Asymmetries in the Emerging Multilateral Trading System under the WTO: An Analysis

Developing countries in the Multilateral Trading System

Research Paper (postgraduate) 2011 40 Pages

Economics - International Economic Relations



The fundamental principles of the multilateral trading system is to help trade flow as freely as possible, on the one hand, and deal with disputes over trade issues on the other. The expansion of trade has played a dynamic role in the growth of the global economy since World War II. Trade is important for the development of all types of economies. But its sustained growth calls for a free and fair Multilateral trading system. A trading system that is rule based helps in the expansion of trade. Similarly, a trading system that lowers trade barriers through negotiations and applies the principle of non-discrimination promotes trade from developing countries. Further, the trading system that allows disputes to be settled effectively and constructively has the added advantage for the developing countries. The world trading system under the WTO promises all but its working over the past years since its establishment has revealed that the pace and pattern of implementation by different member countries have not been uniform. More powerful players in the trade space have evolved many new instruments of safeguarding their national interest while the weaker players have been forced to implement their commitments. This has generated asymmetries in the pattern of effective market access in the different countries of the world economy.

In the light of the above, our objective in this study is primarily to examine the role of Multilateral trading system under the WTO in promoting international trade of developing countries in general and that of India in particular. The purpose of this paper is (a) to discuss the importance of trade and trading system for developing countries in general and India in particular (b) to discuss the asymmetries exist under the WTO which effect the development process of developing countries adversely, and (c) to suggest ways and means as to how India and other developing countries can maximize the gain and minimize the losses from its membership of the world trade organization under the globalize era.

Keywords: Trading System, WTO, Developing Countries, Indian Economy.

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- Department of Economics, A.M.U. Aligarh


The world trading system since the establishment of GATT in 1947 has undergone substantial reform. Its present status under the WTO seeks to establish a ‘new market-based’ trading system. Many new areas such as agriculture, textiles, IPRs, TRIMs and services have been included under the WTO provisions. The scope of liberalization has been widened by including NTBs along with tariffs and many new norms and disciplines such as sanitary and phytosanitary measures, anti-dumping measures, dispute settlement procedures, safeguard measures etc., with a view to ensuring liberalized effective market access and rule-based trade. The WTO is empowered with the authority of enforcing the commitments, rules and norms of discipline governing international trade. The fundamental principles of the trading system is to help trade flow as freely as possible, on the one hand, and deal with disputes over trade issues on the other.

The system attempts at improving predictability and stability by discouraging the use of quotas and other measures to set limits on quantities of imports. Another most appealing aspect is that the new multilateral trade regime would be transparent and non-discriminatory. For the world trading community as a whole, every initiative on trade liberalization should ensure rewards in the form of large and expanding markets and greater trade flows for all participating members (Chadha, G.K. (2003). Many WTO agreements require government to disclose their policies and practices publicly within the country or by notifying the WTO. The regular surveillance of national trade policies through the Trade Policy Review Mechanism (TPRM) provides a further means of encouraging transparency both domestically and at the multilateral level.

All these developments in the world trading system are expected to have profound influence on developing countries trade performance. With this background our objective is to examine how far the multilateral trading system is responsive to the development needs of the developing countries in general and that of India in particular. To develop this main theme, the importance of international trade and the trading system in developing countries is discussed in section 1.3. This is followed by a brief description of some of the asymmetric in the present trading system that affect the development process in developing countries adversely in section 1.4. In section 1.5 and 1.6 discuss the trade performance of the developing countries in the post- WTO era and development agenda for the developing countries is proposed, respectively. The last section gives conclusion.

1.2 DATABASE AND Methodology:

The study has as its period of reference the post-WTO period which is also compared with the pre-WTO period. The study is based on secondary sources of data which have been collected from various sources. Due acknowledgement has been given to their appropriate places.

The data on share of agricultural subsidies of selected OECD countries is supplied by the Central Statistical Organization of India. The data on share on export and import of region and economic grouping supplied by world Trade and Development Report(2007), Research and Information system, New Delhi. The share of merchandise Export-Import for the period of 1985 to 2006-07 is collected from UNCTAD Secretariat. The study is based on secondary sources of data which have been collected from various sources. Due acknowledgement has been given at their appropriate places. The methodology used is simple and analytical.

