Does WTO actually promote world trade?

Topics: International trade, Free trade, World Trade Organization Pages: 18 (4171 words) Published: October 30, 2014
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 to choose specific contribution schedule based on subsidies and tax policies Framework:
Common agency problem: where several principles attempt to induce a single agent to take action that may be costly for the agent to perform certain menu auction choice Objectives:
1. Individuals: maximize welfare given by income from labour, consumer surplus, net government transfer per capita [fig (2), (3)]
2. Lobby groups: maximize individual members’ welfare in specific industries [fig (4)]
3. Incumbent government: maximize weighted contributions and aggregate welfare Proposition 1: Sub game nash equilibrium is if and only if contributions is feasible for the lobby groups, government decides on price of domestic goods based on its objective within the menu schedule, equilibrium price needs to maximize aggregate welfare of government and the lobby groups

Proposition 2: Ramsey rule which signifies that higher import demand or export supply elasticities will cause trade climate to mimic that of free trade if all sectors are represented by lobbies protected by import tariff or export subsidies, trade policies are applied to all sectors and political power is represented by domestic input/import Further illustrated in Goldberg and Maggi (1999), it is also emphasized that the Grossman-Helpman Model attempts to explain how influence exerted by special-interest groups on policy makers by means of political contributions, and it predicts that cross-sectional differences in protection should be entirely explained by three variables: import elasticity, import-penetration ratio and whether or not the industry is politically organized.

We focus our findings on the existence of

protectionism in organised industries. Goldberg and Maggi state that for organised sectors, the level of protection increases as the ratio of exports to imports increases.

This can be explained by specific-factor owners having more to gain from an increase in the domestic price when domestic output is large, while the...

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
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