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Globalization causes a significant change across the world economy. This occurs because of an increase in interaction of households and firms all over the world who exchange goods and services between each other. As technology and productivity of many countries develop year by year the world community is less constrained with political borders.
Exports and Imports and the measure of economic openness more than doubled over recent decades in countries with advanced economies. In order to sustain a healthy trade among different nations it was sufficient for the world to form one global institute which may control the overall performance and conduct international trade policies.
Consequently after many negotiations organizations such as General Agreements on Tariffs and Trade (GATT) and later the World Trade Organization (WTO) were created.
General Agreement on Tariffs and Trade (GATT) was established in 1947, it was an agreement between 150 countries which was done with an intention of reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.
It lasted for 46 years and ended with a new agreement among 117 countries with a name World Trade Organization (WTO) which had more comprehensive and enforceable world trade rules.
Nowadays WTO is the only global international organization dealing with rules of trade between different countries. It is exist “to facilitate the implementation, administration, and operation as well as to further the objectives” of the WTO agreements. The main goal of these agreements is to enrich and enlarge free trade which has various advantages for global economy.
After the Great Depression of 1930th many countries preferred to apply trade barriers such as tariffs and quotas which could help every single country to increase its Domestic output and employment by stopping imports.
However those restrictions that were implemented made the things even worse, since they prevented nations from maximizing their specialization level and thus using factors of production inefficiently. This politics which goes against free trade is called protectionism. There are few arguments that protectionists use for implementing tariffs and quotas on imported goods.
Primarily they state that trade restrictions could protect infant industries to survive, since those well-established foreign producers generate smaller costs and are able to sell their products at lower price. In addition to law costs, unfair competition might occur due to subsidies or other benefits that firms receive from government.
Even though free trade critics argue that protectionist policies protect domestic jobs the net effect on employment is close to zero. Government may save jobs in one industry where there is a direct foreign competition, but lose jobs in other industries that you may not see.
The Columbian University professor Baghwati explains why free trade is still the first best policy in his famous book “Free Trade Today”. He claims that even if distortions exist in the international market, where protectionism could in theory be the right policy response, deviating from free trade will cause more problems than it solves.
Politicians are more likely to listen to lobbyists rather than economists seeking special benefits for themselves. Thus, intervention to correct market would result in government failure that only makes matters worse. Baghwati concludes, “the invisible hand may be frail, but the visible hand is crippled”.
What is the role of WTO in managing free trade? One of the most important functions of WTO is to serve as a forum for trade negotiations since international negotiations are very technical, detailed and politically sensitive. Furthermore their system helps to keep the peace which is achieved by helping trade to flow smoothly plus an international confidence and cooperation are created and reinforced.
Moreover trade is a core tool to raise income. At the time of 1994 Uruguay Round trade deal was $109 billion and after $510 billion was added to the world income. Economists estimate that cutting trade barriers in agriculture, manufacturing and services by only one third would expand the world economy by $613 billion.
Not only an appropriate and effective usage of resources in production is offered by trading system of WTO, in addition it helps to reduce costs even more because of principles established. Lower costs improve the well- being of society by making the prices for goods and services, such as food, clothes, cars and real-estate, cheaper.
Another major benefit world economies could get from joining WTO is Free Trade Agreements (FTAs) which is an example of preferential trade agreements and certainly the most popular. FTAs are dependable on WTO rules. One of the examples of the benefit a country may get from the agreement is an Australian FTAs with New Zealand, Singapore, US, Thailand and Chile.
By facilitating access to these markets, FTAs provide significant commercial profits to Australian exporters and more economic benefit to all Australians. Additionally these agreements may help to improve competitiveness through access to inputs with lower costs and to encourage domestic producers to remain competitive against imports.
The idea of WTO appeared slowly from various needs and negotiations. Despite there are still many protectionists who argue the necessity of markets to be protected by various restrictions, the Great Depression of 1930s showed the reverse situation and proved that protected markets are more likely to fail.
WTO has a big impact on international trade as it is the only global organization in the world which sets the rules and controls performance among member countries and it is considered as among most powerful international bodies in the world.