International Economic Problems

International Economic Problems

1. Describe how the GATT and WTO have helped to free international trade. Also, what has been the mechanism to accomplish that objective?

Both the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT) have had tremendous contributions towards international trade. One of the most valued contributions is the enhancement of free global trade. The two organizations serve one major role in ensuring smooth international trade. The job is done through a number of approaches. GATT was mandated to establish nondiscriminatory and reciprocal trade tariffs between nations that, in turn, led to not only harmonious trade but also profitable to each party. In essence, the principle of reciprocity means that if in a negotiation, one party reduces a barrier, then the other party should also reduce one of its barriers. Nondiscriminatory, on the other hand, means that all members of the organization should enjoy the same reductions in trade barriers. WTO was established to be the paramount international trade regulator. It builds on establishing world trade rules and discipline. It uses trade policies to enhance balance and freedom.

2. Explain how a multilateral trading system can help to create a stable and predictable environment and why this is important.

A multilateral Trading System (MTS) is a way of governments to enhance the stability and predictability of the trading environments. This is also a role played by the WTO. According to WTO, as countries come to trading agreements, terms of engagement and commitments to such terms are stated. For instance, when nations communicate their will to open up their markets for particular commodities, they present legally binding commitments. Such commitments serve as an assurance that the trading environment is going to be fair and safe. Based on such agreements, and the nondiscriminatory principle of WTO, all parties have the privilege to know what goods and services are going to be available in the market. Similarly, common price policies and tariffs are predetermined. Hence competition is fairly managed. This makes the market predictable.

3. Explain the factors in favor of an open trading system based on multilaterally agreed rules.

An open trading system refers to a situation whereby countries allow each other free and nondiscriminatory access to one another’s market. The fact that multilaterally agreed rules should cut across all the members of a trading block favors an open trading system. For instance, less developed countries who have entered such agreements will benefit equally as the developed counterparts. The countries coming together are at liberty to decide what barriers to lift and which ones to maintain. This aspect enhances the freedom and openness of the markets. To these end, multilateral agreements, and the resultant rules are a factor when it comes to open trade and trading blocks.

4. What are the successes and challenges that the General Agreement on Tariffs and Trade (GATT) faced during its existence?

GATT was able to reduce tariffs for about 47 years. It recorded an average of 8 percent annual increase in world trade between the 1950s and 1960s. Such a growth rate was even faster than the economic growth rate. Trade rose to 3.7 trillion dollars in 1993 from the 1970s 332 million dollars. As a result of this success, more nations wanted to join the GATT. The membership grew to 128 nations by 1995 and was contributing 80 percent to the world trade. The increase in trade promoted world peace. As a result of the free trade championed by GATT, other economies realized the benefits of trade blocks. It set the base for other trade agreements such as the European Union (EU).

There were, however, two major challenges that GATT faced. One of the challenges was the efficacy of its low tariff mechanism. It destroyed the domestic industry, leading to high levels of unemployment. Following this, the government spent a lot of money trying to revitalize these industries through subsidization. Examples here include the 1970s exemption of textile and clothing industries from GATT. Secondly, GATT suffered the change of a booming service trade since it had not addressed it. For instance, countries were unable to control the globalized financial services.

5. What are the temptations or possible reasons to impose protective barriers with the idea of preventing the challenge of competitive imports?

Although WTO advocates for free trade, nations are still tempted to establish protective barriers to protect their economies. There are various reasons for such a move. One of such reasons is a move to protect infant industries. Industries that are newly starting need to be protected so that they can eventually stand firm to compete on their own. Protecting such industries from the threat of cheap imports is necessary. Secondly, as a result of free and open trade advocated for by WTO, some economies use others as their dumpsites by selling cheap outdated commodities. For instance, when Japan sells it second-hand vehicles into African markets, Africa becomes Japan’s dumping site. As a result, specific African member states may impose barriers to protect their economies from such menace.