CONTENTS. INTRODUCTION TO INTERNATIONAL TRADE p.1. LESSON 1: INTERNATIONAL TRADE p.3. LESSON 2: THE WORLD TRADE ORGANIZATION p.28

Transcription

1 April July 2011 i

2 ii CONTENTS INTRODUCTION TO INTERNATIONAL TRADE p.1 LESSON 1: INTERNATIONAL TRADE p.3 LESSON 2: THE WORLD TRADE ORGANIZATION p.28 LESSON 3: GLOBALISATION p.50 REFERENCES p.73

3 3 Introduction to International trade In this unit we will look at International trade and some of the issues involved. Take a look at the list below. These are some of the topics which will be covered in this first course: What is International trade? Why should nations trade with each other? What benefits are to be gained by trading? What do we mean by a pattern of trade? What is the World Trade Organization? What benefits are to be gained by being a member? What is the effect of globalization on world trade and on the nations that trade? Let s begin by considering the character and evolution of trade. It is important to keep in mind, first, that although we frequently talk about trade "between nations," the great majority of international transactions today actually take place between private individuals and private enterprises based in different countries. Governments sometimes sell things to each other, or to individuals or corporations in other countries, but these comprise only a small percentage of world trade. Trade is not a modern invention. International trade today is not qualitatively different from the exchange of goods and services that people have been conducting for thousands of years. Before the widespread adoption of currency, people exchanged goods and some services through bartering trading a certain quantity of one good or service for another good or service with the same estimated value. With the emergence of money, the exchange of goods and services became more efficient.

4 4 Developments in transportation and communication revolutionized economic exchange, not only increasing its volume but also widening its geographical range. As trade expanded in geographic scope, diversity, and quantity, the channels of trade also became more complex. The earliest transactions were conducted by individuals in face-to-face encounters. Many domestic transactions, and some international ones, still follow that pattern. But over time, the producers and the buyers of goods and services became more remote from each other. A wide variety of market actors individuals and firms emerged to play supportive roles in commercial transactions. These "middlemen" wholesalers, providers of transportation services, providers of market information, and others facilitate transactions that would be too complex, distant, time-consuming, or large for individuals to conduct face-to-face in an efficient manner. International trade today differs from economic exchange conducted centuries ago in its speed, volume, geographic reach, complexity, and diversity. However, it has been going on for centuries, and its fundamental character the exchange of goods and services for other goods and services or for money remains unchanged

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6 6 International Trade. Getting Started Let s begin by looking at International trade. Take a few minutes to think about these questions: 1. What is International trade? 2. What is Domestic trade? 3. Can you think of several local examples of both types of trade? 4. What factors play a role in both types of trade? 2. Terms and definitions You will find a number of terms and definitions in the texts on International trade. Here are some definitions which appear in the texts. As you read the text, try to determine which terms these definitions refer to. Then write the term in the space provided. 1. a system in which goods, capital, and labor flow freely between nations, without barriers which could hinder the trade process. 2. an item created for sale, use or consumption. 3. tax or duty placed on an imported good by a domestic government. 4. the value of all the goods and services produced in a country. Take a look at this text on International trade taken from Wisegeek 2. As its name implies, international trade is the exchange of products, services, and money across national borders; essentially trade between countries. When consumers in the U.S. purchase Swiss-made watches, Guatemalan-grown fruits, Chinese-made toys and electronics, and Japanese-manufactured automobiles, they experience the end result of international trade. Also known as foreign trade, international trade has been maintained since the dawn of time. Trading goods were transported on the backs of tradesmen across tribal boundaries, and bartered and sold among neighboring, and, hopefully, accommodating tribesmen. The Silk Road between Europe and Asia is one example of the sometimes beneficial, sometimes troubling essentials of international trade. Asian silks and spices 2

7 7 were traded for European technology and weapons, with varying benefits and consequences. Domestic trade is the purchase and sale of products and services within a particular nation s borders, and is inherently limiting to a modern national economy. International trade, conversely, raises national gross domestic product (GDP) by providing vastly expanded economic opportunity. It is, therefore, incumbent upon the global economic community to promote fair trade between nations. In addition, the ability of nations to trade freely with all others is also vital for profits. Free trade, fair trade, and profits are the cornerstones of global economic well-being. There is a somewhat cyclical nature to international trade. Poorer nations, able to provide cheap labor and lower production costs, are subservient to richer and more consumer-oriented nations. As the productive nations gain wealth through their productivity, the consumer nations are forced to become productive themselves through the transfer of their capital to the productive nation. Thus, the process is reversed. The burgeoning imbalance of trade between the United States and China is one example of the cycle where the consumer nation is becoming economically beholden to the producing nation. International trade is most commonly recognized in the exchange of goods or products. However, trading services, such as expertise in a particular field, or the ability to facilitate the trade of goods, is another common form of foreign trade. Trading capital on the foreign exchange market (FOREX) represents a third facet of international trade. Capital, or currency, held for foreign trade fluctuates in value hourly due to political, business, weather and other conditions and factors from nation to nation. Trading currency in the international market attempts to profit from the rising value of one nation s currency through selling the lower value of another nation s capital. Trading capital is also the amount of money designated by a trader to pay the costs of foreign trade, such as tariffs, subsidies, transportation, etc. Checking your understanding of the text Based on the information given in reading, discuss the following questions with your classmates. 1. What is the difference between national and international trade? 2. What are the three forms of international trade mentioned in the text? 3. Why does the author believe that national trade limits the national economy? 4. How can a consumer nation become indebted to a productive nation?

8 8 Rhetorical functions: Definitions A definition is the formal statement of the meaning of a term or a concept and describes its important characteristics. A simple sentence definition includes the concept, that is, the item being defined, the class to which it belongs and the characteristics which separates it from other similar items. Simple definitions can be written in the following way. Term + Verb + General class word + Special characteristics Look at the examples below: 1. International trade is the exchange of goods and services in the world, or global market. 2. A multinational is a large company that sets up production facilities in several different countries. These definitions can also be written in the following manner: 1. This exchange of goods and services in the world, or global market is known as international trade. 2. A large company that sets up production facilities in several different countries is referred to as a multinational. Go through the text and find at least two (2) definitions While reading the following text Gateways to Global Markets, underline the terms which are defined. How many definitions did you find? GATEWAYS TO GLOBAL MARKETS World markets have changed enormously in the past decade. New markets have been opened with the end of the cold war. New economic blocks have been formed. New trading alliances are shaping. Inevitably, a new way of thinking and an approach to doing business is necessary in order to survive in the fast changing economy. Most countries realise the advantages of international trade. Countries have developed their economies, increased production of goods, and met market demands through the increase of international trade. A nation that exports more will grow stronger. The stronger a nation is, the more recognition and respect it will earn. With the end of cold war, more resources worldwide are geared towards exporting. Exporting becomes more challenging with continued population growth and the addition of new exporters.

9 9 "Exports are the key to the economic survival of a nation. Exports not only help a country earn money, they help create jobs, peace, prosperity, and the power to influence." Morris Ng Exporting can provide growth and profit. It is a complex and demanding field, which may enhance every nation s productivity. In order to export and import products, there needs to be a system of international monetary exchange. Most products must be paid with the legal tender of the producing country. International trade involves the exchange of one currency for another. Most currencies are now exchanged on a floating rate basis. The rates fluctuate according to market forces. The exchange rate may vary greatly due to demand and therefore the price of currency is either rising or falling. The comparative advantage which exporting countries enjoy sometimes changes. If transportation costs increase or currency exchange rates change, it may become cheaper to produce the product in the market country, especially if large amounts of exports are involved. Trade surplus--- favourable balance of trade ---is an excess of exports over imports. Trade deficit--- unfavourable balance of trade---is an excess of imports over exports. A country with a record trade surplus is often threatened with sanctions and trade barriers from a deficit importing country. A country with a record trade deficit is usually faced with the internal social disorders. There are several reasons why governments try to control the imports and exports of a country. One reason is that a country enjoys an advantage if it exports more than it imports. Wealth accrues to the exporting country. Some countries have special programs to encourage exports. They may be programs that provide marketing information, establish trade missions, subsidise exports and provide tax benefits or incentives. Government subsidies allow companies to sell products cheaply. Sometimes these subsidised companies export their products and sell them cheaply overseas. This practise is known as dumping; it is selling on a foreign market at a price below the cost of production. The imposition of trade barriers, such as import quotas and higher duties, is not the only solution to meeting the international challenge. The remedy to beat the trade imbalance is to understand foreign cultures and business practices, and to provide competitive products and services. On the other hand, governments impose taxes and quotas to restrict imports of certain products. Sometimes governments want to protect a domestic industry because that industry provides employment for the population. Not only the industries, but also the labour unions encourage the government to establish protectionist controls. Protectionist measures are in the form of duties, which eliminates the comparative advantage, or quotas that restrict the import of the product altogether. There are two forms of import tariffs: specific and ad valorem. A specific tariff is a

