Unit 3
BALANCE OF PAYMENT AND INTERNATIONAL ECONOMIC ORGANIZATION
Most of the exports and imports involve finance, i.e., receipts and payments in money. An account of all receipts and payments is termed, balance of payments. “The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time” The term ‘residents’ is broadly interpreted as all individuals, businesses and governments and their agencies. International organizations are classified as foreign residents. Economic transactions which enter into the balance of payments record, involve transfer of goods and assets, or rendering services from residents of one country to the residents of the rest of the world.
The balance of payments record is maintained in a standard double-entry book-keeping method. International trade transactions enter into the record as credit and debit. The payments received from foreign countries entry as credit and payments made to other countries as debit. The balance of payments record is shown in table.
Receipts (Credits) | Payments (Debits) |
| 2. Import of goods |
Trade Account Balance | |
2. Export of services | 2. Imports to services |
3. Interest, profits and dividends received | 3. Interest, profits and dividends paid
|
4. Unilateral receipts | 4. Unilateral payments |
5. Current Account Balance (1 to 4) | |
6. Foreign investment | 6. Investment abroad |
7. Short term borrowing | 7. Short term lending |
8. Medium and long term borrowing | 8. Medium and long term lending |
9. Capital Account Balance (6 to 8) | |
10. Statistical Discrepancy (Error and Omissions) | |
11. Overall Balance = Current Account + Capital Account Balance (5 +9 + 10) | |
12. Change in reserves (-) | 12. Change in reserves (+) |
Total receipts = Total payments |
The balance of payments account is traditionally dividend into (i) trade account (ii) current account and (iii) capital account. However it can be vertically divided into many more components as per the requirements.
A. Trade Account Balance
It is the different between exports and imports of goods, usually referred as visible or tangible items. Till recently, goods dominated international trade. Trade account balance tells as whether a country enjoys a surplus or comprising consumer and capital goods always had an advantageous position. Developing countries with its exports of primary goods most of the time suffered from a deficit in their trade account except most of the OPEC countries. The balance of trade is also referred as the balance of visible trade or balance of Merchandise trade.
B. Current Account Balance
Current account includes Nos. 1,2,3 and 4 in table no.24.1. They comprise Export and import of goods which are traditionally referred as visible or tangible exports and imports and Export and import of services, also known as invisibles. Services include insurance, transport, banking, income from tourism, etc.
Income received and paid in the form of interest, profits and dividends for lending or investing in other countries.
Unilateral receipts or payments which are also referred as transfer payments include gifts, donations, private remittances etc, received by the residents or paid to residents of other countries. Such receipts and payments do not have any counter obligation i.e. they are received free.
C. Capital Account Balance
The capital account records all receipts and payments that involve the residents of a country changing either their assets or liabilities to residents of other countries. The transactions under this title involve direct investment, portfolio investment and borrowings and lending’s from and to other countries.
a) Foreign Investments
b) Direct investment
c) Portfolio investment
d) Short term investment
e) Short term borrowing
f) Medium and Long Term Borrowings
g) Financial Accounts
D. Statistical Discrepancy (Errors and Omissions)
Statistical discrepancy (errors and omissions) reflects transactions that have not been recorded for various reasons and so cannot be entered under a standard hearing but must appear since the full balance of payments account must sum to zero.
E. Overall Balance
Overall balance is obtained by adding up current account and capital account balances.
F. Foreign Exchange Reserves
Foreign exchange reserves in item no.12 shows the reserves which are held in the form of foreign currencies usually in hard currencies like dollar, pound etc., gold and Special Drawing Rights (SDRs). Foreign exchange reserves are analogous to an individual’s holding of cash. They increase he has a deficit. When a country enjoys a net surplus in current and capital accounts combined, it results in a positive balance in overall balance is negative, it leads to decrease in reserves.
G. The Basic Balance
The basic balance is the sum of the current account and capital account, when the two sides of the current and capital accounts are equal i.e. when the difference between the two is equal to zero, the basic balance is achieved. An increase in deficit or reduction in surplus or a move from surplus to deficit is considered worsening of the basic balance.
