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Terms Related to International Business - What is the World Trade Organization?

Updated on May 9, 2013

World Trade Organization

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Introduction

International Business is business conducted across national borders between governments or corporations located in other regions of the world. One of the main groups overseeing international business or global trade is the World Trade Organization. This hub provides an introduction to the WTO and highlights a few pros and cons highlighted by experts in cross borders commerce or international trade.

WTO Membership Map

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The History of the World Trade Organization

According to the World Trade Organization's (WTO) official website, the WTO was founded in January of 1995. The official opening of the global trade watch dog was the result of nearly eight years of negotiations held from 1986-1994. The negotiations were associated with what is known as the Uruguay Round. The WTO is in many ways an extension of the General Agreement on Tariffs and Trade (GATT) adopted just after WWII.


Since its establishment in 1995, the World Trade Organization has grown to a membership of 159 countries (as of March 2013). It has operates on a budget of 196 million Swiss francs and employs over 600 staff members. The WTO is headquartered in Geneva, Switzerland with Pascal Lamy serving as Director-General.


Currently, the WTO is attempting to re-organize under a new agreement begun in 2001. That agreement is known as the "Doha Development Agenda.."

Promoting Global Trade

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The Mission, Purpose, and Functions of the World Trade Organization

Mission of the WTO

The mission of the WTO is stated as follows:

"The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application."


Purpose of the WTO

According to the Council on Foreign Relations, the general purpose of the WTO is to establish rules and structure of international trade in order to provide stability for the commerce sector of those nations that rely heavily upon international trade.


Functions of the WTO

In conjunction with this general mission statement, the intent of the WTO is to serve the following functions:

  • Negotiate and monitor WTO trade pacts
  • Establish a forum for trade negotiations
  • Mediate trade conflicts
  • Keep a watchful eye on national trade policies
  • Provide training and assistance to developing countries
  • Build coalition with other international agencies

(WTO.org, 2013).

The WTO Debate

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Potential Benefits and Drawbacks of the World Trade Organization

Potential Benefits of the WTO


The chief purpose of the WTO is to promote free and fair trade, as such Economics Help (2013) site offers the following advantages of this global trade watchdog include:


  • The lowering or removal of tariffs that results in lower prices for consumers


  • Greater competitiveness also resulting in lower costs for consumers; barriers to entry are dropped allowing the potential for new entrants that will move current firms to be more efficient and offer products and serves at a lower cost.


  • More countries will be able to take advantage of the law of comparative advantage and increase the economic welfare of their peoples. Comparative advantage takes into account the opportunity cost of producing a certain product or service. Free trade opens the opportunity for countries to specialize in making products with lower opportunity costs. However, the developed economies must decide to show restraint to produce the products where they have lower opportunity costs.

For instance, Cambodia can decide to use its resources and human capital to make airplanes or grow rice. If they use the resources to develop aircraft manufacturing capabilities then they lose the opportunity to use those resources to grow rice. However, to date Cambodia does not have the technological know-how to manufacture airplanes, but have abundant expertise and land to grow rice. In such a case, Cambodia has a comparative advantage to grow rice. It would be more profitable for them to use their resources to grow rice than to attempt to manufacture airplanes. This is so even if a country like the USA has the capability to manufacture airplanes and grow rice at a lower cost than Cambodia. The law of comparative advantage encourages the USA to use their resources to manufacture airplanes and leave rice production to Cambodia. (Of course, such a decision may not be received well by rice growers in California and Arkansas.)


  • The promotion of free trade opens the opportunity to produce larger amounts and take advantage of economies of scale. As the WTO encourages free trade, manufacturers can specialize and produce high quantities of a given product that lowers the cost per unit.


  • The bottom line, theorists argue that free trade will increase global economic growth


Main Drawbacks of the WTO


  • The World Trade Organization may benefit developed countries more than developing countries. The benefits of free trade have not yet trickled down to developing countries. Subramanian (2007) found that while the WTO has helped increase global trade the benefits of membership have been uneven. He found that developing countries had more resources for active participation than developing countries and thus received more benefits from membership.


  • Developing countries are made to compete according to the same rules as developed countries even as they may not have the same resources to market their products. For instance, when Cambodia was granted entry into the WTO in 2003, the USA was forced to drop its favorable quota based trade agreement with the Cambodian garment industry because it gave the Cambodian garment industry an unfair advantage in the US marketplace. The USA was the Cambodian garment industry's largest trading partner. At least, temporarily garment factories in Cambodia had to shut down operations until they could expand their list of trading partners


  • The WTO may not have been as effective as claimed. Rose (2002) examined 50 years of economic data from 175 countries and found little evidence that the GATT/WTO agreements actually encouraged trade. He found that the trade patterns of WTO members did not differ significantly from non-members.


  • Promotes production at the expense of the environment.


References

WTO.Org. (2013). About us - Who are we? wto.org.

Subramanian, A., & Wei, S. (2007). The WTO promotes trade, strongly but unevenly. Journal of International Economics, 72(1), pp. 151-175.

Rose, A. K. (2004). Do we really know that the WTO increases trade? American Economic Review, 94(1), 98-114.

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