10 10 certain amount of tax for each unit of the product. An ad valorem is based on the value of the product, for example 5% of its value. The imposition of the ad valorem tax depends upon first determining the value of the product. A tariff increases the price of the item, raises revenue for the government and controls consumption through market forces. A quota has a different effect on the market because it limits the number of items imported. While under a quota there may be a higher price because of a limited supply, under a tariff, a tax that creates a higher price, the supply is not limited. Exporting enterprises sometimes set up subsidiaries in the market countries. The larger enterprise is referred to as the parent company. A large company that sets up production facilities in several different countries is referred to as a multinational. Understanding the text: Writing and answering questions. 1. Form groups of four (4). Scan the text and write two sets of six questions based on the information given. 2. Give these questions to another group and receive questions from them. Answer these and then pass them on to a third group who will correct them. You will be given a limited amount of time to do this activity. Let s continue looking at different aspects of international trade.

11 11 Getting started 1. Discuss with your classmates your understanding of the following terms and how they relate to trade: a. Supply b. Demand 2. What is the difference between goods and services? Give local examples of each. Terms Here are a few terms that will appear in today s text. Discuss with your classmates your understanding of these: import export capital specialization protectionism balance of payments free trade Now check your understanding of these terms as we read this article What is International trade written by Reem Heakal 3 What Is International Trade? International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments. 3

12 12 Increased Efficiency of Trading Globally Global trade allows wealthy countries to use their resources - whether labor, technology or capital - more efficiently. Because countries are endowed with different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can. This is known as specialization in international trade. Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours). But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products. We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trading). Specialization reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With the greater supply, the price of each product would decrease, thus giving an advantage to the end consumer as well. Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology. However, according to international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization. Other Possible Benefits of Trading Globally International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can therefore grow more efficiently and can more easily become competitive economic participants. For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues.

13 13 Free Trade vs. Protectionism As with other theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade: free trade and protectionism. Free trade is the simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth because market forces will do so automatically. In contrast, protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade and they aim to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs, subsidies and quotas. These strategies attempt to correct any inefficiency in the international market. Conclusion As it opens up the opportunity for specialization and therefore more efficient use of resources, international trade has potential to maximize a country's capacity to produce and acquire goods. Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change and, as it develops, so too must all of its participants. Rhetorical functions: Cause and Effect Many events that occur around us have an effect on others. The reason something happens (the cause) results in another action occurring (the effect). One event can have various effects. One effect, can then in turn, become the cause of another event. We see many examples of cause and effect in the texts read in International trade. Let s look at the example in paragraph 1. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Cause Political change in Asia an increase in the cost of labor increase in manufacturing cost Effect an increase in the cost of labor increase in manufacturing cost increase in the price you have to pay for tennis shoes at your local mall.

14 14 There are several connectives (words that connect two grammatical units together) or indictors that we can use to show cause and effect. These words indicate that the information that follows is the cause of the event. Due to political change in Asia, there was an increase in the cost of labor. Owing to an increase in the cost of labor, there was an increase in manufacturing cost. As a result of an increase in manufacturing cost, the price of the tennis shoes rose. An increase in the labor costs was caused by political change in Asia. Because of political change in Asia, there was an increase in labor cost. You can also find words that indicate that what follows is the result of an action. An increase in manufacturing costs lead to an increase in the cost of the tennis shoes. An increase in the cost of labor causes an increase in manufacturing costs. So, There was political unrest in Asia. Consequently, there was an increase in labor costs. For this reason, Exercise A. The following sentences show a cause and effect relationship. Circle the indicators and indicate by writing C (Cause) and/or E (Effect) above the examples of this relationship in the sentence. 1. The rates fluctuate according to market forces. The exchange rate may vary greatly due to demand and therefore the price of currency is either rising or falling. 2. If transportation costs increase or currency exchange rates change, it may become cheaper to produce the product in the market country, especially if large amounts of exports are involved. 3. Countries have developed their economies, increased production of goods, and met market demands through the increase of international trade.

15 15 Exercise B. 1. Scan the text What is International Trade for indicators of cause and effect. Circle the indicators and indicate by writing C (cause) and/or E (effect) above the examples of this relationship in the sentence. 2. Then represent this relationship graphically using arrows. 3. Use the information in the graphic organizer and write sentences showing the cause and effect relationship. Use as many different indicators as possible.

16 16 Looking at terms: Let us review some of the terms met in the texts on What is International trade. Try and match the terms in the box below to their respective definitions. term next to its definition. Write the subsidy export quota service Foreign Direct Investment capital demand tariff free trade supply goods consumer specialization Gross Domestic product asset 1. A tax levied on imported goods. There are five types and include revenue, ad valorem, specific, protective and prohibitive. 2. The monetary value of all goods and services produced in a country during a 12 month period. 3. The financial aid paid to a business or economic sector by the government. 4. An individual or household that uses goods and services generated within the community. 5. Intangible support that is provided to a consumer in some manner. 6. The amount of cash and assets owned by a business. 7. The desire of a consumer to purchase a good or service at a price. 8. Tangible, physical products that can be used to satisfy a consumer s needs.. 9. A limit set on the amount of a product that can be either imported or exported during a given time period. 10. A product which is produced in one country and then sent to another Anything of value which is owned by a person or a company The investment of money by an individual or company in a business which is located in another country. 13. A system in which goods, services, capital and labor flow freely across international borders without trade barriers A method of production in which companies focus on a limited number of products and services which they can do best The amount of goods or services available for purchase..

17 17 Understanding Comparative advantage, Opportunity costs and Absolute advantage. Opportunity costs are the benefits you would have received if you had made an alternative choice. For example, opportunity costs are the money you would have earned if you had gone to work in a company instead of entering university. In terms of production, it would mean the money, time and labor invested in the production of one good (bikes) instead of another (CDs). Comparative advantage exists when a country, region or company can produce goods or services at a lower opportunity cost that its competitor. Absolute advantage exists when a country, region or company can produce goods or services at a lower cost than its competitors using the same resources. Group work: Scenario 1 In groups of four, think of two goods or services that are being produced by two different individuals or companies. 1. Decide on the type and number of goods or services and the amount of resources (time, labour and money) allocated to produce them 2. Give names to the people or companies involved. 3. Which person or company has a comparative advantage in the production of the goods/services? 4. What is the opportunity cost for producing the goods/services? 5. Which individual or company has the absolute advantage (if any) in the production of the goods/services? 6. Select two representatives to present your scenario to the class.