H. Deficits and Surpluses
The balance of payments always balance in a technical or accounting sense(in a double entry record) The balance in the balance of payments implies that a net credit in any one of the items must have a counterpart net debit in another. When the total credits and debits of all accounts balance, we say the balance of payments balances.
It is convenient to distinguish between two types of transactions or flows in the balance of payments. They are autonomous transactions (flows) and accommodating transactions (flows).
Autonomous flows take place in the ordinary course of foreign trade and they are independent of other items in the balance of payments. Autonomous transactions are undertaken for their own sake, i.e., for the profit they involve or the satisfaction they yield. They are voluntary and deliberate in character. They comprise virtually all exports and imports of goods and services, since they are generally undertaken directly for the profit to be made. They also include unilateral transfers, which are generally intended to reduce deliberately fundamental differences between the incomes of individuals or of nations. They also include most long term capital movements as well as the many short-term capital movements motivated by a desire either to earn a higher returns or to make a speculative gain.
Accommodating transactions, on the other hand, are not undertaken for their own sake. They have their source in the autonomous i transactions in the balance of payments which leave a gap to bei filled. Accommodating flows take place to fill such gaps. According to B.J. Cohen, "accommodating flows consist almost entirely of cash payments or receipts (including transactions in official reserves). They are the residual money flows in the balance of payments and as such they reflect increases or decreases of the liquidity of a country. They are, therefore, the best measure of surplus or deficit in the balance of payments."
Autonomous flows take place in the ordinary course of foreign trade and they are independent of other items in the balance of payments. Accommodative flows take place to equalize the balance of payments.
Credits $ | Debits $ |
Autonomous receipts 1200 | Autonomous payments 1500 |
a) Autonomous exports (visible and invisible) 800 | a) Autonomous imports (visible and invisible) 1300 |
b) Autonomous unilateral receipts 100 | b) Autonomous unilateral payments 50 |
c) Autonomous capital receipts 300 | c) Autonomous capital payments 150 |
Accommodating receipts 300 | 2. Accommodating payments Nil |
1500 | 1500 |
Disequilibrium experienced by a country can be categorised as follows:
1. Short-run Disequilibrium: It is a disequilibrium that prevails for a year or for few quarters. Such deficits occur due to a sudden increase in demand for foreign goods and services. Domestic problems may arise due to the failure of monsoon, natural calamities or political disturbances etc, which may result in an increase in imports or decline in exports. Such disturbances do not require major policy decisions. They can be corrected through short-term borrowings or other adjustments in the capital account.
2. Long-run Disequilibrium: Disequilibrium that prevails continuously for a long period of time or chronic and persistent is called long-run disequilibrium. The IMF terms such disequilibrium as "fundamental disequilibrium". A long-run disequilibrium is caused by continuous excess demand for foreign exchange rather than the supply. The main causes for a fundamental disequilibrium can be found in (i) excess imports for planned economic development (ii) continuous increase in population compelling a country to import essential goods (iii) domestic investment exceeding domestic savings (iv) increase in the price of imports e.g. increase in crude oil prices, and (v) decline in the demand for exports due to technological improvement and change in habits, taste, income etc. in countries where these goods are exported.
For correcting a long-run or fundamental disequilibrium, a country has to export more and import less. Very often IMF atter studying the problem, recommends certain policy measures to enable a country to increase its exports and Simultaneously to reduce imports.
3. Cyclical Disequilibrium: As the countries are interdependent they are subject to international transmission of economic ups and downs or what is called as international transmission of cyclical changes. Economic activities are subject to business cycles which have four phases: (1) prosperity or boom (2 recession (3) depression and (4) recovery. During the prosperity period, imports increase. Exports may increase during recession or depression due to a decline in price. Imports usually decline during this period owing to reduced income. Besides, if economically strong countries like U.S.A. undergo a recession or depression phase of a business cycle, it would affect many other countries. Countries suffering depression will have more unemployment and less income thus discouraging imports from other countries. Similarly, a boom period encourages imports into this country. Thus some countries may have a problem of deficit because of the decline in demand from other countries due to their recession or depression. In other words, disequilibrium is the result of the effects of business cycle at home as well as in other countries.
