The WTO's mission and exchange rate systems

WTO

Since the end of World War II, there has been an emphasis on liberalizing trade barriers and establishing rules for everyone to follow. Originally implemented in 1948 as the Global Agreement on Tariffs and Trade (GATT), this became the foundation for free trade and economic liberalization. To enforce various rules, there was an international agency established to encourage different nations to support the numerous provisions of GATT (i.e. The World Trade Organization / WTO). To fully understand their role requires: examining the mission, how the fixed exchange rate system works and possible threats businesses will face from integrated markets. Together, these different elements will provide the greatest insights as to the responsibilities of the WTO when it comes to international trade.

Describe the mission of the World Trade Organization (WTO). How effective is this group? Provide an example to support your conclusion. When you consider current global economic conditions, do you think the role of such a group is enhanced or compromised?

The mission of the WTO is to enforce international trading rules that were established under GATT and the Uruguay Round. This is when there are specific regulations that define what practices are considered to be acceptable under international provisions. This is having a positive impact in addressing trade disputes. A good example of this can be seen in 2002 when the U.S. imposed steel tariffs of 8 to 30% on all imports (which is a breach of the WTO agreement). The organization ruled that this is in violation of these provisions (which led to a sudden reversal). This is important, because it is showing how the WTO is enhanced by the current global economic conditions. The reason why, is because different nations have become more dependent upon each other. When there is any kind of adverse ruling from the WTO, this could have an impact on the economy of certain regions. As a result, the present economic conditions are forcing countries to comply with these guidelines. (Ackerman)

Explain how fixed exchange rate, floating exchange rate and managed floating exchange rate systems work. Provide examples to support your explanation. Which do you think makes the most sense for facilitating international business?

The fixed exchange rate system is when there is an emphasis on maintaining a fixed rate for all currency reserves. This is designed to provide a country's currency reserves with greater amounts of stability. A good example of this can be seen with the U.S. dollar tied directly to a fixed rate of gold until the early 1970s. This increased confidence and stability in the system itself. (Madura 169 -- 184)

The floating rate system is when the currencies will trade against each other in the marketplace. An example of this can be seen with the U.S. dollar moving back and forth against the Euro based on economic events. This is helping traders to evaluate the issues impacting a particular currency and the expectations in the markets. (Madura 169 -- 184)

The managed floating rate policy is when the central bank will engage in specific actions to keep the currency at certain levels. An example of this can be seen with the Japanese central bank buying dollar bills to keep the rate low. This is designed to ensure that Japanese products will remain affordable in American markets (based on the strength of the U.S. dollar in comparison with the yen). As a result, the best system for facilitating international business is a managed floating rate policy. (Madura 169 -- 184)