E conomic I ssue of the D a y Philippine Institute for Development Studies
April 2000
World Trade Organization (Second of two parts)
Volume I Number 4
What’s the score so far? It has been five years since the Philippines became a founding member of the World Trade Organization (WTO). Still, the country is in the process of implementing part of its international commitment. Many other member-countries are also in the same boat. This delay in the implementation of the international commitment, coupled with some protectionist sentiment from developed countries, sparked the need for another round of discussions among member-countries. The initial meeting of this new round of talks was held in Seattle, U.S.A. from November 30-December 3, 1999. There were three prominent groups that were formed. The first group, headed by the European Union and strongly supported by Canada, Japan, Hong Kong-China, Singapore and Argentina, was the most vocal proponent of a new round of trade negotiations. This was, on the other hand, strongly opposed by the second group composed mainly of Egypt, Pakistan, India, and other developing countries. Their opposition stemmed mainly from the belief that any inclusion of new issues would be counterproductive and future work should only focus on addressing the imbalances identified in the earlier Rounds. An example of this imbalance is the restrictive business practice of multinational corporations based in the United States and Europe in the area of trade-related investment measures. Finally, the third group, which is neither openly supportive nor opposed, is where the Philippines belonged. This group is convinced that the protectionist policies in the past were not effective in attaining development. Unfortunately, the Seattle discussion failed to come up with an agenda for the new round of trade negotiations. Instead, what the world saw, as shown on national and cable television, were violence and demonstrations organized by trade unions, environmentalists, activists and students protesting the corporate dominance of the WTO.
Adjustment costs felt In the Philippines, there are sectors in the economy which do not agree with the President’s drive for trade reforms. Their major concern lies in the argument that foreign companies eat up their share in the domestic market. The reduction of trade barriers lowers the cost of imported goods, making it “difficult” for local firms to compete with the foreign companies. This argument stems mainly from producers who face the probability of being eliminated in the market unless they do something to improve their competitiveness. Similarly, competitiveness can be translated into reasonable price and worldclass quality. While it is possible that foreign counterparts may outshine some domestic producers, the trade reforms nonetheless open up opportunities for other domestic players
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 April 2000
W O R L D T R A D E O R G A N I Z AT I O N
Volume I Number 4
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
to cater their products to a bigger market. The larger consumer market will then result to higher revenues, additional employment opportunities in the country, and improved income for all. The transition costs embedded in adapting these trade reforms will thus eventually be offset by the gains from the more competitive producers.
Other domestic concerns The objective of the WTO system is to lower trade barriers in order to expand trade. Trade expansion comes in the form of increased export opportunities and desirable import competition. However, the level at which member-countries can lower the barrier is entirely negotiable and rests solely on how low they can go and what they get in return. The WTO is a forum where they can negotiate and provides rules on how to liberalize. Negotiation for agriculture is considered a priority area in the next round of discussion. The Philippines is part of the Cairns group that calls for progressive liberalization of trade in agricultural products. Similarly, it is also pushing for the elimination of export subsidies being given by developed countries for their export products. Aside from agriculture, another main concern is the service sector. It is believed that the full benefits of international trade liberalization have not yet been reaped. As such, it is of utmost importance that the negotiating representatives be equipped with the appropriate tools that will fully maximize our benefits from the WTO. The greatest incentive in trade organizations such as this is the decline in the prices of consumer goods, which in turn will have a direct positive impact on the ordinary Filipino. Further, technology is implicitly traded which then improves knowledge. However, as previously mentioned, lower consumer prices also have their trade-off. In this case, though, it should be regarded more as a challenge than a hindrance to promote domestic competitiveness. The WTO and advances in information technology have set the stage for globalization. Against this background (with free movement of capital, goods, and services), more changes should be expected in the way things are conducted in the future. k
Definition of Terms p Tariffs are taxes imposed on imports, usually as a percentage of the price of the imported product. p Subsidies are financial assistance given to domestic producers to prevent competition from lower-priced imports. p Dumping is a trade practice where exports are sold at unusually low prices, often as a result of government subsidy. p Plurilateral trade agreements are trade agreements signed by some members. p Multilateral trade agreements are trade agreements signed by all members. p Nontariff measures are forms of trade restrictions that do not make use of tax rates such as: l Quota – a quantity limitation imposed on the imported good l Import licensing – a procedure where importers are required to obtain licenses before they can import l Embargoes – a total ban imposed by the government on the imported product such as drugs