As most of the cyclical periods are short in nature, there are no special measures adopted to overcome such disequilibrium’s. Measures are primarily directed to control cyclical changes which in turn also help overcome disequilibrium in the balance of payment.
4. Structural Disequilibrium: It arises due to structural changes in the economy affecting demand and supply, relations in commodity and factor markets.
Exports of a country may decline if in the rest of the world demand is diverted to other commodities due to a change in taste, fashion, habits or income. Demand for raw material may decline either due to technological changes which reduce the raw material content or discovery of substitutes. Factor market may also undergo structural changes due to changes in the supply of factors of production specially labour and capital. A shortage or excess supply of these factors may change their prices and accordingly the commodity prices which in turn affect the exports.
Causes of Disequilibrium and Measures to Correct Disequilibrium in BOP 137 Most of the developing countries have been undergoing structural adjustments in recent years. Along with this, international relations have also been changing under the W.T.O. regime. All these changes cause a certain extent of disturbance in the balance of payments of such economies.
CAUSES OF DISEQUILIBRIUM
Any disequilibrium in balance of payments is the result of imbalance between receipts and payments for exports and imports. A deficit in balance of payments of which we are more concerned is obviously the result of imports being more than exports. Let us, therefore, discuss the various causes which result in a disequilibrium (deficit) in the balance of payments.
1. Increase in Imports:
(i) Import of Essential Goods and Services: Countries which do not have enough supply of essential goods like food items or raw materials (crude oill or essential capital equipment are required to import them. Being essential items it is not possible to reduce their imports.
(ii) Development Programmes: Developing economies which have embarked upon planned development programmes require to import capital goods, raw materials and, highly skilled and specialised man-power unavailable or in short supply at home. Since development is a continuous process, imports of these items continue for a long time landing these countries in a balance of payments deficit.
(iii) Population Growth: Most countries experience an increase in population and in some like India and China the population is not only large but continues to increase. To meet their needs, imports become essential and the quantity of imports may increase as population increases.
(iv) Demonstration Effect: An increase in income coupled with the awareness of the higher living standard of foreigners, induce people at home to imitate the foreigners. Such a behaviour is termed 'international demonstration effect'. When people become victims of demonstration effect, their propensity to import increases.
(v) High Income and Price Elasticity of Demand: When a country experiences increase in income as a result of economic growth demand for imports increases if income elasticity is greater than one. Similar is the case when imports become cheaper.
2. Low or Decline in Exports: Disequilibrium is also caused by slow increase or at times a decrease in exports. The reasons for this are:
(i) Low Income Elasticity of Demand: If a country experiences a low income elasticity of demand for its exports then the exports may not increase. Most of the poor countries find that their primary goods exports have a very low income elasticity of demand.
(ii) Discovery of Substitutes: Technological and scientific improvements result in finding out new substitutes. For example, plastic for rubber, synthetic fibre for cotton alternative sources of energy, etc. Technological improvements also reduce the raw material requirement or content thus reducing the demand for raw materials.
(iii) Protectionist Trade Policy: Though most developed countries advocate free trade they do not actually follow it in practice, as the case with USA under President Donald Trump. Taking advantage of the existing international trade rules and regulations, they impose many restrictions mainly non-tariff barriers (NTB) on their imports. NTBs which may take the form of place of origin, quality requirements, social dumping etc. restrict the exports of developing countries.
(iv)Inflation: Exports become costlier due to inflation leading to decline in exports. Demand for imports may increase as they may be cheaper than domestic goods and services.
3. Cyclical Transmission: Business cycles affect international trade. Recession or depression in one or more developed countries may affect the rest of the world as was the case during the 1930s depression. "The negative effects of trade cycle ie. low income, low demand etc. are transmitted from one country to another. Low demand for imports causes deficit in exporting countries. The 2007-09 financial crisis affected the world economy resulting in an increase in deficit in balance of payments of many countries.