18 18 Looking at the Topic and the Main Idea The topic of an article is the general theme or idea that the writer wants to convey to the reader while the main idea is most important point that the writer wants to make. The writer often starts with a thesis statement and then develops this throughout the text which is made up of a number of different paragraphs. The writer introduces his idea, develops it in the body of the text with arguments or evidence to support his idea and then concludes, emphasizing his main point. Each individual paragraph has a main idea that the writer later develops through the use of details. Sometimes the main idea can be found at the beginning of the paragraph but this not always so. The writer can also begin with an introduction, and then state the main idea and finish with details or the writer can give the details and finish by stating the main idea. Sometimes the main idea is explicitly stated but sometimes it is not and the reader has to deduce it from the text. A. Read the following paragraphs below and underline the main idea. 1. World markets have changed enormously in the past decade. New markets have been opened with the end of the cold war. New economic blocks have been formed. New trading alliances are shaping. Inevitably, a new way of thinking and an approach to doing business is necessary in order to survive in the fast changing economy. 2. With the end of cold war, more resources worldwide are geared towards exporting. Exporting becomes more challenging with continued population growth and the addition of new exporters. "Exports are the key to the economic survival of a nation. Exports not only help a country earn money, they help create jobs, peace, prosperity, and the power to influence." Morris Ng Exporting can provide growth and profit. It is a complex and demanding field, which may enhance every nation s productivity. 3. Trade is not a modern invention. International trade today is not qualitatively different from the exchange of goods and services that people have been conducting for thousands of years. Before the widespread adoption of currency, people exchanged goods and some services through bartering trading a certain quantity of one good or service for another good or service with the same estimated value. With the emergence of money, the exchange of goods and services became more efficient. Look at the title of the article that follows. What do you think is the topic? What do you think the author will discuss?

19 19 Getting Started 1. Discuss with your classmates and then make a list of the reasons countries trade. 2. While reading the text, check and see if the reasons given by the author are similar to yours. WHY NATIONS TRADE 4 Nations trade a lot, but it is not quite evident why they do so. Put differently, why do private individuals and firms take the trouble of conducting business with people who live far away, speak different languages, and operate under different legal and economic systems, when they can trade with fellow citizens without having to overcome any of those obstacles? Why Do Nations Export? Exports are easier to explain than imports. At least since the beginning of the industrial era almost three centuries ago, countries have tended to sell things to other countries either because: 1. Individuals and firms have been able to produce more of certain goods and services than can be consumed at home. This prompted a search for foreign opportunities to sell the "excess" production; 2. Individuals and firms have been able to sell goods or services to other countries at prices higher than the prices they can obtain domestically. In today's global economy, exporting serves somewhat different purposes for developing and industrial countries. Although the economies of developing countries are typically not as economically productive as the economies of industrial countries, developing countries nonetheless produce some goods and services in amounts they are unable to use or consume at home, called a production surplus. For example, some developing countries produce vast quantities of agricultural products, like cocoa in Cote d Ivoire and coffee in Latin America, which their own populations are not large enough to consume. Other developing countries produce quantities of industrially valuable minerals, like oil or iron ore, that their own economies are too small or insufficiently industrialized to use. But for many developing countries, exports also serve the purpose of earning foreign currency with which they can buy essential imports foreign products that they are not able to manufacture, mine, or grow at home. Developing countries, in other words, sell exports, in part, so they can import. Exporting goods and services can also further advance developing nations' domestic economies. 4

20 20 Interconnectivity through global trade can also be problematic. For example, up until 2008, Japan had a booming export business with the United States. When American consumers became unable to buy Japanese products, Japanese companies lost that business.1 Why Do Nations Import? The reasons that explain why countries import products and services from other countries are perhaps less obvious. As with exports, the purposes served by imports vary from country to country. It is reasonable to ask why a country such as the United States, with its massive and extraordinarily diverse economy, needs to buy anything from other countries. In fact, there is only a handful of goods or services that the United States absolutely must import from other countries. With a land area spanning several climatic zones, immense natural resources, and a dynamic workforce, the United States is able to produce, mine, or grow almost every item its citizens need to lead reasonably prosperous lives. Yet no country today, including the United States, can be totally self sufficient at a cost that would be tolerable to its citizens. All countries need to or choose to import at least some goods and services for the following reasons: 1. Goods or services that are either essential to economic well-being or that consumers desire are simply not naturally available or cannot be produced at home; and, 2. Goods or services that satisfy domestic needs or wants can be produced more inexpensively or efficiently by other countries, and therefore sold at lower prices. It is helpful to illustrate these points by looking at the case of the United States, precisely because it comes closer to being self-sufficient than any other country. Coal, copper, iron, silver, and nickel are just a few of the natural resources the United States possesses in large quantities that other countries do not possess. But there are some economically essential items, such as tungsten and oil, which the United States either does not produce at all or does not produce in sufficient quantities to serve current needs at a reasonable price. The United States cannot now meet its oil consumption needs exclusively through domestically produced oil; as of 2007, the U.S. ranks third in total oil production (8,457,000 barrels/day), but also first in oil consumption (20,680,000 barrels/day).(1 ) In fact, since Hurricanes Katrina and Rita in 2005, U.S. oil production has been on the decline.(2) As a result, the United States today imports 59 percent of the oil it consumes.(3) Most of these imports come from Saudi Arabia, Mexico, Canada, Nigeria, and Venezuela. In 2008, the United States imported 3.58 billion barrels of crude oil.(4) The United States could, in theory, abandon foreign oil imports, but it would constitute a very costly step because it is not clear that domestic reserves of oil, both those that are known and those that have yet to be discovered, could satisfy current

21 21 domestic demand; and even if U.S. oil reserves were adequate, generating the extra production necessary to fill the gap now filled by imported oil would be extremely costly. Many foreign countries are able to produce oil much more cheaply. Besides, accessing the additional U.S. reserves would require many years of research and development; other energy sources for example, coal, nuclear power, or hydro-electric power could conceivably be substituted for oil imports, but complying with the associated environmental regulations, along with the cost of producing additional energy from these sources, would be very expensive. After all, oil currently satisfies more than 40 percent of America s energy needs (including more than 99 percent of the fuel for cars and trucks) precisely because other domestic sources of energy are either not sufficiently abundant to cover demand or are more expensive to exploit than oil.(5) Of course, energy conservation measures could also reduce the need for oil imports by decreasing energy consumption of the average American citizen. Energy conservation would be prudent, regardless of which energy supply the United States favors in the future; however, foreign producers would still be able to produce the oil more cheaply, regardless of the level of production. In addition, the scale of energysaving measures needed to substantially reduce U.S. imports of oil would require costly changes in economic activity and lifestyles and have thus far proven to be politically unsustainable. In the end, it is clear that the United States will depend upon imports to meet its energy needs into the foreseeable future. This is not the same as saying that the United States has no choice but to import oil from other countries. As the preceding discussion suggests, there are alternatives. But those alternatives are less economically and politically feasible than simply continuing to import oil from countries endowed with generous petroleum reserves. The same logic applies to a number of other resources or products whose domestic supply is limited: the United States -though not most other countries -can often find ways to increase production of a commodity, reduce consumption, or identify domestic substitutes. But these alternatives will often prove more costly than continuing to import from other countries. Moreover, the United States and other nations choose to import many other products that, unlike oil, are not economically essential, but differ in quality or features from equivalent products made at home. One prominent example is foreign-made cars, which, starting in 2007, accounted for more than 50 percent of all cars sold in the United States.(6) Americans do not buy imported foreign cars because foreign manufacturers produce certain kinds of vehicles that American manufacturers do not; U.S. car makers produce an extraordinary range of vehicles at a wide range of price levels. But many Americans have concluded that Asian and European car manufacturers produce vehicles with a combination of qualities or features that satisfy their preferences more so than vehicles manufactured by U.S. car makers. The same holds true for much simpler products like wine, or cheese, or shoes. All of these and thousands of other items that the United States imports from other countries are still made at home, but some American consumers believe imported versions of these items offer satisfactions that American varieties do not. The United States has almost entirely stopped producing other goods because of foreign competitive efficiency, in other words, firms in other countries are better able to produce these goods. This is the case with many types of clothing because clothes can

22 22 be produced at a much lower cost in countries where labor is cheap; most clothes are produced in developing countries. It is worth noting that the country where a good is produced need not be the same as the country where the corporation that manufactures and sells the good is established. Several American clothing companies, such as Gap, manufacture most of their clothes in developing countries. The goods that the United States have almost ceased to produce because of foreign competitive efficiency include not only low-tech products, but also some electronic equipment. For example, the United States used to produce VCRs, but it completely abandoned their production because of the superior efficiency of foreign competitors (most notably the producers in Japan). Sources 1 Source: CIA World Fact book 2 Source: U.S. Energy Information Administration 3 Source: /company_level_imports/current/import.html 4 Source: 5 Source: 6 Source: /08/01/AR html Checking your understanding of the text. Discuss with your classmates the following questions: 1. Why, according to the author, do developing nations export goods? Give two of your own examples to illustrate this point. 2. Why, according to the author, do developed nations import goods? What examples does he use to illustrate his point? Is this also true of developing nations? If so, what examples can be used to illustrate this? 3. What arguments does the author use to explain the reason the U.S continues importing oil? Do you agree with the reasons? 4. The author states that many types of clothing is produced in developing countries? Why is this so? What countries are primary manufacturers of clothes? What advantages or disadvantages can this bring to the country? Summarizing the text in your own words. Re-read the text and find the main idea of each of the paragraphs. You can underline them if you whish. Then find details to support each of the points the author makes. Use this information to write a paragraph summarizing the information in the text. Give your summary a title.

