E conomic I ssue of the D a y Philippine Institute for Development Studies
March 2000
World Trade Organization (First of two parts)
Volume I Number 3
Trade organization in focus The Philippines has been undergoing changes in trade policies since the 1980s, resulting in a more open trade regime. These liberalization efforts have been consistent with global developments, mainly through the country's involvement in the General Agreement on Tariffs and Trade (GATT). Thus, it comes as no surprise when products like Wesson oil, St. Ives shampoos, Hershey’s chocolates, and Australian lambchops find their way in the cupboards of many Filipino households. Is this a case of colonial mentality adapted for the new millennium, or just the world getting smaller and smaller? The primary goal of trade reform is to have a more efficient allocation of resources and improved consumer welfare. Efficient allocation of resources implies producing quality goods at the least cost. Similarly, improved consumer welfare is defined as providing the buying public with a wider variety of products. To achieve these twin goals, the government participated in various regional and global trade organizations whose objective is to improve the welfare of the citizens through the reduction of trade barriers. One of these organizations is the World Trade Organization (WTO). The WTO is an international organization, formerly known as the GATT, which deals with the rules of trade between and among nations. Its overriding purpose is to help trade flow as freely as possible without causing undesirable side effects. This implies the removal of trade obstacles and the keeping of individuals, companies, and governments informed of the existing trade rules. At the heart of the WTO are the agreements negotiated and signed by almost all of the world’s trading countries. The agreements cover a wide range of activities including agriculture, textiles and clothing, banking, telecommunications, government purchases, food sanitation regulations, and intellectual property. These documents or contracts provide the legal ground rules for international commerce and bind governments to keep their trade policies within agreed limits.
Basic principles There are five fundamental principles forming the foundation of the multilateral trading system, to wit: k A trading system without discrimination. This principle ensures that all contracting parties are bound to treat their trading partners equally. This treatment, called the most favored nation (MFN) treatment, means that if a country lowers its tariffs to one trading partner, then the same treatment should be available to all the other WTO member-countries. k A freer trading environment. This can be achieved through the reduction of trade barriers in order to encourage trade. The only trade barriers, meanwhile, that can be used are customs tariff and selective import measures. The WTO allows countries
What is WTO? The World Trade Organization (WTO) is an international organization that provides institutional and legal foundation for multilateral trading system. It was set up on January 1, 1995 as a successor to the GATT and is a result of the need to oversee and coordinate the agreements reached in the world trading system. Its basic functions include: p facilitation of the i m p l e m e n t a t i o n , administration, and operation of the objectives set by the multilateral and plurilateral trade agreements; p provision of a forum for multilateral and plurilateral trade negotiations; p conduct of trade policy reviews; p settlement of disputes that may arise between member-countries; and p cooperation with the World Bank and the International Monetary Fund on the goal of achieving a coherent global economic policy.
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Economic Issue of the Day March 2000
The Economic Issue of the Day is one of a series of PIDS efforts to help in enlightening the public and other interested parties on the concepts behind certain economic issues. This dissemination outlet aims to define and explain, in simple and easy-tounderstand terms, basic economic concepts as they relate to current and everyday economicsrelated matters. This Issue was written by Ms. Ma. Teresa S. DueñasCaparas, Supervising Research Specialist, with supervision from Dr. Josef T. Yap, Senior Research Fellow at the Institute. The author wishes to acknowledge the various comments from Dr. Mario B. Lamberte, Dr. Erlinda M. Medalla, and Ms. Rafaelita M. Aldaba. The views expressed are those of the author(s) and do not necessarily reflect those of PIDS.
kkk Philippine Institute for Development Studies NEDA sa Makati Building, 106 Amorsolo Street Legaspi Village, Makati City Telephone Nos: 8924059 and 8935705 Fax Nos: 8939589 and 8161091 URL: http://www.pids.gov.ph
W O R L D T R A D E O R G A N I Z AT I O N
Volume I Number 3
to introduce changes gradually and Table 1. Trend in PHilippine developing countries are given longer Exports and Imports, 1995-1999 time to carry out their obligations. k A predictable condition. Year Exports Imports Rate of Growth This is assured when contracting parties (In million US$) Exports Imports “bind” their tariffs. Tariff binding is (In percent) simply a commitment not to raise tariffs 1995 17,447 26,391 29.4 23.7 beyond a certain rate. In doing so, the 1996 20,543 31,885 17.7 20.8 business community will have a clearer 1997 25,227 36,355 22.8 14.0 view of future opportunities. When the 1998 29,496 29,523 16.9 (18.8) environment is stable and predictable, 1999 35,258 30,725 19.5 4.1 investments are encouraged, employment Source: Bangko Sentral ng Pilipinas is created, and consumers are able to enjoy the benefits of competition. k A more competitive setting. The WTO can be described more accurately as a system of rules dedicated to open, fair, and undistorted competition. It is not exactly a “free trade institution” since it allows for tariffs and, in limited cases, other forms of protection. k A trading system more beneficial for less-developed countries. The WTO recognizes that less-developed countries need flexibility in terms of time required to implement the agreements. Thus, it allows for special assistance and trade concessions for developing countries.
Gains from WTO vs. adjustment costs The Philippines' participation in the global arena has brought about a reduction of trade barriers and lowering of tariffs. A primary benefit gained from participating in the WTO is that trade liberalization takes place on a multilateral basis. This means that the opening of the Philippine market would be compensated by the opening up of all other member-countries’ markets. Studies show that lowering of tariffs would lead to trade expansion and stimulate economic growth. Recent data on Philippine trade (Table 1) confirm this as Philippine exports have been growing at an average rate of 21.3 percent for the past five years while imports at an average rate of 8.8 percent. (It should be noted, though, that the Asian financial crisis led to a decline in imports.) The increase in exports created good-paying jobs in the country which offsets the employment lost by uncompetitive industries. As such, the WTO should be regarded as an area where we can exhaust opportunities, improve competitiveness to meet new challenges, and reap the rewards of the changing global economy. There is, of course, also a cost to the gains and opportunities derived from joining the WTO. The reduction of trade barriers and participation in the global environment indeed entail some adjustments which may be painful in the short run. For instance, the influx of cheaper imported items may displace some local producers and workers. The WTO nonetheless recognizes these adjustment costs, particularly for the developing countries. Thus, it allows for special assistance and trade concessions, giving more flexibility and longer timetable to these countries to implement the necessary policy changes. On the whole, it is important to realize that these trade reforms create a larger market and unrestricted flow of goods and services. Domestic firms benefit by catering to a larger market and expanding until they reach their most efficient size. The challenge then is how to achieve efficiency in order to produce cheaper and better products. k