standardize the regulatory treatment of intellectual property rights among WTO members. TRIPS agreement established multilateral obligations for intellectual property rights protection and enforcement and provided a mechanism for dispute settlement under WTO.

Despite being regarded as one of the most comprehensive IP agreements, TRIPS had failed in protecting intellectual rights both through giving various member countries broad discretion in granting IP rights and through failing to adequately protect them in certain fields, with some patentable technologies such as pharmaceuticals, agricultural chemicals, biotechnology, education materials and so forth, being excluded from protection in many countries. In some countries the duration of patent protection is limited, while some even limit patentability to the process and not the product. (BELAY)

Second, there is an ongoing debate of how issues of technology transfer under TRIPS might affect the developing countries. (_SCIENCE_TECH) also notes a common perception that very few gains have emerged despite the claims that stronger technology protection under TRIPS would expand flows of knowledge to developing countries.

Similarily, HOEKMANN argues that despite the given promise that stronger technology protection under TRIPS would expand knowledge flow to poor countries, very significant gains have been lacking in this regard. (HOEKMAN_EVERET) Both HOEKMANN EVERET AND SCIENCE TECH have voiced concerns that exclusive rights under TRIPS may impede the access developing countries have to publicly-generated basic research. (_SCIENCE_TECH) (HOEKMAN_EVERET)

Economic evidence suggests that, in the long run, the requirements under TRIPS should provide developing economies with significantly greater private technology inflows through imports, licensing and foreign direct investments. (_SCIENCE_TECH)

However, the likelihood of these increases is dependent on many local national factors. Further threats arise because strengthened proprietary rights to knowledge also increase the likelihood of monopolistic strategies in setting prices on information. SCIENCE TECH notes that there has been a sharp policy shift toward making a private commodity out of knowledge and that increases in technology flows are not guaranteed to developing economies. (_SCIENCE_TECH)

While governments in many countries place special accents on easing the process of acquiring technological information for local businesses and researchers, ISMAIL contends that TRIM has somewhat restricted the scope for policy interventions in supporting further industrial develop among developing countries, despite the fact that similar measures are being used by the developed countries in facilitating their own economic development strategies. (MAINSTREAMING)

The TRIPS agreement recognizes the need to build “a sound and viable technological base” in developing countries, but fails to provide any means to achieve it, thus giving rise to serious contention. Further, the implication of TRIPS requirements on public health protection has been a concern for many developing countries. (BELAY) For any future implementation, it is imperative for developing nations to have confidence that the TRIPS Agreement would not impede their efforts to address health crises and fight infectious diseases. (_STRACK)

Effects of medicines availability

It became clear even before the Doha meeting that WTO has to respond to concerns on possible implications TRIPS may have on access to medicines, given the acute disparities in pharmaceutical technology between developing and industrialized countries. Data shows that developing countries approximate to 80% of the world’s population, but only to 20% of global pharmaceutical consumption. (_STRACK)

A large body of research suggests that an increase in price of drugs and concentration of production into industrialized countries is to be expected. (JUSTIN_PAUL) Since large multinational companies are free to export their products, it is deemed there will be little or no technology transfer to developing countries. (JUSTIN_PAUL) contends that TRIPS agreement will prevent positive development in a way that makes the pharmaceutical industries of the developing countries likely to collapse.

Member states were given a certain amount of freedom in promulgating the regulation of patent rights, with various mechanisms such as issuing of compulsory licensing, advanced generic registration and parallel importation of protected products. Even though many developing countries recently modified their intellectual property laws in order to conform to the TRIPS agreements (_STRACK), TRIPS implementation is increasingly facing political pressure and threats, particularly by US Government. (JUSTIN_PAUL)

As an example (JUSTIN_PAUL) brings the case of South Africa passing legislation to permit generic substitution and parallel import in pharmaceuticals. However, despite this practice being common in Europe an allowed under TRIPS, the US government used trade threats under the influence of pharmaceutical industry in an attempt to force South Africa into repealing its legislation. Similarly, the US government became known for threatening with a compulsory license order against Bayer AG, unless significant quantities of medicines were made available for lower prices to the victims of anthrax. (BELAY)

Under original Uruguay round TRIPS agreement, compulsory licensing was permitted only for supplying the domestic market. This implied that the export of drugs produced under compulsory licenses is prohibited, thus the countries that lack the necessary manufacturing capabilities could not import those drugs for domestic consumption. In 2003 the WTO members had agreed to resolve this issue through allowing countries to import cheaper generic drugs produced under compulsory licenses, if they do not possess the capacities to produce the medicines themselves. (BELAY)

Consequently, WTO members agreed to to extend the exemptions on pharmaceutical patent protection rights for undeveloped countries until 2016, as a part of WTO agenda to support public health initiatives. (BELAY)

Still, in his research ISMAIL contends that TRIPS also reflects a “lack of attention to balancing the potential benefits of increased research with the costs of reduced competition”, especially the monopoly power that the pharmaceutical-producing countries acquired through patent rights. (MAINSTREAMING) The effect of these powers can be highly detrimental, which led JUSTIN PAUL to question if the TRIPS agreement is going to be used to protect corporate profit regardless of the cost of human life.

As (_STRACK) noted, whether TRIPS agreement and the Doha Agenda represents a substantial step forward in the incorporation of public health, environmental and social standards in the WTO remains an open question. (_STRACK)

The Effect on Economic Growth

There has been a large number of studies that examine the links between trade liberalization and various factors of economic growth.

