The purpose of this paper is to outline the theoretical framework of the most popular economic theory approaches and the meaning of trade in general.
As part of globalization nations are moving closer together and the importance and intensity of the cooperation between countries increases continuously. During this development transnational networks are getting an increasingly important role regarding the regulation and control of various areas of life such as economic relations, environmental issues, security and law. These transnational institutions are influencing technical standards and norms, they affect environmental-, consumption- and law standards and their power is gaining in importance.
One of these bodies is the World Trade Organization (WTO) which was founded in the end of the 20th century with the purpose of creating a platform for negotiations about trade standards, regulating institutions in the trade sector and the development of multilateral agreements. The principles which underlain the work of the WTO include amongst others the subject of transparency, non-discrimination, and safety valves. With the evolution of a world ongoing getting more complex in trading subjects the facilitation, standardization and harmonization of global trade procedures get crucial and necessary for successful global growth. The implementation of the Agreement on Trade Facilitation (TFA) as the first multilateral agreement enforced in this context includes the establishment of global standards regarding customs and administrative measures and aims at the reduction of trading barriers and transaction costs in the future.
Table of Contents
1. Introduction
2. Theoretical Background: Different approaches on trade
3. Theoretical Background of the WTO
3.1 Historical development of the WTO
3.2 Structure and parameter of the WTO
3.3 Main purpose and tasks of the WTO
3.4 Principles of the WTO
4. The Agreement on Trade Facilitation
4.1 Background of the Trade Facilitation Agreement
4.1 Content of the Agreement on Trade Facilitation
4.2 Consequences and Meaning for global trade in future
5. Critical Reflection
5.1 Chances of the Agreement on T rade Facilitation
5.2 Risks of the Agreement on Trade Facilitation
6. Conclusion
Bibliography
List of Abbreviations
ASEAN Association of South East Asian Nations
ATF Agreement of T rade Facilitation
EU European Union
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
IMF International Monetary Fund
ITO International Trade Organization
LDC Least-developed Countries
MENA Middle East and North Africa regions
MERCOSUR Southern Common Market MFN Most-favoured-nation
NAFTA North America Free Trade Agreement
SDT Special and differential treatment
TFA Agreement on Trade Facilitation
TFAF Trade Facilitation Agreement Facility
TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights
WCO World Customs Organization
WTO World Trade Organization
List of Figures
Figure 1: The structure within the WTO
Figure 2: The articles of the Agreement on Trade Facilitation
1. Introduction
As part of globalization nations are moving closer together and the importance and intensity of the cooperation between countries increases continuously.1 In the course of this development transnational networks are getting an increasingly important role in regard to the regulation and control of various areas of life such as economic relations, environmental issues, security and law.2 These transnational institutions are influencing technical standards and norms, they affect environmental-, consumption- and law standards and their power is gaining in importance.3 One of these bodies is the World Trade Organization (WTO) which was founded in the end of the 20th century with the purpose of creating a platform for negotiations about trade standards, regulating institutions in the trade sector and the development of multilateral agreements.4 The principles which underlain the work of the WTO include amongst others the subject of transparency, non-discrimination and safety valves.5 With the evolution of a world ongoing getting more complex in trading subjects the facilitation, standardization and harmonization of global trade procedures get crucial and necessary for successful global growth. The implementation of the Agreement on Trade Facilitation (TFA) as the first multilateral agreement enforced in this context includes the establishment of global standards in regard to customs and administrative measures and aims at the reduction of trading barriers and transaction costs in the future.6
The purpose of this paper is to outline the theoretical framework of the most popular economic theory approaches and the meaning of trade in general. Further on the World Trade Organization (WTO) as one of the most important global institutions will be described in chapter three, including an historical overview of the emergence, the structure of the work within the WTO as well as the main purpose and the principles which are fundamental for global trade issues. Based on this theoretical framework the paper characterizes the Agreement on Trade Facilitation (TFA) as a current example of the work within the WTO. The content of the agreement is explained in chapter four and leads to an evaluation of the meaning of trade facilitation for global growth. In this regard different approaches reveal the chances and risks for the development of global trade in future which are associated in different perspectives. A short inference as well as a critical reflection of the previous achievements and outstanding dues are summarized in the last chapter.