1.3 IMPORTANCE OF Trade and trading system for devleoping countries:

Trade is important to developing countries for four reasons. First, it is frequently the primary means of realizing the benefit of globalization. Countries win when they gain market access for their export and new technology through international transfers, and when heighten competitive pressure improves the allocation of resources. The rising share of exports and imports in gross domestic product attests to growing exposure to international trade.

Second, the continuous reallocation of manufacturing activities from industrial to developing countries offers ample opportunities to expand trade not only in goods, but also in services, which are becoming increasingly tradable. In a few decades global trade in services may well exceed that in goods.

Third, trade is intertwined with another element of globalization: the spread of international production networks. These networks break up sequential production process which traditionally have been organized in one location, and spread them across national boarders. This dynamic will result in further geographic dispersion of production and increased trade among cities, regions, and countries. Increasingly, the fortunes of the new production venues are bound together by trade.

Fourth, the growth of trade is firmly buttressed by international institutions of long standing. The World Trade Organisation, built on the legacy of the General Agreement on Tariffs and Trade is the latest step in creating a commercial environment more conductive to the multilateral exchange of goods and services.2

The trading system that is rule based helps in the expansion of trade for developing countries. Particularly important are negotiations that lead to agreement by consensus and focus on abiding by rules.

The trading system allows disputes to be handled constructively. Before the World War II that option was not available. After the war, the world’s community of trading nations negotiates trade rules which are now entrusted to the WTO. Those rules include an obligation for members to bring their disputes to the WTO and not to act. Unilaterally, when they bring disputes to the WTO, the WTO procedure focuses their attention on the rules. Around 300 disputes have been brought to the WTO since it was set up in 1995(WTO). The WTO system helps resolve these disputes peacefully and constructively.

The advantage of the world trading system based on the rules rather than power is that it makes life easier for all. Decisions in the WTO are made by consensus. The WTO agreements are negotiated by all members, approved by consensus and ratified by all members of parliaments. The agreements apply to every one rich and poor country alike. They have an equal right to challenge each other in the WTO dispute settlement procedures. This makes life easier for all, in several different ways. Smaller countries can enjoy some increased bargaining power without a multilateral regime such as the WTO’s system the more powerful countries would be freer to impose their will unilaterally on their smaller trading partners. Smaller countries would have to deal with each of the major economic powers individually, and would be much less able to resist unwanted pressure. In addition, smaller countries can perform more effectively if they make use of the opportunities to form alliances and to pool resources.

The WTO’s global system lowers trade barriers through negotiations and applies the principle of non-discrimination. This results in reduced cost of production and reduced prices of finished goods and services and ultimately a lower cost of living.

Trade allows a division of labour between countries. It allows resources to be used more appropriately and effectively to production. But the WTO trading system offers more than that it helps to increase efficiency and to cut costs even more because of important principles enshrined in the system.

It promotes trade liberalization which benefits economies in different ways. First, when tariffs are lowered the relative prices change, resources are reallocated to production activities that raise national incomes. The tariffs reductions implemented after the Uruguay Round (UR) is estimated to have raised national income by 0.3-0.4 per cent Srinivasan (1998). Francois, Mc Donald and Nordstorm (1996). Second, much larger benefits accrue in the long-run as economies adjust to technological innovations, new production structures and new patterns of competition. These gains will continue to be an important in the future as they have been in the past.

Trade liberalization has other powerful. It strongly influences the way firms perform. The evidence of its effects on domestic enterprises highlights the benefits of developing economies and gain from access to world markets.

Policy that makes an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increase in living standards of its people, without being open to the rest of the world. In contrast trade opening has been an important element in the economic success of East Asia, where the average import tariffs has been fallen from 30 to 10% over the past 20 years.

- There is a considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward looking (Srinivasan T.N. and Jagdish Bhagwati, (1999).

- Trade liberalization can permanently raise the productivity of firms by providing access to up-to-date capital equipment and high quality intermediate inputs at relatively low prices. Some firms in the Republic of Korea and Taiwan (China), for instance raised productivity by diversifying their use of intermediate inputs (World Bank (2001).