4. Capital Flight: When restrictions on the movement of capital are reduced or eliminated, there is a tendency among those who possess money capital to transfer it to those countries which yield higher returns. If economic and political troubles are sensed then capital is the first to run away from that country. Speculation in a foreign exchange market may also result in capital flight as witnessed during 1990s in some south-east Asian countries.
5. Structural Adjustments: Many countries specially those which were subject to more controls by the governments or central authorities, have in recent years been undergoing structural changes. Their economies are being liberalised, private sectors have been given more freedom and responsibilities. As a result, investment, income and other macro variables have been changing, resulting in changes in both exports and imports, more often imports in the initial phase. Changes in consumer's preferences, improvement in technology and scientific knowledge lead to changes in exports and imports resulting in disequilibrium.
6. Globalization: The world economic environment has been undergoing a change under the World Trade Organisation (WTO). There has been a more liberal and open atmosphere for international movement of goods, services and capital (foreign investment). Competition has been increased due to the globalization of the international economic relations. The emerging new global economic order has brought in certain problems for some countries which have resulted in the balance of payment disequilibrium. The current global economic problem is also affecting the balance of payments of money economies.
Generally, the burden of adjustment falls on the country experiencing a balance of payments deficit rather than on a country having surplus. We, therefore analyse the measures to correct disequilibrium in the balance of payments with respect to deficit in the BOP.
The principle involved in the measures adopted to correct disequilibrium (deficit) is to increase exports and to reduce imports To achieve this task a country is required to make exports cheap and imports costly.
The important measures adopted to correct balance of payment disequilibrium (i.e. deficit) are discussed below:
1. EXPENDITURE REDUCING (ADIUSTING) POLICIES The expenditure reducing policies are used to reduce expenditure in the economy in order to curb a deficit in the balance of payment. This policy is also known as deflationary policy. The two important tools used to reduce expenditure are:
(a) Tight monetary policy, and
(b) Contractionary fiscal policy
(a) Tight monetary policy: It involves a reduction in money s and an increase in the interest rate. This will discourage investment and reduce income and imports. It will also lead a short term capital inflow or reduced capital outflow due to higher interest rate. Since it will lead to fall in prices, it can also lead to rise in exports.
(b)Contractionary fiscal policy: It refers to a reduction in government expenditures and/or increase in taxes. These measures will reduce domestic expenditure and hence lead to a fall in imports. It can also lead to fall in prices and, therefore rise in exports.
Both monetary and fiscal policies are the important means of implementing expenditure adjusting policies. A country can correct a deficit in the balance of payments by pursuing a tight monetary policy and or a restrictive fiscal policy. This will have a deflationary effect on the national income. It will lead to a fall in imports and increase in exports.
Expenditure Reduction = Deflation— Increase in Exports and Decrease in Imports — Reduction in Deficit in Balance of Payments.
On the other hand, a country having a surplus in the balance of payments can pursue an expansionist monetary and fiscal policies. This will have an inflationary effect on the economy and may, therefore, increase imports and decrease exports. Expenditure reducing policy as a measure to correct disequilibrium s unpopular as it has many negative effects on the economy such I as less investment, more unemployment, less income and finally it leads the country to deflation.
2. EXPENDITURE SWITCHING POLICIES Expenditure switching policies primarily work by changing exchange rates i.e. a devaluation or revaluation of the domestic currency. Devaluation is used to correct a deficit in the balance of Payments and revaluation is used to correct a surplus in the balance payments. Devaluation is often used interchangeably with depreciation, and revaluation with appreciation. The main distinction between the two sets of terms is that devaluation is brought about by monetary authority, and depreciation is brought about automatically by market forces. Devaluation usually adopted under fixed exchange rate whereas, depreciation takes place under floating / flexible exchange rate.
