Monday, July 6, 2009

An Introduction to the WTO

Foreign Direct Investment (FDI) is responsible for half of globalization. However, just defining FDI neglects the work that the World Trade Organization (WTO) and its former incarnation, the General Agreement on Tariffs and Trade (GATT), have done. GATT and the WTO are responsible for thousands and thousands of tariff reductions over the last sixty years. Although the WTO has helped push along growth and trade, it is also responsible for hindering development and trade because of its structure.

These tariff reductions have resulted in a significant increase in international trade with respect to total economic output. Foreign companies routinely sell their goods for equal or lower prices than their domestic-made substitutes. This is why you can buy Korean cars, Japanese electronics or German beer in the US for equal or lesser prices than their American counterparts.

The WTO was created in 1995 as the successor organization to GATT, which was formed in 1947. GATT started out as a mechanism to regulate international trade. The first set (or round) of negotiations was between 23 countries and only dealt with tariff reductions. GATT went through eight rounds of negotiations, culminating with the Uruguay Round in 1994 that created the WTO. There are now 153 countries in the WTO. The trade volume in the WTO is astronomical.

Two important changes occurred with the change from GATT to the WTO. First, in order to join the WTO, each country must accept all of the WTO rules. Previously, in GATT, a country could just sign on to the various agreements that would benefit it. Second, for the WTO to come to a consensus, every country must agree. These two changes have given smaller and less powerful countries a much larger voice within the WTO.

The scope of the WTO also increased after the Uruguay Round. GATT negotiations agreements mostly dealt with tariffs. The WTO expanded upon GATT’s tariff agreements on intellectual property rights, services, investment and market access. However, the success of these agreements has been asymmetrical as the North (the richer countries of the Northern Hemisphere) can derive more benefits from them. The North has more intellectual property to protect, has a much bigger service economy than the South and has more money to invest than does the South (the poorer countries of the Southern Hemisphere). The South only really benefits from the increased market access.

The agreements on intellectual property rights and investment are the most restricting for Southern countries. The intellectual property rights agreement extends patent rights internationally, limiting the innovative capacity of those in Southern countries. The investment agreement curbs domestic policies that protect domestic firms from foreign competition, thereby putting domestic and foreign firms on an even playing field. Domestic firms in Southern countries are at a disadvantage to powerful Northern countries; it is exceedingly unlikely that a domestic firm will be able to compete with a foreign firm that has the capital to invest in another country.

The WTO is currently in the midst of another round of negotiations, the Doha Round. They have been ongoing for almost eight years now, in part because the Southern countries have realized their power to negotiate. How this round plays out is yet to be seen, as little progress has been made.

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