Trade Agreement

1. Introduction

World Trade Organization is an international organization established to supervise and liberalize world trade. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1947 in the expectation that it would soon be replaced by a specialized agency of the United Nations (UN) to be called the International Trade Organization (ITO). Although the ITO never materialized, the GATT proved remarkably successful in liberalizing world trade over the next five decades. By the late 1980s there were calls for a stronger multilateral organization to monitor trade and resolve trade disputes. Following the completion of the Uruguay Round (1986–94) of multilateral trade negotiations, the WTO began operations on January 1, 1995. [1]

2. Methodology

My goal is to get as relevant information that will be useful for the assignment. At this, point of time, I have collected secondary data. It is necessary to be sincere while collecting these data and I tried my best to achieve my target with honesty and hard work.

3. Objectives

The WTO has six key objectives: [2]

(1) To set and enforce rules for international trade,

(2) To provide a forum for negotiating and monitoring further trade liberalization,

(3) To resolve trade disputes,

(4) To increase the transparency of decision-making processes,

(5) To cooperate with other major international economic institutions involved in global economic management, and

(6) To help developing countries benefit fully from the global trading system.

4. Trade agreements

The term trade agreement or commercial agreement can be used to describe any contractual arrangement between states concerning their trade relationships. Trade agreements may be bilateral or multilateral—that is, between two states or between more than two states.

5. Bilateral trade agreements

Bilateral Trade Agreements are between on two nations at a time. They are fairly easy to negotiate, and give those two nations favored trading status between each other.[3] A bilateral trade agreement usually includes a broad range of provisions regulating the conditions of trade between the contracting parties. These include stipulations governing customs duties and other levies on imports and exports, commercial and fiscal regulations, transit arrangements for merchandise, customs valuation bases, administrative formalities, quotas, and various legal provisions. Most bilateral trade agreements, either explicitly or implicitly, provide for (1) reciprocity, (2) most-favoured-nation treatment, and (3) “national treatment” of non-tariff restrictions on trade[4].

5.1. Reciprocity

In a trade agreement, the parties make reciprocal concessions to put their trade relationships on a basis deemed equitable by each. The principle of reciprocity is extremely old, and in one form or another it is to be found, implicitly at least, in all trade agreements. The concessions may, however, be in different areas. In the Anglo-French Agreement of 1860, for example, France pledged itself to reduce its duties to 20 percent by 1864. In return, Britain granted duty-free imports of all French products except wines and spirits. The principle of reciprocity implies only that the gains arising out of foreign trade are distributed fairly.

5.2. The most-favoured-nation clause

The most-favoured-nation (MFN) clause binds a country to apply to its partner country any lower rate of import duties that it may later grant to imports from some other country. The clause may cover a list of specified products only, or specific concessions yielded to certain foreign countries. Alternatively, it may cover all advantages, privileges, immunities, or other favourable treatment granted to any third country whatever. The clause is intended to provide each signatory with the assurance that the advantages obtained will not be attenuated or wiped out by a subsequent agreement concluded between one of the partners and a third country[5]. It guarantees the parties against discriminatory treatment in favour of a competitor.

5.3. The “national treatment” clause

The “national treatment” clause in trade agreements was designed to ensure that internal fiscal or administrative regulations would not introduce discrimination of a nontariff nature. It forbids discriminatory use of the following: taxes or other internal levies; laws, regulations, and decrees affecting the sale, offer for sale, purchase, transport, distribution, or use of products on the domestic market; valuation of products for purposes of assessment of duty; legislation on prices of imported goods; warehousing and transit regulations; and the organization and operation of state trading corporations.

6. Trade-policy reviews

The WTO reviews the trade policies of the world’s four largest traders (the European Union, the United States, Japan, and Canada) once every two years, the policies of the 16 next largest traders once every four years, and the policies of all other traders once every six or more years. After extensive consultations with the member country under review, the WTO Secretariat publishes its review together with a companion report by the country’s government. The process thus monitors the extent to which members are meeting their commitments and provides information on newly opened markets. It also provides a firmer basis for subsequent trade negotiations and the resolution of trade disputes.

7. Regional arrangements and WTO rules

When countries join regional trading groups, they provide preferences to one another. In the EC, for example, German producers can export duty-free to France, whereas U.S. or Japanese exporters still have to pay duties on products shipped to France. In this way German producers become preferred over U.S. or Japanese suppliers, because a customs union represents a departure from MFN treatment. Nevertheless, countries entering a customs union or free trade association are not in violation of their commitments under the World Trade Organization; just as they were permitted under GATT, customs unions and free trade associations are still permitted through the WTO.

8. The General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade was signed in Geneva on October 30, 1947, by 23 countries, which accounted for four-fifths of world trade. On the same day 10 of these countries, including the United States, the United Kingdom, France, Belgium, and The Netherlands, signed a protocol bringing the agreement into force on January 1, 1948[6].

