WTO, Trade Liberalization, and the Developing World

Introduction to the World Trade Organization

The World Trade Organization (WTO) is an international body located in Geneva, Switzerland that was officially founded in 1995. Its stated purpose is to help trade flow as freely as possible within a number of given restrictions. For example, the WTO does not attempt to pressure countries into openly trading items that pose safety concerns or could cause illness without appropriate safeguards. Essentially, the organization tries to maximize trade without introducing undesirable side effects that could diminish commerce between nations. Subject to those restrictions, however, the WTO works to open markets to international importers and exporters.

Much of what the WTO does involves facilitating trade through negotiations. The WTO does not have the authority to dictate countries' trade policies, nor can it act unilaterally. What it can do is ensure that representatives from any particular nation have the resources to understand how global markets operate and what their options are. Countries are not required to follow the WTO's recommendations, though ignoring them can come at a considerable economic cost. While the WTO has no direct authority over a country's policies, it can exert indirect influence through the collective economic activities of its members.

A clear example of the power the WTO can exert is illustrated by the case of Iran. Iran threatened to use military force to block one of the main shipping routes through which oil is transported in the region. Such an action would send a shock through world markets capable of destabilizing international trade. In response, the United States led an effort to impose severe economic sanctions on Iran — sanctions intended to cause enough economic hardship that the Iranian population would pressure its leaders toward a peaceful resolution. Other countries that depend on Iranian oil for their development, such as China, are also affected by these sanctions. The WTO therefore steps in to hear complaints from affected nations and to offer a forum where peaceful trade negotiations can be conducted (The Economist, 2012).

The Importance of Trade Liberalization

Under most circumstances, free trade can generate a wide range of benefits felt by consumers, producers, or the domestic economy as a whole. Generally, free trade is restricted only when it might reduce the supply of a good or service deemed vital to national security. For example, many Western nations maintain significant restrictions on food imports. These nations want control over the quality and safety of their food supply, and they also want to ensure that domestic production is sufficient to feed their populations. A country that is overly dependent on another nation for food could face the threat of starvation if trade were ever disrupted. Industries subject to similar restrictions include the defense sector and many pharmaceutical industries.

It is important to note that trade liberalization does not mean the complete elimination of all trade rules. Rather, it refers to the reduction of barriers such as tariffs, quotas, and regulatory restrictions that impede the cross-border flow of goods and services. The WTO has been a central institution in advancing this agenda, particularly through successive rounds of multilateral trade negotiations.

Benefits and Costs for Consumers and Producers

Consumers represent one of the largest segments that can benefit from international trade. In open international markets, consumers can access a wide array of goods and services produced by suppliers from across the globe. More choices generate more competition, pressuring producers to lower costs or improve quality. China provides an immediate illustration: it has become one of the world's largest exporters of manufactured goods largely because of its very low labor costs. Products manufactured in China can be produced for a fraction of what they would cost in more industrialized nations with stricter labor laws, allowing consumers in open markets to purchase those goods at deeply discounted prices.

From a long-term perspective, however, these short-term consumer benefits can come at a cost to the domestic economy. Although the effects of trade liberalization are often difficult to quantify, a country that becomes overly dependent on low-cost imported goods can gradually dismantle its own manufacturing base, resulting in significant domestic job losses. Determining which effect carries the greater overall weight is a difficult and heavily debated question. One longer-term possibility is that labor costs around the globe will eventually reach an equilibrium, eliminating any single country's significant advantage in human resources.

The benefits to producers can also be substantial, as trade liberalization exposes them to far more markets in which to sell their goods — sometimes expanding their potential customer base exponentially. At the same time, they also face heightened competition. For the most competitive firms, this environment can be highly advantageous, enabling seemingly limitless growth. Globalization has produced notable success stories: McDonald's, Walmart, and Apple have all become truly global forces. Less competitive firms, however, are sometimes absorbed by larger international players. In theory, and under most common circumstances, this consolidation is ultimately beneficial for the consumer.

Conclusion

However, such poor outcomes with respect to poverty are not universal. The case of India demonstrates that access to exterior markets can provide a domestic economy with the capital inputs needed to drive economic activity and overcome obstacles in production (Goldberg et al., 2009). India was able to build a substantial technological infrastructure, which allowed it to prioritize high-tech education and eventually become one of the world's foremost providers of technology services. Although the gains from this growth have not been shared uniformly across the entire population, it is difficult to deny that India benefited significantly from trade liberalization.

In conclusion, the trade liberalization of markets has produced mixed results, helping some while hurting others. It appears that each instance must be evaluated on a case-by-case basis to determine the effectiveness of trade liberalization in a given context. The conclusions one draws also depend on the perspective from which the policies are viewed. Considering only the effects on total GDP may lead to one conclusion, while approaching the question from the perspective of the ordinary citizens of that country may yield an altogether different one. Although trade liberalization can generate significant economic benefits for certain sectors, those benefits are sometimes limited to particular segments of the population.

There does not appear to be any clear-cut answer to some of the challenges inherent in the WTO's role or in the actions of individual nations. Nevertheless, it should be noted that even where poverty is not directly addressed through trade liberalization, such economic openness would undoubtedly place a nation in a stronger position to confront those issues over time.

Bussolo, M. & Lecomte, H. (2009). Trade liberalization and poverty. Overseas Development Institute, 6(1), 1–4.

Edwards, S. (1993). Openness, trade liberalization, and growth in developing countries. Journal of Economic Literature, 31(1), 1358–1393.

Goldberg, P., Khandelwal, A., Pavcnik, N., & Topalova, P. (2009). Trade liberalization and new imported inputs. American Economic Review, 99(2), 494–500.

The Economist. (2012). The world in their hands. Retrieved January 23, 2012, from http://www.economist.com/node/21542930

The World Trade Organization. (2012). Who we are. Retrieved January 23, 2012, from http://www.wto.org/english/thewto_e/whatis_e/who_we_are_e.htm