2. Theoretical Background: Different approaches on trade
Adam Smith and David Ricardo are known as one of the most popular pioneers in the classical approaches of international trade theories. While Adam Smith is cited often for his theory of an absolute advantage, Ricardo has invented the theory of the comparative advantage.7
Seen as the founder of classical economy Adam Smith (1723-1790) was laying the foundation for a new thinking concerning trade issues with his book ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, which was published in 1776 and is focusing on the question how nations can achieve wealth through trade. Smith is naming pricing (natural pricing and market pricing), growth and the relation between economic and political aspects as the three main factors in a good functioning economy.8
In his opinion dividing the labor and specializing in innovation and the improvement of worker's skills and their productivity is the key to a successful economy.9 Labor in this context is seen as the essential part of growth in economy and needs to be divided to reach a higher productivity and in consequence to get work more efficient and effective through the aspect of specialization. Sharing work is based on the natural and individual instinct of human beings getting more advantages out of the situations and improve their own wealth.10
As Smith argues this principles of increasing domestic productivity through specialization are transferable to the international market as well. This means that every country should focus on producing those goods where the production requires the minimal financial and timely effort for the highest outcome. All other goods that could be produced nationally for a higher effort and a lower output should be traded with other countries that are specialized in those goods, because they can offer these goods for a cheaper price.11 As a result the so called absolute advantage occurs if one country has an advantage in producing a certain product, compared to other countries.12 The possibility of free trade in this relation is important in Smith's theory as well as it is laying the foundation of an active trade and exchange of goods amongst nations.13 Additionally trade amongst different parties allows a transfer of technology and knowledge between the involved nations.14
The aspect of pricing is also influencing the amount of trading activities between nations because a currently valid market price is also depending on the relationship between supply and demand. But Smith is not only talking about market pricing: He distinguishes between market price and natural price. While the natural price in this context includes production costs like the wages of workers, the market price on the other hand is influenced by the natural pricing.15 He also stated that in a free market the correlation between the both pricing aspects leads to an automatically compensation between supply and demand and between wages and prices.16 This mechanism, also called the ‘invisible hand’, describes Smith's belief that the forces in a free market will always balance out competition in economy and compensates possible inequalities by itself without any significant government interventions.17 Only a few areas should be guided by the government such as national protections systems and functioning systems of justice. Every governmental interference in the economic system he was considering as a violent intervention in a natural, self-regulating market system that should be prevented as good as possible.18
As stated by Kates19 the so called Say's Law was also an important part of the classical theory of economy until the 20th century. Say's Law implied that every activity in economy has his origin "on the supply side”. The fundamental thought of the law is that, after the production of a product, the product needs to get sold for a certain amount of money in order to buy something else for the profit one got. To be profitable in this logic a nation always needs to specialize in producing the goods or services that can cover the costs of the prices they are offered for.20
Based on the trade theory of Adam Smith, David Ricardo called his own theory of trade into existence. His fundamental assumption was that the productivity of nations differs through the available individual resources of a country, concerning aspects like labor, capital, natural resources, technological progress and skill ingenuity.21 Based on the availabilities and conditions within the different nations every market can produce some goods for a high effort and some for a low effort. To get the most efficiency out of the production of a certain good, Ricardo suggested that nations should be focusing on the goods that could be produced with a maximal output and a minimum of cost-input.22 This advantage of manufacturing a commodity in the best way in regard to quantity and quality compared to other parties is called the comparative advantage.23 To increase the wealth within a country the nations should always focus on the production of the products where they have a comparative advantage in, the remaining goods can be traded with other nations. In the end both trading partners benefit from this specialization and by buying in the products where they do not have a comparative advantage in.24 Completing this logic also means that Ricardo assumes an advantage as already given before trade even happens, by implication this means trade is not influencing advantages of a nation.25
