WTO and Developing World Trade Organization Currently Essay
- Length: 8 pages
- Sources: 20
- Subject: Economics
- Type: Essay
- Paper: #62295487
Excerpt from Essay :
WTO and Developing World
World Trade Organization currently does not have a clear definition of a developing country. For this paper, we need to know what a developing country is in order to see if accession to WTO actually improves their economic situation and to see if they are treated fairly by the organization and its wealthier members. But we need to understand that since there is no clear definition of a developing country in WTO, we will use the general definition by the World Bank which states that a developing country is "a low- or middle-income country & #8230;in which most people have a lower standard of living with access to fewer goods and services than do most people in high income countries." (Nass et al. 2004, p. 221) Interestingly WTO allows member countries to decide for themselves if they would want to be categorized as a developing nation or a developed one. This is based on various characteristics which may or may not qualify a nation for various provisions meant for developing countries. When we discuss the reasons why WTO is still the desired destination for many developing countries, the case of China comes to mind that has reaped tremendous benefits from trade liberation and subsidies offered to developing countries by WTO. However other developing countries fail to demonstrate much positive impact on their economy due to accession to WTO. For this reason, we shall study the case of China and its accession to WTO in greater detail. We shall first however get an overview of the effects on WTO accession on the economy of developing countries in general and then focus on China precisely. It must be made clear that most developing countries have had to endure serious challenges when they sought accession. The very process of gaining accession indicates the WTO doesn't assign same status to all countries and tends to discriminate between developed and developing countries. China with all its economic and military strength still had to face serious challenges during the long waiting period when it had applied for entry into the WTO.
Effects of Accession to WTO on developing countries
Though not much is known in detail about effects of WTO accession, it is generally believed that there has been no significant impact on the economy of developing countries. Most researches have dealt exclusive with the case of China while they have ignored the other 19 countries that have joined the WTO since 1995 which leaves us with little plausible information on the well-being of member developing countries since accession. Interestingly while some officials of international organizations have tried to highlight the benefits of joining WTO and have claimed that accession results in better trade relations etc. this claim has not been proved by studies. Series of research papers submitted by Rose (2002a, 2002b, 2003, 2004) indicate no statistically proven beneficial impact of accession on the trade flow of developing countries over a fifty year period. Another study by Rose (2003) found that while GATT/WTO accession had resulted in some improvement in bilateral trade, the same was not true for WTO accession alone.
Subramanian and Wei (2003) however find different results. Their research employed techniques that helped then diverge from Rose's method of deriving conclusions. First they specifically studied the impact separately on two set of countries i.e. developed and developing. Secondly they used different techniques for reaching an estimate for bilateral gravity equations that helps in controlling some unpredictable factors. Their findings have thus been very different from Rose papers. They found that industrialized countries witnessed better trade flow with other developed countries after accession and noticed that this flow also improved with developing countries only after the completion of the Uruguay Round.
The case of China
China has been the most prominent example of a developing country's struggle to join the WTO, the challenges it faces and the impact it has had on the country's trade flow. China has been working relentlessly to restructure its economy and prepare it for foreign trade. This has had positive impact on the growth of GDP in the country with real per capita GDP reaching 6.04% from 1978 to 1995 (Maddison, 1998).
The reason why China sought accession must be understood because they would highlight answer the same question for other developing countries as well. The reforms introduced by China have had serious positive impact on the foreign investment in the country. Many special incentives introduced by the country in early 1990s led to sharp increase in foreign investment in 1992-1993. It had risen so exponentially that by 1994, China accounted for 20% of all foreign investment in the developing world. (Garbaccio, 1995).
But with more foreign investment and foreign ventures entering China, the vulnerabilities, weaknesses and shortcomings of Chinese business regulations, policy framework and political structure also became visible. This led to a gradual slowdown in foreign investment and by 2000; the world was pondering the mystery of this slowdown. The Economist (2000) focused on the reasons for the slowdown and found that investors entering China were disappointed by the absence of regulations in the economy, widespread corruption and inefficiency of state enterprises. It was also found that country was not allowing foreign investment in the service sector and all this needed to change to stem the slowdown and return to former FDI position. For this reason China pushed for accession to WTO. It had originally offered to join GATT in 1986 but faced numerous challenges as developed countries focused on the weaknesses of Chinese economic structure, fragility of its political fabric and absence of rules and regulations in business community. We need to understand why it took China so long to gain accession to WTO when it was unanimously regarded as the fastest growing market and the country was also implementing quick reforms. In such a situation, it seems rather odd that China had to negotiate for 15 years to gain entry into the WTO but if we take into account the global sourcing market, the reason for United States' reluctance to allow China into the WTO would become absolutely clear. It is important to understand that America was playing a key role in stopping China's accession and some other western countries also backed American's views on the subject. But in order to understand what the main reason behind their objection was, the best thing would be to take a look at the global sourcing industry and problems that America is likely to face in this connection with China's entry into this major world body. While the Chinese businessmen and corporations are more or less satisfied with government's decision to join WTO, the political community in other countries especially United States was of the view that China is the only country which is likely to benefit from its accession, while the businesses in America will face newer and fiercer challenges. The fear behind this argument springs from the improper policies of the American administration, which has forced many businesses to seek global sourcing in order to cut costs and increase profits margins. In other words, since there are heavy taxes of all kinds on businesses in the United States and some other western countries, the only way corporations think they can increase their revenues is if they start purchasing raw materials from Asian countries where labor and resources are still cheaper than they are in some other parts of the world. But while it was a problem even when China had not entered the WTO, it will certainly to turn into a major cause of concern once China officially opens its market to foreigners. This is because now the businesses, which were restricting their global sourcing in some manner, would see no longer the need to do so and this would make China's supply market even more aggressive. Along with that many companies would be tempted with the idea of establishing their businesses in this region and they would find it easier to enter Asia-Pacific countries now that China has become a member of the WTO. Though we need to understand that America and other western countries which are engaged in global sourcing will also stand to benefit from China relaxing its trade laws and opening its market, but there is one major department in which they are likely to lose big time. This department is employment, which has already turned into a major economic and social problem for United States. Suffering from a more 5-percent unemployment rate, America couldn't possibly see an increase in its unemployment rate. With China's accession, production would begin offshore even more aggressively which could on the one hand take away the jobs which western citizens would have gained if production had remained onshore and on the other hand, it could also hurt their supply market. (Bhattasali et al. 2004)
Apart from political reasons which definitely had an impact on China's bid to join WTO but there were serious economic fragilities too which hindered the accession process. It…