International Trading System and Villas Economy - Case Study Example

Title: International Trade Policy Name of the Student: Course Code and Name: Class Name: Date Assignment due: Villa: country profile The imaginary country is Villa, a developing country located in the Southern African region, with 48,687,000 people and an area of 1,219,912 sq km. This country has developed a great deal since the World War II by undergoing a transition from an agrarian society into a modern industrial state. Today, Villa’s economy is very diverse and produces a wide range of investment and consumer goods. A fifth of the entire continent’s production comes from Villa. The mining industry plays a key role in Villa’s economy. However, in recent, the country has stopped depending on export of raw materials, notably gold. Meanwhile, the mainstay of Villa’s economy is foreign trade. More than a half of this country’s total GNP (Gross National Product) is obtained through export and import trade. The main exports include agricultural produce, raw materials, machinery, chemical products, vehicles and electric appliances. The main imports include plastic products, vehicles and chemicals. The main buyers of Villa’s products include (from the highest to the lowest export revenue generated) Japan, Italy, USA, Germany, Great Britain and Zimbabwe. The country’s imports come mainly from Germany, USA, Great Britain, Japan, Italy and France (in descending order of value of imports). International trading system and Villa’s economy Trade Liberalization For a developing country like Villa, liberalization of markets leads to unfair competition from the developed countries, which already have an upper hand by virtue of their economies’ strength. Many companies from Villa are unable to compete with multinationals that are based in developed countries. The gains derived from trade liberalization are small, sometimes because they are spread over a very long period of time. The trade liberalization policy set up by the WTO also creates a provision for multilateral partnerships between a developing country such as Villa and trading blocs such as the European Commission (EC). Such agreements, too, do not yield any significant benefits because of the infrastructural imbalances that exist between them. Import protection Import protection is an important policy issue for Africa. Villa, like all other African countries has required, as part of their commitments to the WTO, to facilitate the process of translating quantitative restrictions into effective tariffs, to bind all their tariffs against any further increases and to ensure that with time, they are reduced. With this regard, Villa is required to observe transparency when imposing charges and duties applicable to various international transactions. However, WTO policies make tariff levels in Villa to remain very high compared to developed countries. There is a conflict between the liberalization targets set by the WTO and those that had been set by Villa prior to her entry into the WTO. The WTO does not have a policy that brings about harmony between a country’s targets that the levels of economic stability recommended at the international level. For instance, Villa had put in place a liberalization plan that was to be executed within five years, while WTO’s plan was supposed to take eight years. Despite the significant progress that is being made through unilateral liberalization efforts, Villa’s economic strategists always find that they have to impose some protective measures through administrative controls. In the WTO, such administrative controls are missing. Villa regularly uses such administrative controls in order to protect some local industries and to maintain a balance of payments. The commitments of WTO require that such practices should be limited. Under special circumstances, Villa makes use of restrictions over a very limited period of time. These restrictions are mostly targeted by countries who are not member of the WTO. Sometimes, the restrictions tend to be imposed on WTO members in case there are some countervailing and anti-dumping laws that are pending revision. Direct Export Promotion Policies Many countries, including Villa, have been using various instruments in order to promote direct exports. These include trade-related assistance and export subsidies that reduce the cost of exporting products. Most of these practices are allowed within the policy frameworks of WTO. However, the WTO can countervail the use of subsidies if they are judged to be a cause of serious injury to some industries in the importing countries. As a general WTO principle, export restrictions are not allowed by the WTO. The delicate nature of some of Villa’s industries necessitates some of these measures while the WTO prohibits them. Such policies need to be revised so that they can address the ultimate issue of poverty and sustainability. The weakness of WTO arises in the case of Villa when it comes to initiation of reforms involving real exchange rates whereby a country is forced to undertake ‘mock devaluation’ measures while simultaneously increasing export subsidies and import tariffs. If Villa intended to impose a manufactured export subsidy, the WTO may come in impose restrictions over claims that such a measure may kill industries in other countries. In Villa, export promotion activities have been going on although they have not been as effective as they should be because of many obligations that arise because of WTO membership. WTO’s structural and external constraints to Villa’s Industrialization For a country like Villa, the domestic supply-side and trade-related reforms that have been put in place are very necessary although they are not sufficient conditions for the country to diversity its economy and maintain global competitiveness in the provision of industrial products. Additionally, WTO rules and trading practices in many developed countries present yet another set of constraints, which are of external nature. There are many channels through which Villa suffers serious constraints