23 23 Balance of payment and Balance of trade The following text contains several terms of importance to your understanding of International trade. While reading, underline the terms you find. The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. The BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction. The Current Account The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account. Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. When combined, goods and services together make up a country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received. The Capital Account The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

24 24 The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets. The Financial Account In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account. The Balancing Act The current account should be balanced against the combined-capital and financial accounts. However, as mentioned above, this rarely happens. We should also note that, with fluctuating exchange rates, the change in the value of money can add to BOP discrepancies. When there is a deficit in the current account, which is a balance of trade deficit, the difference can be borrowed or funded by the capital account. If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow. However, the sale of that fixed asset would be considered a current account inflow (earnings from investments). The current account deficit would thus be funded. When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP. Liberalizing the Accounts The rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations. With the advent of the emerging market economic boom - in which capital flows into these markets tripled from USD 50 million to USD 150 million from the late 1980s until the Asian crisis - developing countries were urged to lift restrictions on capital and financialaccount transactions in order to take advantage of these capital inflows. Many of these countries had restrictive macroeconomic policies, by which regulations prevented foreign ownership of financial and non-financial assets. The regulations also limited the transfer of funds abroad. But with capital and financial account liberalization, capital markets began to grow, not only allowing a more transparent and sophisticated market for investors, but also giving rise to foreign direct investment. For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation's overall gross domestic product by allowing for greater volumes of production. Liberalization can also facilitate less risk by allowing greater diversification in various markets.

25 25 Based on the information in the text, answer the following questions. 1. What information is found in the Current Account? 2. What is a country s Balance of Trade? 3. What information is found in the Financial Account? 4. What are assets and liabilities?

26 26 Re-read the information given in What is Balance of Payments. Put this data on the graphic organizer below. BALANCE OF PAYMENTS Based on the information in the chart, where would you list the following items: 1. Inheritance taxes are recorded in 2. Direct foreign investments are recorded in 3. 3,000 kilos of rice imported from India are recorded in 4. Royalties from the sale of books are recorded in 5. Money from national companies located abroad 6. Purchase of land is recorded in the

27 27 Review questions on topics in International trade. 1. What is International trade? 2. What are the types of markets in which the sale of goods and services take place? 3. What are the benefits of international trade to nations? 4. What resources help determine which products a nation will specialize in? 5. What are imports and exports? 6. Why do governments encourage exports? 7. Why do governments implement protectionist measures? 8. Why do governments try to control imports and exports? 9. Why does exporting help to develop a nation s economy? 10. What is the difference between Balance of Trade and Balance of Payment? 11. What is gross domestic product of a country? 12. What are opportunity costs? 13. What is the difference between absolute advantage and comparative advantage? 14. What is the difference between a good and a service? What do the following acronyms refer to: 1. BOT 2. GDP 3. BOT 4. FDI

28 28

29 29 Getting started A. In this unit, we will learn about the largest and most important organization of International Trade. The World Trade Organization. Before we start, briefly think about the following questions. What is the role of International Organizations in Foreign Trade? Are they necessary? Why? What are the advantages and disadvantages of having International Organizations in Foreign Trade? Discuss the questions with the class. B. Now read this brief definition of what the World Trade Organization (WTO) is The WTO is better understood as negotiating forum and a set of rules that regulate International Trade. It also helps to settle disputes between trading nations. As you read the texts that follow bear these ideas in mind. C. The first text in this lesson provides an overview of the WTO. However, the headings that identify each section have been deleted. Without reading the text in detail, try to match these headings with the blanks in the text. A little bit of History Principles of the International Trading System The Organization What is the WTO? D. Now read the complete article. Was your matching correct? Make the necessary changes. The World Trade Organization 1 The WTO is a negotiating forum Born out of negotiations, where member governments try and sort out the trade problems they face with each other. The WTO s current work comes from the negotiations called the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade (GATT). The WTO is the host to new negotiations, under the Doha Development Agenda launched in 2001.

30 30 It s a set of rules At its heart are the WTO agreements, negotiated and signed by the world s trading nations. These documents provide the legal ground-rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits. The goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives. The system s purpose is to help trade flow as freely as possible. It also means ensuring that individuals, companies and governments know what the trade rules are around the world. In other words, the rules have to be transparent and predictable. And it helps to settle disputes Trade relations often involve conflicting interests. Agreements, including those negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. The World Trade Organization (WTO) deals with the rules of trade between nations at a global or near-global level. There are a number of ways to look at the WTO. It s an organization for liberalizing trade a forum for governments to negotiate trade agreements. a place to settle trade disputes and a system of trade rules. 2 The WTO agreements are lengthy and complex because they are legal texts covering a wide range of activities. They deal with: agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property, and much more. These principles are the foundation of the multilateral trading system. Trade without discrimination Most-favoured-nation (MFN): treating other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners. This principle is known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. National treatment: Treating foreigners and locals equally Imported and locally produced goods should be treated equally at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This

31 31 principle of national treatment is also found in all the three main WTO agreements (GATT, GATS and TRIPS). Freer trade: gradually, through negotiation Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. By the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the new areas such as services and intellectual property. Predictability: through binding and transparency Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. The multilateral trading system is an attempt by governments to make the business environment stable and predictable. The system tries to improve predictability and stability in other ways as well. One-way is to discourage the use of quotas and other measures used to set limits on quantities of imports. Another is to make countries trade rules as clear and public ( transparent ) as possible. Promoting fair competition The WTO is sometimes described as a free trade institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition. The rules on non-discrimination MFN and national treatment are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property, services, for example. Encouraging development and economic reform The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system s agreements. They inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries. More recently, developed countries have started to allow duty-free and quotafree imports for almost all products from least-developed countries. On all of this, the WTO and its members are still going through a learning process. The current Doha Development Agenda includes developing countries concerns about the difficulties they face in implementing the Uruguay Round agreements.

32 32 3 The WTO began life on 1 January 1995, but its trading system is half a century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system. The GATTgave birth to an unofficial, de facto international organization. Over the years GATT evolved through several rounds of negotiations. The last and largest GATT round, was the Uruguay Round which lasted from 1986 to 1994 and led to the WTO s creation. Whereas GATT had mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, and in traded inventions, creations and designs (intellectual property). The GATT years: from Havana to Marrakesh The WTO s creation on 1 January 1995 marked the biggest reform of international trade since after the Second World War. It also brought to reality in an updated form the failed attempt in 1948 to create an International Trade Organization. Much of the history of those 47 years was written in Geneva. But it also traces a journey across continents, from that uncertain start in 1948 in Havana (Cuba), via Annecy (France), Torquay (UK), Tokyo (Japan), Punta del Este (Uruguay), Montreal (Canada), Brussels (Belgium) and finally to Marrakesh (Morocco) in GATT helped establish a strong and prosperous multilateral trading system that became more and more liberal through rounds of trade negotiations. By the 1980s the system needed a thorough overhaul. This led to the Uruguay Round, and ultimately to the WTO. GATT: provisional for almost half a century From 1948 to 1994, the General Agreement on Tariffs and Trade (GATT) provided the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce. It seemed well-established, but throughout those 47 years, it was a provisional agreement and organization. The original intention was to create a third institution to handle the trade side of international economic cooperation, joining the two Bretton Woods institutions, the World Bank and the International Monetary Fund. Over 50 countries participated in negotiations to create an International Trade Organization (ITO) as a specialized agency of the United Nations. With the Second World War recently ended, they wanted to give an early boost to trade liberalization, and to begin to correct the legacy of protectionist measures which remained in place from the early 1930s

