Global Trade Institutions
Trade is an essential tool for the sustenance and growth of any economy. Since a country cannot produce everything that its citizens require, they need to trade for what they do not possess. The purpose of writing the paper is to identify two countries that can apply traditional trade theories such as absolute advantage, factor endowment or comparative advantage to enhance their participation in international trade. In doing so, we will also identify two regional or global institutions such as International Monetary Funds (IMF), World Bank, United Nations World Trade Organization (WTO) and the role they can play in facilitating the trading process between the countries. The topic is relevant as it shall help us to appreciate the roles played by institutions in enhancing trade.
Countries can only produce goods or services to which they have resources for mass production. By providing surplus goods, they can trade the excess with those who do not have while they obtain products they don’t possess. According to Amadeo (2017), comparative advantage happens when a country can produce a service or good at a lower opportunity cost than the others. As a result, the benefit of purchasing the products from such countries outweighs the disadvantages. In absolute advantage, a state can produce more quantity of good or services with the same amount of resources than its competitors. Saudi Arabia which is an oil producing nation has a comparative advantage in the production of chemicals than the USA. Their chemicals are cheaper due to the low opportunity cost. On the other hand, USA has a better climate and fertile land making it be able to have a comparative advantage in producing agricultural produces than Saudi Arabia which a significant portion is a desert. Consequently, the two can effectively engage in trade.
To facilitate the trade, institutions such as IMF and WTO play a vital role. The exchange rates on currency affect all goods and services traded internationally. If a country decides to undervalue its currency and make policies on the exchange rate that resist market signal, their products will end up being cheaper. The state will end up developing an extensive trade market making its trading counterparts lose competitiveness. To prevent such kinds of practices, the IMF puts aside rules for exchange rate policies while the WTO provides rules that enable fair trade. Exchange rates are monitored all over the world by manufacturers, policymakers, ordinary citizens and service providers. According to Lundsager (2015), IMF occasionally reviews the exchange rate systems and the economic policies of its members. Through its External Sector Report (ESR) they highlight how some of the countries play a part in foreign exchange markets hence averting the adjustment in their trade accounts and exchange rates. Since the exports of one country are another’s importation, the intervention helps in sustaining the imbalances in their partners’ current and trade accounts. Such policies will help Saudi Arabia and the USA have a mutually beneficial relationship without the fear of one trying to exploit the other.
IMF also tolerates “smoothing” operations to counter the volatile nature of the market, and countries which have a low reserve of foreign currency are encouraged to increase their amounts to the minimum requirement to be able to handle the volatile nature of the market. Lundsager states that though IMF does not have an adequate mechanism to bar excessive foreign exchange intervention, they have a commanding voice for setting global standards of behavior for intervention, exchange rates policies and overall microeconomic policies (2015). Twice a year through the Global Financial Stability Report (GFSR), World Economic Outlook (WEO), and Fiscal Monitor IMF can scrutinize macroeconomic policies. Countries that were engaging in questionable behaviors are expected to explain their actions and respond to the frustration being undergone by their partners who are losing competitiveness. IMF also monitors fiscal and monetary policies that affect investment and trade flows. A country that is intending to expand their financial system which may result in depreciation in their currency is expected to show how their actions will increase growth and domestic demand, hence enhancing demand in exports for its trading partners. All the officials in charge of trade in a country should understand these policies to avoid being on the wrong side of the law.
WTO, on the other hand, promote fair trade by establishing rules in global business. They do this through the dispute settlement system. WTO provides a forum for countries to address and express their differences on trade issues. They help in raising living standards and cutting living costs. Through negotiations, they can lower trade barriers since they operate under the principle of no discrimination. Cost of production is hence reduced as imports of production materials are cheaper. The action cuts prices of finished products and services which ultimately lowers the cost of living. According to WTO (2017), trade opening from 1945 has boosted the annual incomes in the US by a trillion. The WTO North American Free Trade Agreement and the Uruguay Round between Canada, Mexico and US have increased the purchasing power yearly from $1300-$2000 for an average American family. This can enhance trade between the two countries as people will have the ability to buy products. According to studies done by US products purchased by low-income earners or poor exporting nations experience higher tariffs. WTO has conducted significant trade negotiations resulting in lowering of the trade barriers. Through the progressive fall of the taxes, countries can afford to purchase goods.
WTO also play a substantial role in the reduction of trade tensions and settling of disputes. According to WTO (2017), closer relations have massive benefits but can also bring about wrangles. In the past, such conflicts were rampant, but in the current situation, WTO provides an opportunity for countries to settle their disputes. Disputes are encouraged to be brought by the members to the WTO, and they are discouraged to act unilaterally. Conflict resolution is one of the fundamental roles played by WTO as stated in the multilateral trading system. Once a verdict has been arrived at, countries are expected to comply with the rules. Over 400 disputes have been solved since the formation of WTO in 1965. With the ability of WTO to solve problems between countries, any conflict that may arise between Saudi Arabia and the USA will be settled amicably hence facilitating trade between the countries.