SACH and Warner assessed the process of global integration and its effects on economic growth in developing countries. They examined the timing of trade liberalization and its implications on subsequent growth and economic crises confrontation. (_SACHS_WARNER)

Their research suggests that countries with open economies will converge to the same level of income, although admittedly it will take a long time. (_SACHS_WARNER) The lack of convergence in the recent decades is attributed to the fact that poorer countries have been closed to the world. (_SACHS_WARNER)

(_KEET_ET_AL) examined the potential of the Doha trade negotiations to deliver on their development promise. They concluded that if implemented properly, the effects of trade liberalization could produce an increase in estimated world welfare from 59$ billion for moderate, to 268$ billion point estimate for ambitious scenarios. ­

Similarly, Dollar and Kray (2004) have concluded that growth pattern of countries that have liberalized trade show acceleration in their real income. The growth rate in 1990s was 5% per capita for globalizing developing countries, 2,2% for rich countries and only 1,4% for non-globalizing developing countries. (DOLLAR_KRAY) On a side note, (DOLLAR_KRAY) found little evidence that the “formal democratic institutions or a large degree of government spending on social services” can systematically affect incomes of the poor. (DOLLAR_KRAY)

Among developing countries, the openness of trade is correlated with other features of a healthy economy. (_SACHS_WARNER) Opening the economy helps in promoting governmental responsibility to other areas. For Sachs and Warner the trade policy should be regarded as a primary instrument of the reforms. (_SACHS_WARNER)

Prerequisites for Economic Growth

It was widely believed that trade policy openness and higher trade volume was positively correlated with economic growth until Rodriguez and Rodrik raised various concerns, namely the lack of a uniform and coherent framework to define and measure “openness”. (RODRIK)

Rodrik and Rodriguez surveyed 50 years of data and concluded that there is not enough evidence that liberalization and lowering of tariff and non-tariff barriers have a strong systematic correlation with economic growth. As they contend, no country has developed successfully simply through trade liberalization. (RODRIK)

Rodrik further stresses the importance of policy promulgation in a way which takes into account national particularities and vulnerabilities, showing that gradual institution building paired with gradual opening to imports and foreign investment also provides significant source for growth. (RODRIK)

He notes that todays developed countries achieved economic growth while following protectionist trade policies, suggesting that economies are able to liberalize their trade only when they become sufficiently rich. (RODRIK)

The impact of trade liberalization on convergence of per capita incomes in developing countries was examined by PARIKS. The research didn’t find any evidence of significant convergence between liberalized and pre-liberalized period for Asian and Latin American economies, while finding significant divergence in the liberalization period of African economies. (PARIKS)

HOEKMANN and OLEREAGGA have argued that the liberalization of the market access on a nondiscriminatory basis would be beneficial from the perspective of the poorest countries, but it remains insufficient to carry out growth prospects. Additionally, some poor countries may incur significant loses because of decreased preferences, stating that “the deeper the most favored nation reforms are agreed, the more existing preferential access will be eroded”. (HOEKMAN_OLARREAGA) Not all countries will gain in the short run, and all countries will have to face adjustment costs.

Trade liberalization generates gains for a country well-endowed in capital through raising rates of return and facilitating further investment. Still, for countries that are relatively poorly endowed with capital, losses may arise as trade liberalization lowers the return rates and demotes investment. (PARIKS)

Nugent argues that trade was liberalized by fewer countries than it had been expected, and more importantly that trade liberalization policies have been implemented partially or tentatively, with various negative effects from trade liberalization in many countries. (NUGENT)

The World Bank maintains the view that liberalization is a major factor of economic growth, provided that additional conditions, such as macroeconomic stability and good governance are met. (SLAS) WB recognizes that some sectors may experience negative effects of the trade liberalization process, and advocates instatement of necessary compensation measures. (_KEET_ET_AL) suggest that loses of poor countries can be enhanced through redistributing some of the benefits from high-income OECD countries.

Despite the critiques, (_MCCULLOCH_CIRERA)suggest that evidence points out to a correlation between openness to trade and economic growth. Still they recognize the existence of exceptions that must be addressed with specific policy interventions. Furthermore, they hold that trade liberalization represents a strong factor in the fight against poverty, mainly through providing more resources and an increase in the average income.

The North American Free Trade Agreement

Last decades have been marked with an increase in the establishment of free trade areas and trade agreements, further facilitating economic linkage between countries. The North American Free trade Agreement was signed in an effort to eliminate trade and investment barriers and establish a free trade between United States, Canada and Mexico in 1994.

There were significant interests in to engage into a free trade agreement in all three countries. The main reason lays on mutual trade dependencies since over 80% of Canadian and Mexican exports head to US, while at the same time, their imports contribute to about one third of total US exports. (Belay) Further, United States are the largest investors in both Mexico and Canada, and as such have a strong interest in facilitating further trade and investment opportunities through a regional trade arrangement.

Mexico saw NAFTA agreement as a possible mean in consolidating an export oriented growth path, both through improving and securing access to US and Canadian markets and through encouraging the return of flight capital and attracting new direct investments. (BELAY)

Canada was provided a secure access to a large consumer market in both US and Canada. This allowed Canadian businesses to achieve economies of scale through operating of larger and more specialized plants. (BELAY) Another benefit came from the abolishment of protectionist sentiments and trade measures by US government, which used to create uncertainty for Canadian producers with respect to investment in new facilities. Specifically, NAFTA reduced this uncertainty through a complex system of rules and procedures for the resolution of disputes.

During the US-Canada negotiation process significant restrictions and tariff-quotas on some agricultural products (mainly dairy, poultry and sugar) were imposed, while the US-Mexico agreement a wider liberalization is to be implemented within a framework of phase out periods. Such protectionist measures were deemed as necessary in order to protect national economies and ease the transition toward trade liberalization. Yet many scholars put forth the critique that such regional agreements are inferior compared to the multilateral, nondiscriminatory approach of the WTO. Further,