Does WTO actually promote world trade?
Executive Summary
This report seeks to explore and discuss the incentives for protection and the role of the World Trade Organisation (WTO). The report will first cover a definition of the key terms, followed by an analysis of the factors that contribute to protectionism.
WTO will then be introduced and the relevance of the organisation and its policies will be evaluated.
1. Definitions of terms
WTO: World trade organization
The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application.
Protectionism is a form of trade policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors. Protectionist policies have been implemented by many countries despite the fact that most mainstream economists agree that the world economy generally benefits from free trade.
2. Factors that contribute towards protectionism
a. Organized industries (G-H Model)
Grossman-Helpman model seeks to prove that special interest groups within specific industries of a country will want to seek trade policies that will maximise their members welfare. Assuming that governments rely on these interest groups for elections, government will likely to choose trade policies which allign with the interests of these groups while at the same time balancing the welfare of the voters.
This will cause countries to implement protectionism instead of following trade negotiations by WTO.
Overview of model:
Assumptions:
1. Government is incumbent
2. Lobby groups are allowed to make contributions to incentify government
This report seeks to explore and discuss the incentives for protection and the role of the World Trade Organisation (WTO). The report will first cover a definition of the key terms, followed by an analysis of the factors that contribute to protectionism.
WTO will then be introduced and the relevance of the organisation and its policies will be evaluated.
1. Definitions of terms
WTO: World trade organization
The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application.
Protectionism is a form of trade policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors. Protectionist policies have been implemented by many countries despite the fact that most mainstream economists agree that the world economy generally benefits from free trade.
2. Factors that contribute towards protectionism
a. Organized industries (G-H Model)
Grossman-Helpman model seeks to prove that special interest groups within specific industries of a country will want to seek trade policies that will maximise their members welfare. Assuming that governments rely on these interest groups for elections, government will likely to choose trade policies which allign with the interests of these groups while at the same time balancing the welfare of the voters.
This will cause countries to implement protectionism instead of following trade negotiations by WTO.
Overview of model:
Assumptions:
1. Government is incumbent
2. Lobby groups are allowed to make contributions to incentify government
References: Bagwell, K. and Staiger, R. (2011), ``What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization,’’ American Economic Review, 101(4), pp. 1238- 1273. Baldwin, R. (2008), ``Big-Think Regionalism: A Critical Survey,’’ NBER Working Paper W14056. Broda, C., Limao, N. and Weinstein, D. (2008), ``Optimal tariffs and market power: the evidence,’’ American Economic Review, 98(5), pp Goldberg, P. and Maggi, G, (1999), ``Protection for Sale: An empirical Investigation.” American Economic Review, 89(5), pp Grossman, G. M. and Helpman, E. (1993), ``Protection for Sale”, American Economic Review, 84(4), pp Ossa, R. (2010), ``A ‘New Trade’ Theory of GATT/WTO Negotiations,’’ NBER Working Paper W16388. (Adapted from Broda, C., Limao, N. and Weinstein, D. (2008), ``Optimal tariffs and market power: the evidence,’’ American Economic Review, 98(5), p