WTO also helps in stimulating economic growth and employment. The WTO’s founding Marrakesh Agreement is aimed at providing full employment, higher living standards and sustainable development among its members. Jobs that are trade related tend to pay better than the others. In Western Europe, those working in companies that are export-oriented are paid wages which are 10%-20% more. Those working in open economies get better wages than those in closed economies. By financially capacitating the citizens through trade, the USA and Saudi Arabia can conduct trade as people will have money to engage in trade. The organization also assists in cutting the cost of doing business internationally. The trading systems help in increasing a countries productivity and lower cost of production since they are designed in making life simpler and more transparent. Transparency is provided about rules, policies, and regulations governing transactions between countries (WTO, 2017). Through the commitment of WTO to lower trade barriers and increase access of other nations on one’s market they provide a wider avenue of products to be sold. They also chant on the standardization and simplification of customs procedure and centralized database for holding information, subsequently smoothening the trading process.
Governments also need to be protected against pressure arising from other interested parties in the country. WTO systems assist the government in taking a more impartial perspective of trade policies. WTO (2017) state that through focusing on tradeoffs made in the interest of all the people in the economy they can protect themselves against persuasion from narrow interest groups. By restricting importation to promote domestic economies will subject people to more expensive goods resulting in demand for an increase in salaries hence affecting other sectors. WTO covers many areas, therefore if the government is pressurized by minority groups to consider a case which needs the protection of a faction, they can calm the pressure by arguing that they need to take into consideration all the sectors that stand being affected through the action. Through WTO rules, governments have removed quotas imposed on the importation of specific products. Removal of quotas helps countries to increase the amount of goods and services they can import hence a rise in revenue for the exporting nation.
Most members of WTO are either least developed or developing countries. Special provisions are provided for developing countries. They include things such as being given more extended periods to implement commitments and agreements, aids to help in building WTO infrastructure, and measures to increase their trading opportunities. WTO also help countries to trade by providing opportunities and making sure that developing countries participate in the global marketplace. They have set up centers of reference in over 100 regional organization and trade ministries in the capitals of least developed or developing countries where computers and internet access has been availed. This enables the officials to be conversant with the events organized by WTO and the policies adopted through online access to the organization’s database. By accessing such information, countries can capture the available market hence increasing their export and protect themselves from malpractices.
WTO also gives the weak a stronger voice especially in issues affecting them. According to WTO (2017), developing countries have been reported to be more active in matters of the organization. Numerous coalitions have been set up to increase their bargaining power, especially in negotiations. By WTO using consensus, countries are convinced about a rule or an agreement before it becomes binding. All the countries that are members of the organization have to follow the broadly similar rules and are equal to them.
Through equality, countries can compete fairly in trade without feeling being disadvantaged. WTO and IMF should come up with policies that are incoherent with one another. According to Auboin (2007), it is crucial for the two institutions to exchange their views, ideas, and information regarding trade with one another to avoid adopting policies that are inconsistent with each other’s mandate and rules. WTO rules contribute to the security and stability of world economy due to the trade conditions set. WTO through facilitating the flow of resources to developing countries and undermining macroeconomics, they become essential partners in cooperating with development and finance ministries such as IMF to create economic policies that are acceptable by both parties (Auboin, 2007). Trade can be facilitated between the USA and Saudi Arabia through the implementation of sound policies by both IMF and WTO.
From the article, we have seen the role institutions such as IMF and WTO play in facilitating trade between countries. By adaptation of appropriate policies, they encourage fair competition among its members and assist in boosting the countries’ economies. The institutions work at ensuring peace exist among the nations to enhance trading activities between them. Consequently, WTO and IMF have a prominent role in sustaining trading activities and hence they should be carefully monitored.
Amadeo, K. (2017, May 19). Comparative Advantage. Retrieved November 9, 2017, from The Balance: https://www.thebalance.com/comparative-advantage-3305915
Auboin, M. (2007). Fulfilling the Marrakesh Mandate on Coherence: Ten Years of Cooperation between the WTO, IMF and World Bank. In WTO DISCUSSION PAPERS (pp. 4-30).
Lundsager, M. (2015). How the International Monetary Fund and World Trade Organization Can Promote Fair Trade. In Wilson Center (pp. 1-4).
WTO. (2017). 10 things the WTO can do. In WORLD TRADE ORGANIZATION (pp. 2-50).