- New jobs are created for unskilled workers, raising them into the middle class. An overall inequality among the countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, as a result of trade liberalization (David Dollar and Aart Kraay.

Second, trade liberalization can set off a chain of events that concentrates economic activity in a city or region. When costs fall as output rises, business has an incentive to locate production activities in a few locations, laying the groundwork for “agglomerations” of economic activity. As demand from overseas purchasers boost output in these locations average costs fall and profit rise. The rising profits attract new firms that produce similar goods and thus provide a new source of agglomeration. The increase in final goods producers then encourages the entry of new intermediate inputs, producer’s with products (such as non-tradable services) tailored specifically to the needs of final goods produces. The new inputs make the production of final goods yet more efficient, lowering costs and raising quality (and possibly revenues). Final goods production becomes still more profitable, attracting more producers. The cycle continues until it is curtailed by congestion that is when output grows faster than the capacity of local infrastructure.

Thus trade liberalization opens foreign markets, expands the demand for domestic firms goods and enable them to serve a large market and realize gains from economies of scale (Stiglitz E. Joseph and Charton Andrew (2005). Trade liberalization make available a range of inputs at lower prices by lowering cost of production. Liberalization may also introduce more competition from foreign firms to the domestic economy which may result in improvement in the efficiency of local firms. Finally, trade liberalization, through various channels; affect the rate of economic growth.

The Uruguay Round of trade negotiation predicts that under the new liberalized world trading system, world trade would expand and developing countries would be benefited. But, due to the various unforeseen circumstances, freeing of world trade through reduction in tariff levels has not led to expected increase in the world trade and as such developing countries have been left struggling for expanding their trade in volume and value terms.

The WTO system calls for the member countries to lower their trade barriers and to allow trade to flow more freely. It provides the forum for negotiating liberalization. It also provides the rules for how liberalization can take place. The rules written into agreement allow barriers to be lowered gradually so that domestic producers can adjust. They spell out when and how government can protect their domestic products, for example, from imports that are considered to have unfairly low prices because of subsidies or antidumping. This new trade system under WTO fails to recognize this adverse impact of liberalization of trade on the norms of fairness and such the conflict between free trade and fair trade seems to continue under the new trading system (Punchmukhi, V.R. (2003).

The standard argument in favour of trade liberalization is that it improves the average efficiency in a country. Import from foreign producers may destroy some inefficient local industries, but competitive local industries are supposed to be able to absorb the shock as they expand their export to foreign market. In this way trade liberalization is supposed to allow resources to be deployed from low productivity protected sector into high productivity export sector. But those arguments assume that resources will be fully employed in the first place, whereas in most developing countries unemployment is persistently high. One does not need to redeploy resources to put more resources into the export sector, one simply need to employ hitherto unused resources. In practice trade liberalization often harms competiting local import industries, while local importers may not automatically have the necessary supply capacity to expand. So, liberalization often seems to result in labour temporarily going from low productivity protected sector to zero productivity unemployment. Unfortunately most of the models which attempt to address question of welfare, gain from trade liberalization assume full employment and therefore provide no answer to this key questions: the impact of liberalization in economies with underemployed resources. But the issue of unemployment is not just a theoretical problem. Concern that trade liberalization will lead to increase unemployment is perhaps the most important source to oppose liberalization.

Trade liberalization will also affect inequality. Opening up to trade does not make every one in a country better off. Instead it changes the distribution of income and create winner and loosers. The standard economic arguments is that the net gain from trade liberalization are positive so the gainer can compensate the loser and leave the country better off overall. Inequalities in the world economic order, which constitute the important sources for the frustration of development in some part of the world, would continue to hamper the process of economic transformation aimed at improving the welfare of the people in all parts of the world (Stiglitz, E. Joseph and Charton Andrew (2005).


2 This is not to suggest that WTO is the only International Institution committed to facilitating the expansion of international trade. The IMF and the World Bank shares these goals and have designed programmes to achieve them.


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Title: Asymmetries in the Emerging Multilateral Trading System under the WTO: An Analysis