Devaluation aims at influencing the prices of only traded goods and not the general price level as in the case of expenditure reducing policy. Devaluation refers to an official announcement or an act of monetary authority through which the exchange rate is changed i.e. the value of domestic currency is reduced vis-a-vis foreign currency. For example, if the existing rate is70 = $1, the decision to devalue currency by 20 percent will make the new exchange rate 84 = $ 1. Devaluation makes exports cheaper and imports costlier. In the post devaluation period, exports are expected to increase as they become cheaper to foreigners and imports to decrease as they are costlier in terms of domestic currency. Deficit in balance of payments is expected to be corrected due to increased exports and reduced imports. Depreciation like devaluation lowers the value of domestic currency or increases the value of the foreign currency, via market forces.
Both devaluation and depreciation have the same effect on the exchange rate and hence both measures make exports cheaper and imports costlier.
Expenditure Switching = Devaluation/ Depreciation-Exports Cheaper and Imports Costlier—Reduction in Deficit in Balance of Payments.
The above two methods result in expenditure-switching i.e. people switch or divert the expenditure from domestic goods to the goods of the country which devalued its currency or whose currency is depreciated, as they are now cheaper than their own domestic goods. The process is expected to boost exports and reduce imports of the devaluing country.
Conditions for Success
Depreciation and devaluation which make exports cheaper and imports costlier are expected to increase exports and reduce imports thus bringing the balance of payments into equilibrium. The success of both, however, depends on a number of conditions.
i) Elasticity of demand for exports: The elasticity of demand for exports should be greater than one, only then a devaluation can help to increase exports and reduce the deficit in the balance of payments.
ii) Elasticity of demand for imports: One of the requirements for correcting disequilibrium in the balance of payment is to reduce imports. Thus, for the success of the devaluation, the import elasticity of demand must be greater than one.
Marshall and Lerner, the two economists who had made an in depth study of export and import elasticities, concluded that for devaluation to be successful, the sum total of export and import demand elasticities must be greater than one.
iii) Elasticity of supply of exports: If the demand for export increases then the country whose exchange rate has changed must be in a position to increase the supply of export goods to meet the increased demand. It is possible to do so only if the supply of exports is elastic.
iv) Elasticity of supply of imports: When devaluation (depreciation) takes place, the countries, specially the major suppliers of imports must be in a position to adjust their supply. If a country is in a position to adjust its supply (domestic country s imports) as per the reduced demand, then supply of imports is considered elastic. It is inelastic if the trading partners find the devaluing country as a major market therefore find ways and means in selling the same (the earlier quantity) to devaluing country. A country does so because it does not have an alternate market, or a large domestic market to absorb the reduced exports or it is not possible to divert the factors employed in export industries to other industries or sectors.
v) Co-operation by other countries: When exports become cheap due to devaluation or depreciation, the competing countries whose currencies have remained stable, find their exports suffer. To be competitive in the world market they too are compelled to devalue their currencies. Competitive devaluation will wipe out all the advantages enjoyed by the country which was first to devalue its currency. It is, therefore, essential to secure co-operation of other countries, which is rather difficult.
vi) Control of domestic price level: A devaluation or depreciation by itself does not affect the domestic price level. However, imports in the form of consumer goods or inputs for further production having turned costlier affect the domestic price level. Increased exports also bring in more foreign exchange which in turn may increase domestic money supply resulting in an increase in domestic price level. Measures are to be taken to control the domestic price level. Failure on this ground will offset all the gains of devaluation.
The above measures are categorised as monetary measures. Exchange control also comes under this method.
3. DIRECT MEASURES
A deficit country along with expenditure reducing and switching measures may also adopt the following direct measures, which will either restrict imports or promote exports.
(a) Tariffs: Tariffs are the duties (taxes) imposed on imports. When tariffs are imposed, the prices of imports would increase to the extent of tariff. The increased prices will reduce the demand for imported goods and at the same time induce domestic producers to produce more of import substitutes. Non-essential imports can be drastically reduced by imposing a very high rate of tariff.
