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The dark side of the World Trade Organisation

The dark side of the World Trade Organisation

By Aishwarya Narayan

The World Trade Organisation (WTO) is a body dedicated to promote the ideals of free-trade and its achievements are numerous. Having said so, the international organization has often received staunch criticism for favouring powerful nations and allowing them to exploit lesser developed ones. While the WTO prides itself in decreasing the number of tariffs imposed since it was formed, it has failed on numerous levels to address the issues of developing nations. Poor countries have at times been forced to adopt the so called ‘free-trade’ practices by removing tariffs by the WTO and other international organizations. The WTO has displayed a history of promoting ‘free-trade’ only when it benefits rich nations, and being painfully slow at best or completely care-free at worst in promoting the same to benefit poorer nations.

An organisation of irony

At the heart of what the WTO as an institution proposes—multilateral trading system, lies a plethora of disadvantages for developing countries at outset. Three-quarters of WTO members are developing or least developing countries (LDCs). Given this, it is natural to expect that the theoretical basis on which the WTO was formed provides mutual benefit to all member countries. Surprisingly enough, this does not seem to be the case. The WTO facilitates the liberalisation of trade. It helps freer flow of trade on a multilateral level and claims that this will end in economic development and well-being. Essentially, the WTO propagates and is built on the ideology that free trade is economically beneficial.

The advocates of free trade have long since constructed a rhetoric which links liberalisation with economic progress and development, which the institution and its supporters buy into. However, no empirical evidence has been found to support the hypothesis that trade liberalization is linked with economic growth. Intuitively, it is fair to expect that poorer nations improve their situations as the world of free trade progresses, which does not seem to have happened.

Inequality and injustice

The concept of free trade ignores that some countries, regions and sectors possess inherent advantages in terms of skills, technology, infrastructure and access to markets.  What are advantages to some parties are barriers to the rest. This makes the possibility that free trade provides an equal platform to all countries difficult to believe. By enforcing the rules of free trade on its members, the WTO undermines the ability of developing countries and LDCs to employ protectionist policies to protect themselves from external competition. Essentially, the WTO is kicking these countries in the knee, not even giving them a chance to stand up at all. Even ignoring the economic fallacies of free trade being a fair and level playing ground, the sheer hypocrisy of such a concept is abundantly clear. While the author is of the opinion that the theoretical oppositions to free trade hold complete validity, we focus more on the hypocrisy practised by the Global North in enforcing protectionism or free trade as they deem fit.

An important example is that of Mozambique, which has 80% of its population living in rural areas, and are dependent on agriculture. A lack of skilled, educated labour means that this country cannot adapt to the massive European agricultural imports, which are subsidized by a shift of labour to other industries. This is a case wherein protectionism can help keep the weak strands of a developing country together and keep them from falling into poverty due to a lack of employment.

Protectionism is the constant policy

The USA, Britain, Japan, Taiwan and other countries considered today as the ‘First World’ or ‘developed countries’, all industrialised with the help of protectionist policies. The 19th century was rife with protectionism in the global economy, while simultaneously the now developed countries recovered from the World War and nurtured their damaged economies. Not only were policies inherently protectionist, but the unavailability of advanced technology, slow and expensive transport provided natural protectionism, which developing countries today cannot avail. For example, in the 1830s, the USA imposed an average tariff of 40% on all imports, the highest in the world. Japan, in 1939, in a move to protect Toyota, barred entry to General Motors into its automobile market. The USA’s first Treasurer of State, Alexander Hamilton was a great supporter of protectionist policy himself. By disallowing currently developing countries to take similar measures, the productivity gap between the ‘late developers’ and ‘early developers’ is much more today than it was in the 19th century.

Where was free trade born

The concept of free trade was first globally encouraged by a post War USA, when there was a relative decline in their economic growth and an increase in competition, primarily from Germany and Japan. As a strategy to destabilise competitors, the USA began adopting increasingly protectionist policies at home, but supporting liberalisation of trade abroad. Supporters of trade liberalisation often quote Taiwan and South Korea as success stories, developing countries that succeeded in a global framework of free trade. However, these countries represent highly centralised economies, which placed heavy restrictions on entry and ownership on entry and ownership of businesses, undertook large investments in infrastructure, etc. Historically, many countries have suffered at the hands of WTO’s policies, while many have flourished under protectionism.

The direction world trade has taken, with the WTO supporting free trade, has hypocritical demands. It asks of developing countries to give up the very tool already developed countries used to get ahead. For this fundamental reason, supplemented by the classic arguments against free trade such as the infant industry argument, the case against the WTO’s fundamental endeavour of complete liberalisation of trade is made.

Why propagate free trade

At this juncture, it makes sense to attempt an understanding as to why the WTO believes so strongly in perpetuating free trade. Paraphrasing the WTO homepage, “The case for open trade lies in the theory of comparative advantage, which is arguably the single most powerful insight into economics”. The WTO is based completely upon the law of comparative advantage and superiority of market-based solutions. Simply put, the principle of “comparative advantage” says that countries prosper first by taking advantage of their assets in order to concentrate on what they can produce best, and then by trading these products for products that other countries produce best.

However, possessing a comparative advantage in just any good is insufficient to increase market penetration and income earned from trade. Developing countries which have a comparative advantage in say, agricultural goods will face declining terms of trade between agricultural and manufacturing goods, which they will be required to import. This implies that nations specializing in less favourable goods will fall further behind developed nations. Comparative advantage cannot assure a level playing field, as long as products are not completely equal to one another.

From the point of view of a developing country, the WTO has failed in its outset. While from the perspective of the financially powerful Western countries, it may be defined as successful, this success is not inclusive in nature. It is not unfair to conclude that, unless the WTO makes some radical structural changes, it can never claim to work in the interest of every one of its members. As long as the WTO is dominated by the powerful, its actions will always be constricted to serving the interests of those in power. In order to build up to this, an ideal global trading system must factor the will of the people of the countries constituting the WTO. These countries must have the ability to execute their will through a collective, democratic decision-making processes. Only then will the WTO be able to manufacture a global trading system which works toward the economic and social well-being of all its members.

Featured Image Source: Flickr

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