We have all heard of the World Trade Organization before.
I mean, unless you’re a hermit living in seclusion in a cave in the Himalayas, I’m sure you have come across mentions of the World Trade Organization in various snippets and segments of news.
It is obvious from the very name that the World Trade Organization has to be related to international trade somehow. However, not a lot of people know what the exact purpose of the WTO is or how it came to being.
That is where I come in, dear friends.
I am going to tell you all about the inception and evolution of the World Trade Organization and why it is so important.
In the eternal words of Julie Andrews, “Let’s start at the very beginning.”
The World Trade Organization was officially established on 1st January 1995. The 124 nations who were the initial members of the agreement, pledged to liberalize trade in order to promote economic and social welfare.
It’s a relatively recent organization, isn’t it?
Well, that is because the World Trade Organization is just the most recent and the most comprehensive trade agreement in the world. There are a number of precursors though, the most famous being the General Agreement on Tariffs and Trade or GATT.
You see, seeds of the WTO have been in society since the days of the barter system. It just took a while to reach a cultivable state.
Humans have been participating in trade since the beginning of time. Of course, trade in those days probably looked very different from its present form. However, trade between two individuals is slightly different from trade between two countries.
For trade between two or more countries, a lot of other factors come into play. For example, different countries have different tariff rates, different interest rates and different patterns of trade. Countries that trade together on a regular basis or regular trading partners end up wasting a lot of resources dealing with tariff rates and other barriers to trade.
Throughout history, we have evidences of trading agreements that countries have negotiated with each other to minimize expenditure on unproductive activities like tariff payments. For obvious reasons however, a generalized trade liberalization agreement between countries across the world took a long time to come to fruition.
I mean, can you imagine trying to host a meeting with ALL the major trading countries in the world? What a pandemonium that would be!
You know how people say the world changed after the two world wars that ravaged the earth and scarred humanity?
Well, it did. In more ways than one.
The Second World War left certain parts of the world in ravages. It also brought in its wake the need for a new world order and a new financial system. In other words, it created a void, an opportunity for a more improved system which would priorities trade interests over the foreign and financial policies adopted by individual countries.
The General Agreement on Tariffs and Trade came into being a couple of years after the end of the second world war in 1947. This was the first major multilateral trade agreement in the world. It was signed by 23 countries. In fact, GATT can trace its origins back to the Bretton Woods conference in 1944, which also led to the birth of the International Monetary Fund and the World Bank.
Originally, GATT was supposed to be replaced by a specialized branch under the United Nations called the International Trade Organization, which would solely focus on the supervision and liberalization of world trade. Unfortunately, the International Trade Organization never really came into being.
The truth is, guys, forming a multilateral trade agreement with a sizeable number of countries is like trying to count the number of stars in the sky; the idea seems straightforward enough on paper, but the execution is a different matter altogether.
In fact, until the birth of the World Trade Organization in 1995, the General Agreement on Tariffs and Trade was the only major international trade agreement. The GATT system evolved over its lifespan. By the time it got replaced, it had morphed into a global trade organization consisting of almost 130 countries.
Interesting, isn’t it?
Let’s talk some more about the WTO now, shall we?
The WTO was like the bigger, better and more universal version of the GATT. It covers a broader purview and has stronger dispute settlement mechanisms. While the GATT focused primarily on trade in goods, the WTO covers goods, services, intellectual property as well as some investment policies. You will get to know about more Investment policies.
Now that I have traced the evolution of the WTO, let me ask you this question.
Why do you think the World Trade Organization is so important?
I mean, we all know the frankly ginormous scale the WTO operates on, on a daily basis. Most countries that we know of are members of the WTO.
What is the point of the organization though?
Where does the WTO fit into our way of the world?
It is very simple, really.
Did you have siblings growing up? Have you ever reached an impasse in an argument which required your mother’s intervention?
Well, countries operate on similar lines.
The most important functions of the WTO include the overseeing and enforcements of the agreements negotiated between nations, and providing a forum for the settlement of disputes. In other words, the WTO acts as an enforcer of the agreements.
Among other functions, it is the responsibility of the WTO to review national trade policies adopted by its member countries, and assist any developing country to transition into the disciplines and requirements in global economic policy making.
Now do you understand the importance of the World Trade Organization?
Such a separate entity is paramount to the survival of any trade agreement anywhere in the world. Currently, the WTO oversees about 60 different agreements between its member countries.
Any economist will tell you, free trade is optimum for any welfare maximizing country. The problem, however, lies in the fact that free trade between countries is not a very feasible idea.
This is one of those instances where diversity causes a problem. When the different fiscal and economic policies in every country are combined with different currencies and a number of other factors, it is almost impossible to prevent the cropping up of trade barriers in the form of tariff, quotas and voluntary export restraints.
One cannot even blame the individual countries for imposing these trade restrictions. Of course free trade is optimal for welfare reasons, but one also has to consider the security of the country in question. Freeing all trade would effectively take away all control from the government of the country and open them up to the volatilities and unpredictabilities in the world market.
Who could possibly want that?
The World Trade Organization is the answer to this very puzzling conundrum. It is the largest international economic organization in the world and promotes free trade among its members. It provides a shield of sorts against the vacillations of the international market and ensures that each country honours the trade agreements it has entered into.
With this separate enforcing body, countries are free to negotiate trade agreements among themselves without any worry of default by the partners. This means lowering of tariff rates and other trade restrictions and the general freeing up of trade.
Of course, one can never say unambiguously that the WTO is perfect or the answer to all trade related problems. There are always individual countries who resent the authority of the WTO or find it difficult to conform to its rules, for whatever reason. However, it is possible to say, unambiguously, that the WTO has, in fact, improved trade. Research shows that countries would face about 32% increase in tariff on their exports without the WTO. And this is the argument that wins every time.
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