Both economists, Smith and Ricardo are coming from the idea, that rich countries are getting a higher benefit out of trade than poor countries so.26 In addition both theories are based on a stable and self-regulating market situation as well as passive role of government with minimal intervention in the free market.27
On the other side John Maynard Keynes as a criticist of the classical theory developed a theory based on the idea of an unstable and failed economy.28 His theory was published in his book ‘The General Theory of Employment, Interest and Money’. In comparison to his predecessors Smith and Ricardo he stated that the economic system needs to be steered and regulated by the government in order to keep the system coordinated and organized.29 Hereby money plays an essential role in terms of pricing, liquidity, exchange rates and external stability.30 He stated that effectiveness of a nation could be provided through strict fiscal policies including the elements of government spending and high taxation. Compared to the approach of the classical theory the intervention of the state is an essential factor in the Keynesian approach and should prevent a deterioration in a crisis through internal and external elements which are influencing an economy. This also represents the belief that an economical system is never able to equalize itself without any governmental intervention.31
Summarizing the content above one could say that the main aspects of the trade theory of Adam Smith and David Ricardo are still relevant and transferable, even if there are aspects which are contentious discussed. The importance of free trade on the other hand is a fundamental part of the different theories where international economists agree on. The resistance of economists concerning issues against trade restrictions are still based on the principle of the comparative advantage.32 Additionally in times of uncertainty and instability, for instance during the financial crisis in 2008 and 2009, the theory of J.M. Keynes is still valid as well, just based on a different initial situation.33
3. Theoretical Background of the WTO
3.1 Historical development of the WTO
The initiation of the WTO traces back to the foundation of the General Agreement on Tariffs and Trade, also called GATT, in June 1948. Right after the end of the second world war, in the end of 1947, the members of the UN conference came together in Havana, Cuba for a convention about an international trade body, called International Trade Organization. The first ideas of the ITO were based on regulations on employment, business processes, commodity agreements as well as investments and services in an international context.34 But based on the bad world economy then, the members of the UN conference failed on establishing the planned organization of the ITO and so the Agreement on Tariffs and Trade, as a modified version of the origin idea, remained as the "only multilateral instrument”35. The intention of GATT was to be an institution which regulates and controls trade in an international context with the main aim to strengthen the trade liberalization and to start to correct "the legacy of protectionist measures”36. As a third establishment besides the World Bank and the International Monetary Fund (IMF) the GATT started off with 23 member states in the beginning.37
During the now following negotiation rounds the main discussed issue was the reduction of tariffs in order to improve the world economy by boosting international trade between countries.38 The most time-consuming and most comprehensive discussion forum was the Uruguay Round, which started in September 1986 in Punta del Este, Uruguay.39 After a lot of difficulties, challenges and shift of deadlines within the process of finding a consensus on tariff reduction the members came to a final ratification in 1994, when most of the ministers of the 123 member states by then signed the agreement in Marrakesh, Morocco. In busting the originally agenda of the conference, however the delay had some advantages as the results were now more specific and comprehensive concerning issues like services and environment, intellectual property, agriculture and anti-dumping as well as the trade with textiles and clothing, maritime services etc..40 Furthermore the understanding of the world trade getting more complex and global every day the results of the last negotiation round of Uruguay finally led to the establishment of the World Trade Organization (WTO) on the 1st of January 1995.41
3.2 Structure and parameter of the WTO
The Federal Agency for Civic Education stated 164 WTO-members and additional around 22 observers in the beginning of 2017.42 With the headquarter located in Geneva, Switzerland and currently around 200 million Swiss francs as a budget the organization is striving for an opening in trade, for creating a forum for negotiations between countries as well as a proper handling of disputes concerning worldwide trade issues.43 "Raising the standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand [... ] while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development [,..]”44 are named as an aim in the initial preamble of the multilateral trade agreement about the establishment of the WTO.