33 33 The combined package of trade rules and tariff concessions became known as the General Agreement on Tariffs and Trade. It entered into force in January 1948, while the ITO Charter was still being negotiated. Even though it was provisional, the GATT remained the only multilateral instrument governing international trade from 1948 until the WTO was established in For almost half a century, the GATT s basic legal principles remained much as they were in There were additions in the form of a section on development added in the 1960s and plurilateral agreements in the 1970s, and efforts to reduce tariffs further continued. This was achieved through a series of multilateral negotiations known as trade rounds the biggest leaps forward in international trade liberalization have come through these rounds which were held under GATT s auspices. In the early years, the GATT trade rounds concentrated on further reducing tariffs. Then, the Kennedy Round in the mid-sixties brought about a GATT Anti-Dumping Agreement and a section on development. The Tokyo Round during the seventies was the first major attempt to deal with trade barriers that do not take the form of tariffs, and to improve the system. The eighth, the Uruguay Round of , was the last and most extensive of all. It led to the WTO and a new set of agreements. The Uruguay Round It took seven and a half years, almost twice the original schedule. By the end, 123 countries were taking part. It covered almost all trade, from toothbrushes to pleasure boats, from banking to telecommunications, from the genes of wild rice to AIDS treatments. It was quite simply the largest trade negotiation ever, and most probably the largest negotiation of any kind in history. The Uruguay Round brought about the biggest reform of the world s trading system since GATT was created at the end of the Second World War despite its troubled progress, the Uruguay Round did see some early results. They called for regular reports on GATT members trade policies, a move considered important for making trade regimes transparent around the world. The seeds of the Uruguay Round were sown in November 1982 at a ministerial meeting of GATT members in Geneva. In fact, the work programme that the ministers agreed formed the basis for what was to become the Uruguay Round negotiating agenda. However, it took four more years of exploring, clarifying issues and careful consensus-building, before ministers agreed to launch the new round. They did so in September 1986, in Punta del Este, Uruguay. It was the biggest negotiating mandate on trade ever agreed, and the ministers gave themselves four years to complete it. The Uruguay Round agreements contain timetables for new negotiations on a number of topics. By 1996, some countries were openly calling for a new round early in the next century. The response was mixed; but the Marrakesh agreement did already include commitments to reopen negotiations on agriculture and services at the turn of the

34 34 century. These began in early 2000 and were incorporated into the Doha Development Agenda in late The Doha Development Agenda At the Fourth Ministerial Conference in Doha, Qatar, in November 2001, WTO member governments agreed to launch new negotiations. They also agreed to work on other issues, in particular the implementation of the present agreements. The entire package is called the Doha Development Agenda (DDA). The WTO replaced GATT as an international organization, but the General agreement still exists as the WTO s umbrella treaty for trade in goods, updated as a result of the Uruguay Round negotiations. 4 The WTO is member-driven, with decisions taken by consensus among all member governments. The WTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus. Highest authority: the Ministerial Conference The WTO belongs to its members. The countries make their decisions through various councils and committees, whose membership consists of all WTO members. Topmost is the ministerial conference which has to meet at least once every two years. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements. Second level: General Council in three guises Day-to-day work in between the ministerial conferences is handled by three bodies: The General Council The Dispute Settlement Body The Trade Policy Review Body All three are in fact the same the Agreement Establishing the WTO states they are all the General Council, although they meet under different terms of reference. Again, all three consist of all WTO members. They report to the Ministerial Conference. The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It meets as the Dispute Settlement Body and the Trade Policy Review Body to oversee procedures for settling disputes between members and to analyze members trade policies.

35 35 Third level: councils for each broad area of trade, and more Three more councils, each handling a different broad area of trade, report to the General Council: The Council for Trade in Goods (Goods Council) The Council for Trade in Services (Services Council) The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council) As their names indicate, the three are responsible for the workings of the WTO agreements dealing with their respective areas of trade. Again they consist of all WTO members. The three also have subsidiary bodies (see below). Fourth level: down to the fundamentals Each of the higher level councils has subsidiary bodies. The Goods Council has 11 committees dealing with specific subjects (such as agriculture, market access, subsidies, anti-dumping measures and so on). Again, these consist of all member countries. Also reporting to the Goods Council is the Textiles Monitoring Body, which consists of a chairman and 10 members acting in their personal capacities, and groups dealing with notifications (governments informing the WTO about current and new policies or measures) and state trading enterprises. The Services Council s subsidiary bodies deal with financial services, domestic regulations, GATS rules and specific commitments. The Secretariat The WTO Secretariat is headed by a director-general. Divisions come directly under the director-general or one of his deputies. Director-general Pascal Lamy is the fifth Director-General of the WTO. His appointment took effect on 1 September 2005 for a four-year term. Office of the director-general: administrative support for (disputes) Appellate Body, Textiles Monitoring Body. The WTO Secretariat is located in Geneva. It has around 550 staff and is headed by a director-general. Its responsibilities include: Administrative and technical support for WTO delegate bodies (councils, committees, working parties, negotiating groups) for negotiations and the implementation of agreements. Technical support for developing countries, and especially the leastdeveloped.

36 36 Trade performance and trade policy analysis by WTO economists and statisticians. Assistance from legal staff in the resolution of trade disputes involving the interpretation of WTO rules and precedents. Dealing with accession negotiations for new members and providing advice to governments considering membership. The WTO s main functions are to do with trade negotiations and the enforcement of negotiated multilateral trade rules (including dispute settlement).

37 37 WTO structure Key Reporting to General Council (or a subsidiary) Reporting to Dispute Settlement Body Plurilateral committees inform the General Council or Goods Council of their activities, although these agreements are not signed by all WTO members Trade Negotiations Committee reports to General Council

38 38 Checking your understanding of the text. Answer these questions in your own words taking into account what you have read. 1.- What is the WTO? 2.- Explain the principles of the trading system 3.- What is the GATT? When did it start? 4.- Why is the Uruguay round important for international trade? 5.- How is the WTO organized? 6.- What are the main functions of the International Trade Centre?

39 39 Rhetorical functions: Chronological Order When a writer organizes information by time, he/she is using chronological order. This rhetorical function is common when the purpose of the text is to describe the development of an idea, the life of an individual or to provide a historical account about an event or organization. The writer usually states the events in the same order in which they occurred but sometimes, he may flash back (jump to a point in the past) to describe past events which affect the present or flash forward (jump to a point in the future) to show the results of present events. For example, in the text you have just read, the section A little bit of History was organized by chronological order. Notice that the first sub-section provide a very broad summary of the history. Then, the following subsections are organized from the earlier years to the latest. In this way we now that the first form of Organization occurred under the GATT a few years after the end of World War II. The first GATT took place in Havana, later in other cities until the famous Uruguay Round which preceded the creation of the WTO in The most recent Ministerial Conference took place in Doha in 2001.Let s take a look at some words that indicate chronology and are taken from the text. by (specific time / year or decade) By the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the new areas such as services and intellectual property. during (period of time) The Tokyo Round during the seventies was the first major attempt to deal with trade barriers that do not take the form of tariffs, and to improve the system. from (specific point in time) to (specific point in time) The last and largest GATT round, was the Uruguay Round which lasted from 1986 to 1994 and led to the WTO s creation. until (specific time/ event) The first GATT took place in Havana, later in other cities until the famous Uruguay Round which preceded the creation of the WTO in in (year, month, season, decade) For almost half a century, the GATT s basic legal principles remained much as they were in on (day, date) Since (specific time or period marking the beginning of a state or action The WTO s creation on 1 January 1995 marked the biggest reform of international trade Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system.

