WTO stands for World Trade Organization. Ever since the second world war many countries have been a party to the GATT - the General Agreement on Trade and Tariffs. As time went by there would be negotiation “rounds” when the agreement would be updated. Then in a mammoth round that lasted from 1986-1994 (the so-called Uruguay round) it was decided to fundamentally overhaul the GATT and place the international trading system on a firmer institutional footing. To this end the WTO was created. Essentially it is a club with countries as members and it has three main roles:
Having defined what the WTO does it is important to make clear what it is and what it represents to people particularly when they discuss its merits or problems. To my mind there are four major aspects:
There are two main arguments that I set out below.
Almost all complex societies throughout history have wanted to trade. Today with revolutions in communications and explosion in population this is even more true that in the past. Economics also provides good reason to believe that (free) trade is a good thing [1]. Tariffs hinder trade and are often expressly designed to do so (the only other possibility is to raise revenue). So, the argument is simple: free trade good, tariffs bad. But why, one might ask, has there been so much protectionism then? In fact if we have seen trade throughout history we have also seen its counterpart: attempts to restrict or control a particular aspect of it (normally for the greater profit of those who obtain the monopoly). The answer depends on your perspective but there are a variety of good reasons why there would still be pro-protectionists even if free trade really were a good thing. 1. Many people tend to go in for Absolute Advantage arguments. These tend to view trade between two countries as a strictly zero-sum game and thus to induce the, unfortunately typical, human response: grab as much for ourselves and give them as little as possible. In the context of trade this translates to: import none of their goods and export lots of ours. Apart of the obvious flaws in this approach that the ‘other side’ will be doing the same (see game theory discussion below) the absolute advantage argument was demolished (at least in the straightforward form it is usually encountered) about two hundred years ago by the economist David Ricardo. Nevertheless it remains popular and gains allegiance from such illustrious forbears as Lincoln and Chamberlain. 2. Political economy considerations. Often a particular group in a country has much to gain from protectionism while the country overall has a welfare loss. Classic examples are the corn laws in Britain in the early nineteenth century or US automobile manufacturers facing Japanese competition in the 1970s and 1980s [4]. 3. Specialist economic arguments such as: strategic trade policy or, from the development literature, the infant industry argument. These arguments are dubiously regarded at present, the infant industry, in particular, has been much criticized over the last thirty years. 4. The miscellaneous rag bag: basic nationalism to more measured concerns for self-sufficiency e.g. in agriculture.Conclusion: There are good reasons to support free trade and few decent reasons to oppose it.
Consider the following situation: two countries A and B who can trade. Let us suppose for a moment that each country could gain by excluding the other country’s goods by imposing tariffs or restricting trade in some other manner (for example if we accepted absolute advantage had something to be said for it (see 1.1 above) or one of the countries was very large relative to the other). Say country A can impose a tariff on B and vice versa.
Consider the following further assumptions (for sake of this discussion these are assumptions but they are likely to be reasonably accurate)
But if these assumptions then have a classic prisoner’s dilemma situation (If you are unfamiliar with the Prisoner’s Dilemma some preliminary game theory can be found in [3] including a discussion of that particular issue):
B Has No Tariff | B Has Tariff | |
---|---|---|
A Has No Tariff | (9,10) | (5,13) |
A Has Tariff | (11,6) | (7,8) |
The numbers in brackets indicating welfare outcomes for A and B respectively. The danger is that both countries think they gain from tariffs but crucially this is in the absence of the other country doing the same thing. If they both impose tariffs they restrict trade (and the choice open to their citizens) while gaining no more of the share of the trade themselves1. Thus they both end up worse off than they were to start with. Moreover once a trade war has begun they often tend to escalate and/or entrench themselves in a way familiar from normal wars with each side indulging in tit for tat behaviour. What is the solution? The obvious one is to create an institution that will help maintain the cooperative equilibrium that maximises joint welfare. This institution will also facilitate returning to this equilibrium should problems arise. The institution would have the further advantage of reducing the ability of special interest groups in a country manipulating trade policy to their advantage (see 1.2 above). This is the institutional argument for multilateral trade agreements and an organization such as the WTO.
#### 3. Informational and resource issues
It is possible for each of pair of countries to negotiate their own bilateral agreement as opposed to have one single organization like the WTO. However there are several reasons to prefer the WTO:
### Conclusion
The WTO has a crucial role in promoting free, fair and stable trade. This is to the benefit not just of developed countries but the developing even more so: “. . . if the poor are to have any hope of better lives their countries must be given greater opportunities to participate in the global trading system. Of course trade liberalisation must be planned, phased in, and based on clear rules. Of course it must be accompanied by increased trade capacity and domestic pro-poor policies. But the WTO is the only place where global trade development can take place in a way shaped by the developing world. Without the WTO we are left with the economics of the bully."2
Last Updated: 2003-05-06
Created: 2003-05-06
It is worth remarking that even if one of the countries, say B, had little to gain from imposing tariffs it might still do so as a retaliatory measure. This threat of retaliation would be perfectly rational since it could help prevent the welfare loss B suffered from A imposing tariffs. ↩︎
[5], Conclusion. ↩︎