9. Protectionism in the less-developed countries

Much of the industrialization that took place in the late 20th century in some less-developed countries was characterized by the expansion of import-competing industries protected by high tariff walls. In many of those countries, tariffs and various quantitative restrictions on manufactured goods were high, but the effective rates of protection were often even higher, because the goods tended to be highly fabricated and the proportion of value added in production after importation was low. While countries such as Taiwan, Hong Kong, and South Korea oriented their manufacturing industries mainly toward export trade, they tended to be exceptional cases. More commonly, developing nations have mistakenly sought to compete with foreign-made goods for the domestic market. High protection in these countries has often contributed to a slowdown in production, while the export of primary commodities has discouraged expansion of exports of the more valuable manufactured goods. Although domestic production of nondurable consumer goods fosters rapid economic growth at an early stage, less-developed countries have encountered considerable difficulties in producing more-sophisticated, value-added commodities. They suffer all the disadvantages of small domestic markets, in addition to a lack of incentives for technological improvement.

10. Trade among developed countries

The greatest volume of trade occurs between the developed, capital-rich countries, especially between industrial leaders such as Australia, Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, Spain, Sweden, the United Kingdom, and the United States. Generally, as a country matures economically, its participation in foreign trade grows more rapidly than its GDP[7].

The EU affords an impressive example of the gains to be derived from freer trade between such countries. A major part of the increases in real income in EU countries is almost certainly attributable to the removal of trade barriers. The EU’s formation cannot, however, be interpreted as reflecting an unqualified dedication to the free-trade principle, since EU countries maintain tariffs against goods from outside the Union.

11. Trade between developed and developing countries

Difficult problems frequently arise out of trade between developed and developing countries. Most less-developed countries have agriculture-based economies, and many are tropical, causing them to rely heavily upon the proceeds from export of one or two crops, such as coffee, cacao, or sugar. Markets for such goods are highly competitive (in the sense in which economists use the term competitive)—that is, prices are extremely sensitive to every change in demand or in supply. Conversely, the prices of manufactured goods, the typical exports of developed countries, are commonly much more stable. Hence, as the price of its export commodity fluctuates, the tropical country experiences large fluctuations in its “terms of trade,” the ratio of export prices to import prices, often with painful effects on the domestic economy[8]. With respect to almost all important primary commodities, efforts have been made at price stabilization and output control. These efforts have met with varied success.

12. Analysis of WTO rules

12.1 Strength

The greatest strength of the WTO is its dispute resolution mechanism. This allows small and/or developing economies the opportunity to obtain a fair hearing without being subject to threats of linkage or reprisal. This makes the refusal of any major nation to abide by a WTO ruling politically unacceptable, and brings some degree of parity to international trade for the first time in history.

Another Strength of the WTO is the fact that it encompasses intellectual property rights under its “Agreement on Trade-Related Aspects of Intellectual Property Rights” (TRIPS)[9].

One of the strengths of the WTO that will require vigilance to preserve is its focus on trade to the exclusion of non-trade matters. The E.U. attempt to dilute this strength by bringing up labor standards at the Singapore Ministerial Conference was narrowly averted by pressure from the Asia – Pacific Economic Cooperation group (APEC) and several developing countries.

12.2 Weaknesses

To date, one of the greatest weaknesses that has plagued the WTO has been its Director – General, Renato Ruggiero’s insensitivity to the fears held by many member regarding the loss of national sovereignty under the WTO.

A weakness that WTO shares with its progenitor, GATT, is the relative unenforceability of its conflict resolution decisions. Merely allowing an aggrieved member to institute retaliatory sanctions in a sector in which it may or may not have any leverage in insufficient.

Another policy of the WTO that can be seen as a major weakness is its insistence on food self-sufficiency in developing members. This is both economically and environmentally unsound. The inappropriateness of this policy is illustrated by the fact that Indonesia is currently destroying its tropical rain-forest in order to cerate arable land for the cultivation of rice and soybeans, while the U.S. pays farmers to NOT grow these staples. This policy is a fundamental violation of the concept of “comparative advantage”[10].

The final weakness of the WTO is its insufficient liberalization of foreign direct investment. Neither the agreement on Trade-related Investment Measures (TRIMS), which applies to goods, nor the General Agreement on Trade in Services (GATS), which applies to services, “grant foreign investors “national treatment”–the right to be treated as well as local firms”[11].

12.3 Threats

The greatest threat facing the WTO in nationalism. Even before it was adopted, the WTO was a target for nationalists in almost all member states. Both individuals and institutions fear that the WTO will gradually overcome the sovereignty of their nation. While this fear has been associated with the United Nations (UN) for many years, the UN is not nearly intrusive in the internal affairs of the average member state as is WTO.

Regionalism in the form of trade blocks is another threat to the WTO. Groups such as NAFTA, the E.U., APEC, and the Confederation of Independent States all have regulations that conflict with those of the WTO.