40 40 Other common connectors include Before, after, ago, later, afterwards. Can you find an example of any of these in the text about the WTO? A good way to understand texts organized by chronological order is by creating a Timeline. A Timeline is a graphic representation of events in chronological order. It is usually represented as a horizontal line from which dates stem out sequentially. Under each date brief notes on the events occurred are written. Others models display a chart in which dates are organized vertically (from the earliest dates to the most recent ones) on the left column and brief notes on the event that happened in each date are displayed on the right column. Let s say you want to create a timeline of the WTO. You would use a model like this. From the text we know the WTO was created in 1995, yet we cannot start from 1995 because we would be leaving out all the events that preceded this year. The right date to start would be 1947, the year GATT was created countries sign the General Agreement on Tariffs and Trade (GATT) in Geneva, Switzerland, The WTO was created 2001 Read the section on the history of the WTO and complete the timeline.

41 41 Exercise Now you are given another text on the history of the WTO. Read the text and... Find all the indicators of chronology, the words that show you the passage of time. Underline them. Make your own timeline of the events here described The multilateral trading system past, present and future The World Trade Organization came into being in One of the youngest of the international organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War. So while the WTO is still young, the multilateral trading system that was originally set up under GATT is well over 50 years old. 50 years of exceptional trade growth The past 50 years have seen an exceptional growth in world trade. Merchandise exports grew on average by 6% annually. Total trade in 2000 was 22-times the level of GATT and the WTO have helped to create a strong and prosperous trading system contributing to unprecedented growth. The system was developed through a series of trade negotiations, or rounds, held under GATT. The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping and non-tariff measures. The last round the Uruguay Round led to the WTO s creation. The negotiations did not end there. Some continued after the end of the Uruguay Round. In February 1997 agreement was reached on telecommunications services, with 69 governments agreeing to wide-ranging liberalization measures that went beyond those agreed in the Uruguay Round. In the same year 40 governments successfully concluded negotiations for tariff-free trade in information technology products, and 70 members concluded a financial services deal covering more than 95% of trade in banking, insurance, securities and financial information. In 2000, new talks started on agriculture and services. These have now been incorporated into a broader agenda launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November The work programme, the Doha Development Agenda (DDA), adds negotiations and other work on non-agricultural tariffs, trade and environment, WTO rules such as antidumping and subsidies, investment, competition policy, trade facilitation, transparency in government procurement, intellectual property, and a range of issues raised by developing countries as difficulties they face in implementing the present WTO agreements.the deadline for the negotiations is 1 January Taken from:

42 42 GRAMMAR Take a look at these sentences from the text The World Trade Organization a. By the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the new areas such as services and intellectual property. b. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system. c. Whereas GATT had mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, and in traded inventions, creations and designs (intellectual property). The highlighted expressions refer to......an action, state or event that started in the past and continues to the present....an action that happened at a specific point in the past....an action, state or event that happened before a specific time in the past. The grammatical structure highlighted in these sentences is called past perfect, and it is made up of subject followed by followed by. When an adverb (never, mainly, mostly, insistently) is used it is usually placed the auxiliary and the main verb. Take a look at these graphic representations... GATT negotiations expand to new areas Creation of the GATT Creation of the WTO The expansion of negotiations to cover new areas had occurred before the 1980 s GATT provides rules for International Trading Creation of the GATT Creation of the WTO GATT had provided the rules for International Trading before the WTO was created.

43 43 Notice that we often use the Past Perfect together with the Simple Past. The action which was completed before the other action began is put into Past Perfect. GATT had established the rules of International Trade before the WTO was created Past perfect Action that took place before another action Simple past Action completed in a specific point in the past Exercise Complete the following sentences by selecting the correct alternative from the alternatives in brackets. 1. When the GATT came in force, World War II [had ended/ ended]. 2. In November 1947, the 23 GATT delegates [had met/ met] with almost 30 Representatives from other countries in Havana, Cuba 3. Before the Uruguay round, there [had been/ were] other GATT rounds in different cities of the world including Habana, Annecy, Torquay and Tokyo. 4. In 2003, a 54-year-old Korean farming leader [had killed/ killed] himself in protest over WTO policies. Prior to this date, protests against the WTO policies [had never been/ never had been] so violent. 5. In 2004, members of the WTO agreed in Geneva to a framework to revive the Doha Round of trade talks which [had stalled/ stalled] since For more explanations and extra practice on this grammar point go to

44 44 Against The World Trade Organization Getting started A. So far, you have learnt about the principles, structure and history of the WTO. However, you should know that many countries, organizations and individuals oppose the idea of the WTO. In this section, you will learn about these criticisms. B. Before you read the texts for this section, go to the two previous texts on the WTO. Discuss with the class what you have learnt so far about the definition and principles of the WTO. Working with a classmates, try to predict some of the possible criticism you find in the texts. Write them in a piece of paper. C. Now read the two following texts. Which of your predicted criticism can you find in them? The WTO and Free Trade by Anup Shah, July 02, 2007 The World Trade Organization, (WTO), is the primary international body to help promote free trade, by drawing up the rules of international trade. However, it has been mired in controversy and seen to be hijacked by rich country interests, thus worsening the lot of the poor, and inviting protest and intense criticism. Founded in 1995 after the 8-year Uruguay Round of talks, it succeeded the General Agreement on Tariffs and Trade (GATT), which was created in 1948 to lower trade barriers. The scope of the WTO is greater, however, including services, agriculture, and intellectual property, not just trade in goods. The main principles of the WTO boil down to the following: Non discrimination Reciprocity Transparency Special and differential treatment As principles, many of these sound good. Certainly the vast majority of the world s nations believe so for they have signed up to the WTO. However, in reality, these principles seem to be empty proclamation and power and politics seem to really rule the organization. Thus, the WTO has been criticized by various groups and third world countries for numerous reasons, including: 1. Being very opaque and not allowing enough public participation, while being very welcoming to large corporations. (That doesn t help the claims of free, open and democratic!) 2. Some national laws and decisions for safety and protection of people s health, environment and national economies have been deemed as barriers to free trade. Take the following examples: Countries cannot say no to genetically engineered

45 45 food or products that contain genetically engineered growth hormones known to cause health problems 3. Instead of respecting the reasons why there has been special and differential treatment for developing countries, rich countries want to push poor countries to stick to equality, in what would actually be an unequal result (as it would maintain the unequal terms of trade.) A number of countries have also spoken out against the WTO saying that there needs to be more co-operation between the North and South (a general term to refer to the Rich and Developing countries, respectively) with regards to international trade. Another area that causes international tension is the TRIPS agreement that defines how products can be protected from piracy. While just reward for one s efforts is reasonable, politics and power influences have affected how patent processes work and what can or cannot get patented. A major criticism then has been that in its current form, intellectual property rights regimes like TRIPS serve to stifle competition and protect rich nation s investments and profits from piracy in that way. For poor nations it makes developing their own industries independently more costly, if at all possible. As Noam Chomsky points out, The World Trade Organization regime insists instead on product patents, so you can t figure out a smarter process... that impedes growth, and development... It s intended to cut back innovation, growth, and development and to maintain extremely high profits for the big corporations. At the end of November 1999, Seattle saw major governments meet at a WTO ministerial meeting to discuss various trading rules. Seattle also saw free speech cracked down on for the sake of free trade. Enormous public protests ensued. There were many differences in the perspectives of developing and industrialized nation on the reality of free trade by then and how it affected them. It resulted in a WTO failure to agree on many issues. Developing countries were sidelined and one delegate even physically barred from a meeting. How about that for equality and democracy? The ones above is nothing but a brief list. But these simple examples show that the WTO has not lived up to the principles it promotes. Taken and adapted from A. Summarize in your own words the main criticisms of the WTO the author of the text expressed.