imposed by the external environment in her efforts to achieve national industrialization goals: the erosion of preferences that African countries used to enjoy previously; insistence on reciprocity; tariff peaks; terms of trade losses with the ability to drain resources that are scarce and investible; many agricultural subsidies that encourage damping of many agricultural products into Villa; and escalation that is biased towards the creation of incentives on industrial products at the expense of primary commodity exports. The WTO also presents the problem of lack of synergies and coordination between various WTOs operations and that of other agencies of the UN. The globalization process and the WTO rules are double-edged swords; they provide opportunities on the one hand and present constraints on the other (Das 1988, p. 45). The opportunities exist in the existence of a liberal trading regime whereby there is a high potential for an increased access to markets. On the other hand, they insist that the principle of reciprocity should be applied to all countries. Additionally the limit the policy handles that are available in the form of discretionary national policies. The WTO has reduced the scope within which some measures relating to trade subsidies can be imposed on strategic conditions, in order to attract foreign investments. Some of the measures that are not properly enforceable as a result of the existence of the WTO rules include intellectual property rights, trade-related subsidies, and more generalized protection, which would work out perfectly well in Villa’s current economic realities. The existing WTO rules provide for the treatment that should be accorded to ‘Least Developed Countries’. The rules mainly exist in the form of a transition from the category of exemption to that of obligation to comply with the WTO rules. The new WTO rules have significantly limited the instruments that Villa can use in order to achieve higher levels of export promotion and industrialization. Therefore, many countries in circumstances to Villa’s have to contend with ownership-neutral rules whereby no distinction is made between foreign affiliates and domestic enterprises when it comes to use of local content protection and subsidies. Therefore, courtesy of these rules, Villa has lost the discretion to make use of special policies in order to compel multinational firms to act in a manner that serves ‘national interests’. Additionally, since national treatment remains the cornerstone of the new WTO’s rules-based system, reciprocity remains the overarching guiding principle. Villa, being an African country, feels disadvantaged because the existing preferences that it has been enjoying for a long time are eroded. The WTO framework is such that the ‘single undertaking’ provisions work for the benefit of non-preference competitors. This reduces that competitive edge that countries like Villa have been struggling to achieve. Additionally, nearly all Southern African countries concentrate on production of goods that are of the low-tariff category, meaning that there are no many benefits to be gained in the form of tariff concessions. In this case, such countries were not benefited at all by the Uruguay Round negotiations on trade. The average tariff for African industrial products that are exported annually stands at 3.2 percent of the total trade volume, whereas that of low-income and medium-income countries from other parts of the world is 7.4% and 8.3%. The competitive position of Villa’s exports has been reduced significantly since the Uruguay Round of negotiations. This is mainly because the reduction in tariffs and restrictions in the way quantitative restrictions are imposed led to the reduction of nearly all the trade barriers that were blocking many economies of developed countries from killing African industries through competition. The trading system of WTO poses problems for Villa through constraint on exports and tariff peaks. The generalized reductions on tariffs are not clearly pronounced in the case of sensitive products, meaning that the concerned sectors can maintain significant tariff peaks, something that constrains Villa’s industrialization efforts. Trade escalation encourages countries to trade in raw materials and it can be problematic because it creates limitations on the extent to which a country can diversify its markets in order to focus on value-added export trade. Once the Uruguay Round (UR) is implemented fully, the average tariffs that will be applied on imports that are traded from developing countries such as Villa into developed countries will have exceeded 12% in the USA, 25% in the EU and 30% in Japan. Tariff peaks on various industrial products that Villa plans to concentrates will not amount to any significant levels, therefore, developed countries will benefit from tariff peaks while developing countries will merely suffer. According to the rules set out during the UR, as products undergo further processing, tariffs are extended. Developed can bear the cost of higher tariffs in order to process products only to sell them later on to poor countries exorbitant prices. There is a clear bias on unprocessed primary commodities, a measure that encourages Villa to produce primary commodities. The main problem with primary commodities is that their markets are very volatile. Villa’s industrialization process is being constrained marginally by non-tariff restrictions. In this case, African countries have a right to demand that protectionist against her industrial exports be lifted. Such protectionist measures would also be needed in intraregional trading agreements. It is ironical that the level of protectionist measures that industrial goods are being exposed to by other African countries is higher than the measures to which the similar types of goods from developed countries are subjected. The main solution to this problem is setting up of a reciprocal market policy within WTO. Such a policy would enable villa define her trading activities in a manner that gives her the best