(b) Quotas: To reduce imports for correcting the deficit in balance of payments, the government may introduce restrictions on the quantity or volume of goods imported. Imports may be restricted through quotas, licensing and even by prohibiting altogether the import of certain items.
(c) Export Promotion: Exports can be encouraged by reducing or abolishing export duties, providing export subsidy and encouraging production of export items by tax concession and other incentives. The government may also help promote export through exhibition, trade fairs, conducting market research and by providing the required administrative and diplomatic help to tap the potential markets.
(d) Import Substitution: Along with the increase in exports, it is necessary to reduce dependence on imports by import substitution. Industries which produce import substitutes require special attention in the form of various concessions, which include (i) tax concession (ii) technical assistance (ii) subsidies (iv) providing scarce inputs etc.
In a highly interdependent world which works under the concept of global economy it is not possible to reduce imports i to a greater extent. Besides it is not possible for every country to think of only exports and not of imports. However, heavy dependence on imports is not advisable on various grounds, economic and political. In the long-run import substitution may promote inefficiency and non-competitive industries.
(e) Financial Controls: They take the form of exchange control and use of multiple exchange rates. Under the exchange control, a government tries to have complete control over all dealings in foreign exchange. The recipients of foreign exchange like exporters are required to surrender their foreign exchange to a central bank in exchange for domestic currency and those who need foreign exchange, like importers, have to buy their foreign exchange from the same bank.
Under the system of multiple exchange rates a country fixes different rates of exchange for the trade of different commodities and for transaction with different countries. The main objective is to maximise the foreign exchange earnings of a country by increasing exports and reducing imports.
The main aim of direct control is to restrict imports. It may be a feasible policy in the short-run, but in the long-run its effect may be harmful to the country. It brings about price distortions which will have harmful effects on production and consumption.
The World Trade Organisation (WTO) came into existence on January 1, 1995 replacing GATT, with a membership of 81 countries. The membership has since increased to 164 countries.
Principles of WTO
The important principles governing the WTO are the following:
1. Non-discrimination: The principle of non-discrimination has two dimensions, that is, the most favoured nation (MFN) and the national treatment.
(a) Most-favoured Nation (MFN): It means treating other people equally. The essence of WTO is a commitment on the part of each signatory to give all other signatories the MFN status. MFN means that each member should treat all the other members equally as the most favoured trading partner. Thus, product made in members' own countries are treated no less favourably than goods originating from any other country. The MFN rule forbids discrimination between the national or other member.
(b) National Treatment: It refers to treating foreigners and locals equally. The national treatment clause forbids discrimination between a member s own nationals and the nationals of other members. Each member should accord to the nationals of other members treatment no less favourable than that it gives to its own nationals with respect to copyrights, patents, trademarks, etc. The foreign products should not be treated less favourably than identical domestic products. Thus, it becomes very difficult for a contracting party to prevent foreign products from competing with domestic products.
2. Freer Trade: Lowering trade barriers is one of the most important means of encouraging trade. The WIO agreements allow countries to introduce changes gradually, through "progressive liberalisation". Developing countries are usually given longer time to fulfil their obligations.
3. Predictability: The multilateral trading system is an attempt by governments to make the business environment stable and predictable. The predictability is achieved through binding and transparency. In the WTO, when countries agree to open their markets tor goods and services, they "bind their commitments. For goods, these bindings amount to ceilings on customs tariff rates. A country can change its bindings but only after negotiating with its trading partners, which could mean compensating them for loss of trade.
The system tries to improve predictability and stability by discouraging the use of quotas and other measures used to set limits on quantities of imports, and also by making countries' trading rules as clear and transparent (public) as possible.
4. Promoting Fair Competition: The WTO is sometimes described as a free trade" institutions, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, WTO is a system of rules dedicated to open, fair and undistorted competition.
5. Encouraging Development and Economic Reforms: WTO system contributes to development and economic reform in the developing countries. The WIO agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries. The WTO has special concern for developing countries, especially least developed countries. They have been given more time to adjust, greater flexibility and special privileges.