46 46 Criticism of the World Trade Organization The stated aim of the World Trade Organization (WTO) is to promote free trade and stimulate economic growth. The actions and methods of the World Trade Organization evokes strong antipathies. Among other things, the WTO is accused of widening the sociological gap between rich and poor it claims to be fixing. Critics contend that smaller countries in the WTO wield little influence, and despite the WTO aim of helping the developing countries, the politicians representing the most influential nations in the WTO (and within those countries or between them, influential private business interests) focus on the commercial interests of profit-making companies rather than the interests of all. Martin Khor argues that the WTO does not manage the global economy impartially, but in its operation has a systematic bias toward rich countries and multinational corporations, harming smaller countries which have less negotiation power. Some examples of this bias are: Rich countries are able to maintain high import duties and quotas in certain products, blocking imports from developing countries (e.g. clothing); The maintenance of high protection of agriculture in developed countries while developing ones are pressed to open their markets; Many developing countries do not have the capacity to follow the negotiations and participate actively; and The TRIPs agreement which limits developing countries from utilizing some technology that originates from abroad in their local systems (including medicines and agricultural products). Khor argues that developing countries have not benefited from the WTO Agreements of the Uruguay Round, and, therefore, the credibility of the WTO trade system could be eroded. According to Khor, "one of the major categories of 'problems of implementation of the Uruguay Round' is the way the Northern countries have not lived up to the spirit of their commitments in implementing (or not implementing) their obligations agreed to in the various Agreements." Khor also believes that the Doha Round negotiations "have veered from their proclaimed direction oriented to a development-friendly outcome, towards a 'market access' direction in which developing countries are pressurised to open up their agricultural, industrial and services sectors." Other critics claim that the issues of labor and environment are steadfastly ignored. Steve Charnovitz, former Director of the Global Environment and Trade Study (GETS), believes that the WTO "should begin to address the link between trade and labor and environmental concerns." He also argues that "in the absence of proper environmental regulation and resource management, increased trade might cause so

47 47 much adverse damage that the gains from trade would be less than the environmental costs." Furthermore, labor unions condemn the labor rights record of developing countries, arguing that the more the WTO succeeds at promoting globalization, the more environment and labor rights suffer. Other critics have characterized the decision making in the WTO as oversimplified, ineffective, unrepresentative and non-inclusive; more active participants, representing more diverse interests and objectives, have complicated WTO decisionmaking, and the process of "consensus-building" has broken down. They argue that the GATT decision making worked in the past because there were fewer countries actively engaged and there was no compulsion for all countries to adhere to the results. They have thus proposed the establishment of a small, informal steering committee (a "consultative board") that can be delegated responsibility for developing consensus on trade issues among the member countries.the Third World Network has called the WTO "the most non-transparent of international organisations", because "the vast majority of developing countries have very little real say in the WTO system". Many non-governmental organizations, such as the World Federalist Movement, are calling for the creation of a WTO parliamentary assembly to allow for more democratic participation in WTO decision making. Dr Caroline Lucas recommended that such an assembly "have a more prominent role to play in the form of parliamentary scrutiny, and also in the wider efforts to reform the WTO processes, and its rules Taken and adapted from B. Complete this diagram with the main areas criticized about the WTO in each text. If some criticisms are common in both texts write them in the area where the two spheres overlap. WRITING In this last activity you will write your own text about the WTO integrating what you have learnt from the different readings in the unit.

48 48 Pre-writing Below, you are given a possible outline for the text you are going to write. Start by completing the outline writing brief notes, facts, dates or relevant details around each circle. Paragraph 1: Definition, principles, purpose Paragraph 5: Your own opinion Paragraph 2: History WTO Paragraph 4: Criticism Paragraph 3: Structure Writing. Start writing your text. Remember to start each paragraph with a topic sentence, that is, a sentence that states what the paragraph is going to be about. Then your following sentences must be related to that topic sentence.

49 49 Editing Review your text considering the following questions: My sentences are complete, i.e there is a subject, verb and complement. Each sentence begins with a capital letter and ends with a full stop or period. Each verb in my sentence agrees with its subject. All of the verb forms are correct and consistent. Each pronoun I use refers back to the correct noun it replaces. The adjectives and adverbs I use are in the correct position in the sentence. The words I use in my sentences are appropriate and effective. I use the new words I have learnt in my text. I check the correct meaning of the words I want to use in the dictionary. I check the spelling of the words I ve learnt. I use capital letters for proper nouns, i.e the names of people and places. After that, post your documents in our online space devoted to the purpose. Remember that version will not be definite. Your classmates and/or teacher will give you other feedback and you will probably have to make a second and maybe even a third version.

50 50

51 51 Getting started E. In this unit, we will learn about the Globalisation, a phenomenon that has had a great impact on International Trade in the last year. What ideas, key words or situations can you associate with globalisation? Write at least five ideas in the diagram below. F. Before reading and discussing about globalisation, think about these questions. Then discuss them in class. 1. What is globalisation? 2. How does globalisation affect your life? 3. What is the effect of globalisation in International Trade? G. As you read the text, bear the class discussion in mind and be ready to come back to these questions. Globalisation Globalisation is a relatively new word used to describe a very old process. It is a historical and economic process that began with our human ancestors moving out of Africa to spread all over the globe. The term "globalisation" was first coined in the 1980s, but the concept goes back decades, even centuries, if you count the trading empires built by Spain, Portugal, Britain, and Holland. Some would say the world was as globalised 100 years ago as it is today, with international trade and migration. (E-cyclopedia)

52 52 The problem with globalisation begins when we try to define it. An accepted definition neither exists in science, nor in the broader public debate. Economist and internationalist Malcolm Waters defines globalisation as...a social process in which the constraints of geography on social and cultural arrangements recede and in which people become increasingly aware that they are receding... British sociologist Anthony Giddens, defines globalisation as...an intensification of worldwide social relations, via which faraway places are linked together in such a way that events in one place are affected by processes taking place many miles away, and vice-versa... This phenomenon could be a great deal of different things, or perhaps multiple manifestations of a prevailing trend. It has become a buzzword that some will use to describe everything that is happening in the world today. Globalisation came to be seen as more than simply a way of doing business, or running financial markets - it became a process. From then on the word took on a life of its own. Centuries earlier, in a similar manner, the techniques of industrial manufacturing led to the changes associated with the process of industrialisation, as former country residents migrated to the overcrowded but booming industrial cities to tend the new machines. Globalisation can be seen as a positive, negative or even marginal process. And regardless of whether it works for good or evil, globalisation's exact meaning will continue to be the subject of debate among those who oppose, support or simply observe it. Checking your understanding of the text. Read the following statements; are they true or false according to the text? Write T or F next to each statement. Be ready to explain your answers for false statements. 1. There is universal consensus on what globalisation is 2. Some people think the word is new but the process it refers to isn t 3. International trade and worldwide migration are considered key elements in globalisation. 4. Everybody has welcomed happily the process of globalisation. 5. The word globalisation started to be used 100 years ago.

53 53 THE DIMENSIONS OF GLOBALISATION The dimensions of globalisation are very closely related to each other. When trying to draw differences between each of them, it is essential to see that these are very difficult to isolate. They are all interconnected since they are derived from the process of globalisation. The global networking of players and subject areas counts as a particular feature of globalisation. important driving force. The various dimensions involved form interfaces with 'globalisation, since it is important to envisage all factors that are a part this phenomenon, and the fact that these factors are in no way exhausted in economic processes, even if economic globalisation makes up the cause and is an Economic Dimensions Examples of each dimension can be found in the daily press, whereby the economic dimension is normally placed in the centre of the discussion, samples rank from enormous growth in trade or direct investments, globalisation of the financial markets, transnational integrated production, location competition of states and regions, end of national economies. Environment as a Dimension Global problems such as the warming of the earth's atmosphere, the ozone hole, and the deforestation of the tropical rain forests best illustrate globalisation, since global problems are clearly being dealt with which need to be approached on a global level. The Social Dimension The world is turning into a 'global village', new communication societies (chat, e- mail) communicating across great distances is being added to traditional societies such as the family or neighbourhood.