opportunities. The WTO has also been condoning indirect protective measures through allowing antidumping and countervailing rules to be implemented in their current form. WTO member countries are given permission to impose any countervailing duty on imported products that have the potential to be unfairly priced. This rule has been use to protect very rich countries and to put poor countries at a disadvantage. Antidumping measures are always inclusive of unilateral decisions that are taken for protection purposes, once it is determined that the pricing mechanisms put domestic consumers at a disadvantage. These measures are only applicable once certain substantive and procedural requirements are satisfied. In particular, it is important that procedural requirements are put in place in order to ensure that equitable treatment is imposed to poor countries and rich countries alike. As per the WTO rules, if Villa supplies more than 4% of the total export trade volume, her exports can be countervailed. Such non-trade measures entail imposition and adherence to very heavy human and finance-related requirements that include the tasks of strengthening a country or even a region’s institutional capacity in order to maintain product quality and to certify that products conform to international standards. The agreement on Agriculture Villa’s rural economy is sustained mainly through export of agricultural produce. Most of the produce is in the form of raw materials that require going through the value-addition process before they can fetch a higher income for the farmers. The WTO agreements on Agriculture, therefore, have a very huge impact on the path of development that Villa’s rural economy takes. The UR agreements of 1994 on agriculture were aimed at bring about long-term reforms in the agricultural sector by regulating both domestic and international trade policies for a period of many years to come. However, with the current financial meltdown and the looming global food crisis, developing countries have found themselves on the edge of a crisis as they try to respond to protectionist measures imposed by developed countries as they set out to protect their agricultural sectors from being wiped out in the crisis. The WTO should have foreseen the possibility of such a problem and put in place provisions to ensure that no country puts in place domestic support policies that distort international trade. The current problem in the world of international agriculture trade can be attributed to lack of flexibility in fulfillment of commitments by countries. For a country like Villa, the adjustment burden of complying with commitments comes with many trade-distorting activities that harm the country’s rural economy more than they revive it. Double standards by Industrialized WTO members In the Doha round of negotiations, industrialized countries were accused by Southern African countries of applying double standards when it came to the issue of safeguarding the economic interests of African countries. According to the representative from the Southern African countries, including Villa, Japan, the U.S, Canada, the European Union, among others, wanted to secure flexibilities in the Doha Round negotiations in order to be able to continue with their trading practices that distort international import-export trade. The double standards claims seemed to be justifiable through the way in which these countries turned their back on the problems being faced by southern African countries such as Villa. Yet the commitments that Southern Africans were complaining about were those that had been put in place during the reign of colonial governments. The colonial leaders insisted that Villa should is a developed country during the Uruguay Round Trade negotiations. For this very reason, Villa’s import tariffs stand at 17% while those of other developing countries in Africa range between 30% and 40%. The Doha Development Round was launched by the WTO in 2001, and its main promise was that the developmental concerns raised by poor countries would be addressed so as to enable them accelerate their pace of integration into the international trading system. After seven years of negotiations, the Doha Round, according to envoys from developing countries, has been transformed into a market- access lobby platform that helps the industrialized countries push their imperialist agenda. At issue during the Doha Round was whether Villa, together with four other members of SACU (Southern African Customs Union), should be allowed the flexibilities of addressing all the specific circumstances in which their regional customs union has evolved during the past century. The low import tariff profile is also applied to all other SACU member states. This affects them negatively by making it very easy for cheap imports to find their way into the SACU market. This causes very enormous damage to the region’s industries, especially in apparel and textile sectors. The imports also cause harm to Villa’s efforts to revive industries that produce automobiles, furniture, auto parts and leather products. Villa’s economic analysts attribute the high rate of unemployment in the affected sectors to the low import tariffs. With regard to this concern, the WTO rules have failed to protect vital, labor-intensive industries of Villa. Against this backdrop, Villa’s envoys into the Doha Round were merely asking for additional flexibilities in order to protect these vital industries. Villa and her other Southern African neighbors insist that they should be allowed to levy an import tariff of not less than 23% in addition to other flexibilities in order to ensure that the country’s highly sensitive industrial tariff lines are never subjected to zero tariff cuts. However, industrialized countries insist that increasing tariffs to more than 16% would create “systematic” problems in addition to paving the way for “free-riders” in global trade. Such issues make the WTO appear like a platform where the poor present grievances while the rich reject them. It is a manifestation of bias