Globalisation: WTO and Free Trade

Tuesday, May 09, 2006

In my previous post, I wrote briefly, about how the World Trade Organization (WTO) was brought about by the need for an international platform for exchange of discussion, views, ideas, and policies concerning trade, because of the burgeoning state of economic globalization. In this post, I will be furthering that point, but also, for the major part of it, discuss about how globalization has brought about free trade, and how the role of the WTO affects, and is affected, by free trade.

So, for a start, what is free trade? It is the situation whereby there are no restrictions whatsoever on the international exchange of goods and services. Of course, there would never be such a scenario. Many hindrances, such as protectionism, tariffs, etc, all contribute to this non-existence of free trade, and reasonably so. But how does globalization bring about free trade?

With the increasing interdependence of countries throughout the world, especially so economically, it is no wonder that many countries encourage the practice of free trade. This is because it increases the economic profit of countries, especially through imports and exports, because there is requirement to pay the tax imposed on them, which in the case of free trade, is ideally non-existent. It also increases consumer choice, because free trade allows foreign imports to compete in the market. It is also because of globalization that closer ties and bonds between countries are forged; leading to the general understanding that free trade is beneficial for both parties, thus encouraging free trade. And with most barriers breaking down between countries, such as geographic constraints, which can be solved by transport such as the airplane and the Internet alike, it is likely that many more countries would adopt the approach of free trade, and maximize profits. Note that free trade is different from the free market, which is usually localized, unlike the globalized nature of free trade.

Let me now determine what the WTO is exactly. It is the only international organization dealing with the global rules of trade between nations, to ensure that trade flows as smoothly, predictably and freely as possible. This is through administering trade agreements, acting as a forum for trade negotiations, settling trade disputes, reviewing national trade policies, assisting developing countries in trade policy issues, through technical assistance and training programmes, and cooperating with other international organizations. Take note of the underlined parts. This is how WTO affects free trade. It encourages free trade, and is a platform to facilitate agreements, especially those concerning free trade. However, this very issue may be the one that WTO finds the hardest to cope with.

This is because free trade might not bring about just benefit, but also detriment. One example is that of farming in the European Union (EU). The farmers there were originally producing for the local market, and earning rather healthy profits, until the influx of free trade. Cheaper imports of produce were taking the business away from the local farmers. This matter was brought up to the EU, and they have since had a hard time deciding whether to practise protectionism, consequently providing a captive market so that locals could sell their produce without worry of competition, or adhere to free trade, and introduce lower prices for the consumer. This is similar to the problems that the WTO faces in handling trade disputes. For example, Country A wants to practise free trade of automobiles i.e. import automobiles to Country B, but Country B cites its own budding automobile sector as a reason for protectionism. (Sound familiar? Read up my previous post if you will.) As a result, the role and function of the WTO is affected through personal interests of different countries. This problem is exacerbated with the large number of member countries in the WTO, 149 to be exact, what with their diverse interests and goals, which may inevitably conflict with those of other countries. This is how free trade affects the role of the WTO.

PS Oops, no pictorial post. Shall remember to do one the next time round.

Marc, the Economic 'Expert'
Posted by cram at 1:05 am
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