54 54 The Cultural Dimension Movies can be seen worldwide which allows us to know the culture, values and expectations of a particular country no matter how distant. However, local and regional cultures do not become extinct because of this. On the contrary, the reflection on such cultures counts as one of the accompanying characteristics of globalisation, which is why the term 'glocalisation' has been introduced to the debate. The political dimension Politics has to battle enormous problems. Globalisation and location competition limit the amount of flexibility retained by national politics. Many problems can only be dealt within a measured way at an international or global level. New forms of politics and arenas need to be found. European integration is seen as a promising response to the challenges of globalisation. But globalisation is not actually guilty of everything that it is made out to be. Frequently, it serves politicians as a scapegoat and all-purpose weapon for argumentation. This aspect becomes clear as soon as examples from politics are taken, which do not count as interfaces to globalisation. Checking your understanding of the text. Complete the diagram by adding areas or examples from the text that fall into each of the dimensions. Add one example of your own to each dimension. movies Global warming

55 55 CAUSES OF GLOBALISATION Complex phenomena can only be explained multicausally. There is no controversy about this in the globalisation debate, however all else remains disputed. Depending on the understanding taken as the basis for globalisation, other causes and forces are projected into the field of vision. Without being complete, the image below illustrates some of the elements most frequently cited as causes of globalisation. Technological innovations, particularly in the field of information and communication, have played and still do play a central role. The Internet represents a symbol for globalisation in many respects. The globalisation of the financial markets, the lightening-quick transfer of unimaginable sums of money around the globe would be impossible without this technology, just as the organisation of transnational production would be and much more. The enormous increase in trade as a further central element of commercial globalisation results not least from the fact that transport costs have sunk rapidly, and goods can be transported more quickly. This applies to the service sector in particular. Products such as software or databases can be sent from one corner of the world to the other over data lines in seconds. The end of the Cold War is also frequently named as a cause. Whereas the world was divided up into two camps during the East-West conflict, this separating influence crumbled in the years following 1989/90 following the fall of the Iron Curtain. The former Eastern Bloc countries have opened their borders to the world market. Global problems have played a very central role, above all at a conscious level. The presence of one world stores in the highly developed industrial nations is not the only evidence of this. Globalisation problems require an internationalisation of politics, and the promotion of an international consciousness. Organisations like Greenpeace or Amnesty International, who have dedicated themselves to global topics such as the environment or human rights, are global players in this field. The beginnings of a global society can be seen quite clearly. But without the liberalisation of world trade within the framework of GATT or the WTO, the developments made possible by globalisation would, in fact, have been improbable.

56 56 Globalisation describes the way that world trade, culture and technologies have become rapidly integrated over the last 20 years, as geographic distance and cultural difference no longer pose an obstacle to trade. New technologies have increased the ease of global communication, allowing money to change hands in the blink of an eye. International bodies such as the World Trade Organisation and the European Union have been created to help reduce barriers to trade and investment. To sum up, Globalisation involves... The opening up of trade which allows goods and services to travel across the world more freely. An increase in foreign investment - companies investing overseas by building plants, contracting subsidiaries or buying stock in foreign countries. The opening up of capital markets which increases the flow of money across the world. Improved access to communication - from the development of new technology like the internet to cheaper plane tickets. Checking your understanding of the text. A. Now that you have read about globalisation, its definition, dimensions and causes, go back to the questions in the getting started section and discuss them again with the class. B. Complete the following diagram summarizing the information from the texts you have read so far.

57 57 Globalisation Definition Dimensions Causes

58 58 Getting started A. To this point, you have learnt many things about globalisation. In this next section, you will read about the disadvantages and disadvantages. Let s start by making our own list. Write three advantages and three disadvantages of globalisation. Then compare your list with a partner s Globalisation Advantages Disadvantages

59 59 B. Now you are going to read a text that discusses both advantages (pros) and disadvantages (cons) of globalisation. As you read the text, focus on finding the answers to these questions. What are the pros of globalisation? What are the cons of globalisation? Are the advantages and disadvantages you listed before reading the text similar to the ones listed in the text? The author explains both positive and negative sides of globalisation. However, does he favour one of the two sides? If so, which one? What words, phrases or other elements make you think so? Pros and Cons of Globalization By Poushali Ganguly Globalization has made world a smaller place. Let s know how, it's pros and cons and it's general impact. Globalization refers to the absence of the walls of matchboxes that every country had, between themselves based on suspicion, mutual distrust and ambition. We were different countries, in fact divided into worlds, and therefore could never manage to deal with natural holocausts and deadly epidemics, which time and again challenged us. Globalization has strengthened the nexus and has helped us to know each other s need in a better way. It has helped to demolish those walls that separated us and curbed our natural identity of being fellow human beings. Globalization has primarily become a fiscal term but its impact is not limited to the economy of the countries only, the term globalization actually refers to every aspect of life like cultural, social, psychological and of course, political. It is true that the impact of globalization is visible and affects largely the politics and the economy of the country but its effect on the mindset and the culture is noticeable gradually in the way people think and react. It s like the Iceberg theory wherein what we do and say are at the tip and what we think and believe is at the base. The base is not visible but manifestations at the top are conspicuous. It applies here as well where people do not change abruptly but may be after a decade the change starts showing and seems radical.

60 60 Pro-globalization Globalization is not a new phenomena, the base was laid long back when the Dutch East India Company and the British East India Company started trading with India. In history there were trade relations between different countries like Arabia and Egypt and now in modern times that has translated into Globalization or Free Trade. It s true that ultimately all the free trade resulted in the white man taking the burden proactively but then globalization leads to more employment and higher standard of living, especially among the developing countries. Theories suggest that globalization leads to efficient use of resources and benefits all those who are involved. According to liberalists, globalization will help the whole world to deal with crises like unemployment and poverty. It will help us to raise the global economy only when the involved power blocks have mutual trust and respect for each other s opinion. Globalization and democracy should go hand in hand. It should be pure business with no colonialist designs. The way we have developed in the last 10 years, globalization seems to have given us good returns. Globalization has made the life of the third world citizen a completely different story. There are so many foreign companies that have made way to Orient and have made India a brand name all over the world. Pros and Cons of Globalization The pros of Globalization are many these are some of them: Now there is a worldwide market for the companies and for the people there is more access to products of different countries. There is a steady cash flow into the developing countries, which will gradually decrease the dollar difference to other currencies. Due to the presence of a worldwide market, there is an increase in the production sector and there are lots of options for both companies and consumers. Gradually there is a world power that is being created instead of compartmentalized power sectors. Politics is merging and decisions that are being taken, are actually beneficial for people all over the world. There is more influx of information between countries, even if they do not have many things in common. There is cultural intermingling and each nation/country is trying to learn about the other s cultural preferences and in so doing, we are actually coming across things that we like and adopt as our own. Since we share financial interests, corporations and governments are trying to sort out ecological problems for each other. Socially, we have become more open and tolerant towards each other and they who live in the other part of the world are not aliens as we had always thought. There are examples like now Indian girls work in call centers and work nights, which was a taboo even two years back. We are celebrating Valentine s Day, scraping on Orkut, watching the Idol series, Fear factor, the Indian version Big Brother. There is a lot of technological development that we have undergone over the years. There are fewer brain drains since Asians are working in their own country though for a foreign company but are earning foreign exchange for their country. There are cons as many as pros, which are as follows:

61 61 It is true that Europeans are losing jobs and that is posing a problem for them since the companies are outsourcing work to the Asian countries since the cost of labour is low and that profits companies considerably. There is immense pressure on the employed Europeans who are always under the threat of the business being outsourced. Corporations are building up units in other countries equally well equipped as they have done at their own country, thus transferring the quality to other countries. There are some experts who think that globalization is also leading to the incursion of negatives like communicable diseases and social degeneration. There is also a fear of corporations ruling the world because there is a lot of power, which is invested in them and by them. For nations that are at the receiver s end are also giving up the reins in the ends of a foreign company which might again lead to a sophisticated form of colonization. Impact of Globalization Globalization has made way for free trade and business and has boomed communication among various parts of the globe. It has potential to make this world a better place to live in. It is changing the political scenario thus deep-seated problems like unemployment; poverty and shift in power are coming to the picture. The marginal are getting a chance to exhibit in the world market. The term "brand" is catching up in the Asian countries. It, however, is not only modernizing but also westernizing and to an extent also sinicizing the native cultures. The power play is leading to the linguicide or linguistic, cultural and traditional genocide. That is probably where we need to keep a check and not let enthusiasm go wild. There has been significant de-localization that needs individuals to be more tolerant since face-to-face interaction is no more the order of the day. One American is trying to sort out his billing issue of his mobile phone with an Indian who is not a direct employee of the service provider. Now that sounds complicated and is complicated and has to be dealt with carefully. Taken and adapted from: Checking your understanding of the text Did you find the answers to the questions presented before you read the article? Work with a classmate and compare your answers. Be ready to discuss with the whole class.