Based on the three main pillars of GATT (General Agreement on Tariffs and Trade), GATS (General Agreement on Trade in Services) and TRIPS (Agreement on Trade- Related Aspects of Intellectual Property Rights) the system of the WTO is trying to include all possible trade-related issues. There are a few additional agreements Government Procurement and other issues as well but there are not as fundamental as the three previous mentioned agreements.45
Certain interests within the WTO are represented by some groups of countries which are building an alliance in fundamental questions. The European Union (EU) as one of the most important and the largest group with 28 member states is an example for this type of group as well as the Association of South East Asian Nations (ASEAN), the Southern Common Market (MERCOSUR) and the North America Free Trade Agreement (NAFTA). Further associations are including African states and the developing countries.46
The organization itself is, in contrast to comparable institutions like the IMF and the World Bank, not leaded by one organizational head or a board of directors, instead it is an institution driven by member decisions. The strict rules and policies that need to be kept are designed by the membership itself and decisions are taken by a consensus of 150 members, which can be challenging and time consuming in certain issues. The ministers or their ambassadors as the highest authority are building the Ministerial Conference and regularly meet in Geneva, at least every two years, to discuss current topics and take decisions about any trade agreement. The hierarchical following level of the general council which is handling the daily work consists of the three units General Council, Dispute Settlement Body and the Trade Policy Review Body. They are mainly distinguished by the adapted issues but all three of them are reporting to the ministerial conference and are composed of WTO members. The three pillars that have been described before are reflected in the third-level-institutions Goods Council (Council for Trade in Goods), Services Council (Council for Trade in Services) and the TRIPS Council (Council for Trade-Related Aspects of Intellectual Property Rights). Categorized in the three main units these councils are responsible for working on the content of the related agreement issues, likewise consisting of only WTO members and divided in several subsidiary bodies. These subsidiaries are named in a fourth level and are specified in different units: The Council for Trade in Goods for example has 11 subcommittees that are dealing with topics like market access, agriculture, textiles and measures on antidumping. Subjects like domestic regulations, GATS policies and financial services are discussed and elaborated in the specific committees of the Service Council. In order to ensure timely response to important issues the committees are sometimes divided in smaller groups of 20-30 delegations with the most interested parties in the discussed topics by always keeping the process transparent and informative for all included members. The final formal decisions are always taken by all of the council or committee members.47 Overall these groups of subcommittees, councils and working groups are counting more than 40 in number.48
Two other important bodies which are embedded in the General Council level are the Dispute Settlement Body and the Trade Policy Review Body. Keeping a world trade as secure, transparent and predictable as possible also means to work any dispute which occurs in the context of trade between nations. When it comes to cure a breach of contract the main goal is to act fast, fair, effective and reasonable for the involved parties to find a positive solution. In any emerging disagreement or dispute within the membership the council for dispute settlements is referring to the negotiated rules and policies and follows a strict and prompt procedure. This process involves a first consultation or mediation within the first 3 months of the dispute, followed by the set up of a panel appointment, a panel report to the involves parties as well as to the WTO members and the adoption of the report by the Dispute Settlement Body. Based on the cited agreements and several hearings with the complaining parties and experts in this area the body sets up recommendation to rule the dispute. These must be set into action as soon as they have been approved by the consensus within the Dispute Settlement Body.49
Until now more than 500 procedures have been performed by the Dispute Settlement Body and currently a lot of developing countries are using the system to negotiate especially the special regulations which have been imposed on them. A new reform of the general understanding of handling disputes is on the agenda of the currently active Doha-round.50
The mechanism of the Trade Policy Review as a result from the Uruguay Round negotiations is a unit within the General Council which is responsible for keeping the generally applicable policies and regulations as transparent as possible to all the WTO members involved.51 Furthermore an objective of this institution is "to enable a multilateral assessment of the effects of policies on the world trading system”52. The trade policy reviews are focusing on the trade practices and policies within every individual country and are containing necessary information about specifications of the economic environment, further needs in economy and development as well as the policies within the country and are conducted on a regular base. Depending on the size of a certain country the reviews need to be conducted every two or every four years or in an even longer time frame and can help to understand a country's framework conditions and the circumstances within a country and improve performance and the adherence of requirements and policies.53
Another important part of the structure is the WTO secretariat which is currently headed by the director-general, Mr. Roberto Azevèdo and counts around 630 employees. This unit of the trade institution is responsible for the all the technical and administrative support of the committees, councils and negotiating groups that is necessary for a proper working atmosphere. Additional support in technical issues is provided for the developing countries. Economists are provided for the analysis of trade policy and performance and legal staff is involved in the interpretation of the rules and precedents in the WTO. Depending on the committee there are also some divisions that are only supporting a certain topic or unit, for instance the assistance of the committee on sanitary or agriculture.54 The summarized structure and placement of the explained elements above is shown in the following graph:
Abbildung in dieser Leseprobe nicht enthalten
Figure 1: The structure within the WTO
Source: Own illustration based on Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (2018b)
An overview of achievements and currently discussed topics can be found in the World Trade Report which is getting publishes annually.55
3.3 Main purpose and tasks of the WTO
The main purpose of the WTO as the "only global international organization”56 is to deal with all the trade and economic relations around the world. Thereby the WTO is an independent institution which is embedded in the system of the united nations.57 Being a "forum for trade negotiations”58 the main functions of the WTO include the administration of trade agreements, the management of trade disputes, the surveillance of trade policies within countries as well as being a technical support for the developing countries. This also involves the willingness of cooperative work with other existing international organizations, not only concerning trade issues.59
[...]