that the system has towards rich countries. Therefore, the dispute settlement structure and decision making processes of the WTO should be overhauled. The issues that were raised by Villa during the Doha round were very genuine since they touch on key industries: textiles and clothing, which are very key sectors for employment. By failing to act upon such concerns, the WTO rules cannot be trusted upon to bring about sustainability and development through a global trading system. The ideal international Trading system A balanced system of concessions and commitments Developing countries such as Villa have continued to give more concessions than they receive since the introduction of the Uruguay Round of trade negotiations. Developed countries are given more opportunities by WTO to continue with their value-adding roles, which are more profitable than the roles of producing raw materials. The implication of this in the case of Villa is that gold-mining companies are denied any opportunity to diversify their commercial activities to start adding value to the gold that is mined. Instead, the WTO rules seem to condemn them into the tasks of only producing raw materials without adding any value to them. Instead, the WTO rules should be devised in such a way that producers of raw materials are not constrained from manufacturing their own produce based on the excuse that their activities will distort the international market. For this to happen, the rules should address the need for developing countries and least developed countries to be given preferential treatment. Change of dispute settlement and consultation processes In public international law, one of the means of settling disputes is consultations. Sometimes, consultations are provided for in treaties as the sole means through which disputes are settled. In case there are disagreements, third parties may be invited to intervene. In most international conflicts, discussions are held directly among the concerned parties so that the solutions arrived at are acceptable to everyone. WTO members have a legal obligation to participate in the consultations that characterize the first step in the process of settling the WTO dispute. However, the effectiveness of the consultations is solely dependent on the willingness among parties to engage in procedures on the basis of good faith, in order to solve the dispute amicably. In the case of Villa’s grievances at the Doha Round, parties from the industrialized world expressed, albeit covertly, lack of good faith by refusing to assent to an increase in the import tariffs into the country and the entire Southern African Region. The WTO should put mechanisms in place, of ensure that every party contributes to the effectiveness of consultations instead of derailing them. The provision of Safeguard should have been implemented in the case of Villa’s import tariff problem because the two conditions needed for its implementation had been fulfilled. Regarding the first condition, there was a sharp increase in levels of import in the Southern African market. This increase was too high relative to the level of domestic production. Regarding the second condition, increased imports were causing very serious injury to the local industry, and it was threatening to cause even more serious harm in the future if nothing was done about it. Amendments to the reciprocal market policy Whereas industrialized nations are opposed to the idea of Villa protecting her domestic industries by imposing high tariffs on imports, just like other developing countries in Africa, these nations are doing exactly the same thing at home in order to protect their domestic industries. This is an unfairness that the WTO should address through a change in the rules that govern the global trading system. The rule of reciprocity needs to be introduced if sustainability is to be achieved as countries pursue economic interests on various international platforms. Industrialized countries tend to dominate discussions, consultations and dispute resolution meetings in order to push for policies that leave their protectionist behaviors unaddressed, meaning the rule of reciprocity is never applied in global trade. Most export restrictions that are imposed on Villa by industrialized countries target industrial goods. On the other hand, the same industrialized countries penetrate Villa’s raw-material based economies by exploiting low import tariffs that were consented to by a colonial government. Such imbalances, if unchecked through proper WTO rules, are not sustainability-friendly. They are meant to enrich industrialized nations on the one hand while condemning developing countries into the position of producers of raw materials instead of industrial goods. Conclusion The WTO is one of the Breton Wood institutions whose rules liberalize international trade on the one hand while on the other, being used by industrialized countries as an avenue of enrichment through exploitation. The WTO can be a very effective institution if only the rules that are flouted with so much ease are changed within the principles of fairness and justice. Developing countries such as Villa can still industrialize without being given the so-called ‘preferential treatment’ by WTO. Apart from direct protectionist measures, there are many indirect measures (such as countervailing and antidumping) that industrialized countries employ in order to protect their industries while at the same time condemning poor countries such as Villa into the role of perpetual providers of raw materials. Ironically, the harmful WTO rules have started slipping into intraregional trading practices in the developing world. If the WTO rules were amended in order to reflect the principle of reciprocity both in writing and in practice, Villa, as well as her Southern African neighbors and the developing world in general, would start achieving sustainable development through industrialization. Reference Das, B 1998, The WTO Agreements: Deficiencies, Imbalances and Required Changes, Third World Network, London. Read More