A final threat to the WTO is the appearance of secrecy and “corporate paranoia” in recent WTO actions. In July of 1996 the WTO announced new rules that make the summaries and minutes of all WTO meetings classified documents[12]. This action by an agency that is supposed to prize “transparency” in its members is hypocritical at best.

The WTO needs, above all, to be regarded as open and neutral. It will lose all credibility if it is seen to be reverting to the “smoke filled room” school of trade negotiations.

12.4 Opportunities

Perhaps the greatest opportunity for the WTO is the integration of the former Soviet states, the PRC, and the states of Eastern Europe into the framework of open international trade.

Another significant opportunity for the WTO is the expansion of its mandate to cover the telecommunications sector and electronic trade. The WTO should develop standards for telecommunications system access and free access to electronic media. The example of Singapore, which limits the electronic advertising and information that its citizens may access, should be regarded as anathemic to free trade.

And finally the WTO should take advantage of its opportunity to bring international industrial intelligence to an end. Even though “Trade secrets have never before been the subject of protection under a multilateral agreement” [13].

13. Conclusion

Beginning in the late 1990s, the WTO was the target of fierce criticism. Opponents of globalization, and in particular those opposed to the growing power of multinational corporations, argued that the WTO infringes upon national sovereignty and promotes the interests of large corporations at the expense of smaller local firms struggling to cope with import competition. Environmental and labour groups have claimed that trade liberalization leads to environmental damage and harms the interests of low-skilled unionized workers. Protests by these and other groups at WTO ministerial meetings—such as the 1999 demonstrations in Seattle, Washington, U.S., which involved approximately 50,000 people—became larger and more frequent, in part because the development of the Internet and e-mail made large-scale organizing and collective action easier. In response to such criticism, supporters of the WTO claimed that regulating trade is not an efficient way to protect the environment and labour rights. Meanwhile, some WTO members, especially developing countries, resisted attempts to adopt rules that would allow for sanctions against countries that failed to meet strict environmental and labour standards, arguing that they would amount to veiled protectionism

World Trade Organization: anti-WTO demonstration in Seattle, Wash. in 1999

Anti-WTO demonstration, Seattle, U.S., 1999.[14]


#Peter Van den Bossche, (2005).The Law and Policy of the World Trade Organization United Kingdom: Cambridge University Press.

# Microsoft® Encarta® Reference Library 2003. ©  1993-2002, Microsoft Corporation. All rights reserved.

# Encyclopedia, Britannica Ultimate Reference Suite.

# Schweizer, Peter. “The Growth of Economic Espionage.” Vol 75, Foreigh Affairs, January 1, 1996.


#Czinkita, Michael R. “Executive Insights: The World Trade Organization – Perspectives and Prospects.” Vol. 3, No. 1 Journal of International Marketing, 1995.

# Bilateral Trade AgreementBy Kimberly Amadeo, Guide

# Encyclopedia, Britannica Ultimate Reference Suite.

# Library of Economics and Liberty,International Trade Agreements,by Douglas A. Irwin

# www., General Agreement on Tariffs and Trade

# International trade. (2010). In Encyclopædia Britannica. Retrieved October 17, 2010, from EncyclopædiaBritannicaOnline:

# WTO and Developing Countries,Volume 3, Number 37 November 1998by Aileen Kwa, Focus on the Global South, Bangkok,Editors: Tom Barry (IRC) and Martha Honey (IPS)

# Barnard, Bruce. “The World Trade Watchdog Has a Big Bark.” Europe Magazine, September 1, 1979



# www.



[1] Peter Van den Bossche, (2005).The Law and Policy of the World Trade Organization (pp. 77-78). United Kingdom: Cambridge University Press.

[2] Encyclopedia, Britannica Ultimate Reference Suite.

[3] Bilateral Trade AgreementBy Kimberly Amadeo, Guide

[4] Encyclopedia, Britannica Ultimate Reference Suite.

[5] Library of Economics and Liberty,International Trade Agreements,by Douglas A. Irwin

[6] www., General Agreement on Tariffs and Trade

[7] international trade. (2010). In Encyclopædia Britannica. Retrieved October 17, 2010, from Encyclopædia Britannica Online:

[8] WTO and Developing Countries,Volume 3, Number 37 November 1998by Aileen Kwa, Focus on the Global South, Bangkok,Editors: Tom Barry (IRC) and Martha Honey (IPS)

[9] Barnard, Bruce. “The World Trade Watchdog Has a Big Bark.” Europe Magazine, September 1, 1979



[12] Czinkita, Michael R. “Executive Insights: The World Trade Organization – Perspectives and Prospects.” Vol. 3, No. 1 Journal of International Marketing, 1995.

[13] Schweizer, Peter. “The Growth of Economic Espionage.” Vol 75, Foreigh Affairs, January 1, 1996, pp1.