1 Cf. Kappel and Brach, 2009, p.4
2 Cf. Kappel and Brach, 2009, p.5
3 Cf. Kappel and Brach, 2009, p.6
4 Cf. Hoekman, Mattoo and English, 2002, p.41
5 Cf. Hoekman, Mattoo and English, 2002, p.4
6 Cf. Bhattacharya and Hossain, 2006, p.4
7 Cf. Schumacher, 2012, p.54
8 Cf. Söllner, 2015, p.21
9 Cf. Myint, 1958, p.320
10 Cf. Smith, 1776, vol. II, book IV, cited from Söllner, 2015, p.27
11 Cf. Schumacher, 2012, p.62
12 Cf. Mankiw, 2012, p.64
13 Cf. Schumacher, 2012, p.62
14 Cf. Schumacher, 2012, p.60
15 Cf. Ricardo, 1817, chapter I, cited from Söllner, 2015, p.33
16 Cf. Söllner, 2015, p.25
17 Cf. Siami-Namini, 2015, p.2
18 Cf. Siami-Namini, 2015, p.4
19 Kates, 2014, p.314
20 Cf. Kates, 2014, p. 316
21 Cf. Ricardo, 1821, p.7
22 Cf. Ricardo, 1821, p.15
23 Cf. Ricardo, 1821, p.261
24 Cf. Mankiw, 2012, p.66
25 Cf. Schumacher, 2012, p.70
26 Cf. Schumacher, 2012, p.74
27 Cf. Söllner, 2015, p.28
28 Cf. Keynes, 1973, p.372, cited from Arestis, Filho and Terra, 2018, p.1
29 Cf. Arestis, Filho and Terra, 2018, p.1
30 Cf. Arestis, Filho and Terra, 2018, p.17
31 Cf. Siami-Namini, 2015, p.7
32 Cf. Mankiw, 2012, p.70
33 Cf. Mankiw, 2012, p.875
34 Cf. World Trade Organization, 2018b
35 World Trade Organization, 2018b
36 World Trade Organization, 2018b
37 Cf. World Trade Organization, 2018b
38 Cf. Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung, 2018a
39 Cf. World Trade Organization, 2018d
40 Cf. World Trade Organization, 2018d
41 Cf. World Trade Organization, 2018b
42 Cf. Bundeszentrale für politische Bildung, 2017a
43 Cf. World Trade Organization, 2018a
44 World Trade Organization, 2018g
45 Cf. Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung, 2018b
46 Cf. World Trade Organization, 2018k
47 Cf. World Trade Organization, 2018h
48 Cf. Hoekman, Mattoo & English, 2002, p.47
49 Cf. World Trade Organization, 2018i
50 Cf. Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung, 2018b
51 Cf. World Trade Organization, 2018j
52 World Trade Organization, 2018j
53 Cf. World Trade Organization, 2018j
54 Cf. World Trade Organization, 2018k
55 Cf. World Trade Organization, 2017, p.1
56 World Trade Organization, 2018c
57 Cf. Die Bundesregierung, 2013
58 World Trade Organization, 2018a
59 Cf. World Trade Organization, 2018a