Functions of WTO
1. Administrative Functions: WTO facilitates the implementation, administration, and operation and further the objectives of WTO and Multilateral Trade Agreements and also provides framework for the implementation, administration and operation of Plurilateral Trade Agreements.
2. Platform for negotiations: WTO provides a platform for negotiations among the members concerning their multilateral trade relations in matters dealt under WTO agreements.
3. Execution: WTO has to administer the understanding on Rules and Procedures governing the settlement of Disputes.
4. Administering TPRM: WTO has to administer the Trade Policy Review Mechanism (TPRM).
5. Economic Coherence: WTO works with a view to achieving greater economic coherence in global economic policy making, cooperating as appropriate, with IMF and World Bank.
6. The Organization: The WTO is run by its member governments. All major decisions are made by the members as a whole, either by ministers (who meet at least once in every two years) or by their administers or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus. The last Ministerial Conference was held in Buenos Aires, Argentina, 10-13 December, 2017.
7. Status: WTO is officially defined as "the legal and institutional foundation of the multilateral trading system". Unlike GATT, the WTO is a permanent organisation created by international treaty ratified by the governments and legislatives of member countries.
As the principal international body concerned with solving trade problems between countries and providing a forum for multilateral trade negotiations, it has global status similar to that of the International Monetary Fund and the World Bank. But unlike them it is not a United Nations agency although it has a co-operative relationship with the United Nations.
The WTO is different from the World Bank and the IMF. In the WTO power is not delegated to a board of directors or the organisations head. When WTO rules impose disciplines on countries policies, that is the outcome of negotiations among WIO members. Thus, at resent, the WTO is member-driven, consensus-based organisation.
WTO Structure: The WIO is headed by a director general who has four deputies from different member states. The WTOs ruling body is the General Council comprising each member country's permanent envoys. It sits in Geneva on an average of once a month. Its supreme authority is the Ministerial Conference.
The Ministerial Conference is composed of representatives of all WTO members. It is required to be held every two years. The First Ministerial conference was held in Singapore on 9-13 December 1996.It can take decisions on all matters under any of the multilateral trade agreements.
The WTO's Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) introduced intellectual property rules into the multilateral trading system for the first time.
Ideas and knowledge are increasingly important part of trade. Mo of the value of new medicines and other high technology product lies in the amount of invention, innovation, research, design and testing involved. Films, music recordings, books, computer software and on-line services are bought and sold because of the information and creativity they contain. Many products that used to be trade as low-technology goods or commodities now contain a higher proportion of invention and design in their value.
The "intellectual property rights" take a number of forms such a copyright, patent, trademarks, geographical indications, industrial design, lay-out designs and so on. Developed countries are mostly the owners of intellectual property while developing countries are mostly the users of intellectual property.
The extent of protection and enforcement of these rights varied widely around the world. The WIOs TRIPs Agreement is an attempt to narrow the gaps in the way these rights are protected around the world, and to bring them under common international rules. establishes minimum levels of protection that each government ha to give to the intellectual property of fellow WTO members.
The Agreement on TRIPs provides norms and standards for all area of intellectual property including copyrights and related rights, trade marks, geographical indications, industrial designs, patents, layout designs of integrated circuits and protection of undisclosed information. Patents will be available for any invention whether product or process in all fields of industrial technologies. Patent protection is also extended to microorganisms, non-biological and micro-biological processes and plant varieties. Thus, the entire industrial and agricultural sectors and to some extent the bio technology sector will also be covered under the patent protection.
Each country is required to build adequate procedures and remedies into its domestic laws to ensure the effective enforcement of IPRs Such remedies must be made available to foreign property right holders. Disputes over the TRIPs agreement are to be governed by the WIO dispute settlement procedures.
When the WTO agreements took effect on 1 January 1995, developed countries were given one year to ensure that their laws and practices conform with the TRlP's Agreement. Developing countries were given five years, until 2000. Least developed countries have 11 years, until 2006 which was extended to 2016 for pharmaceutical patents. If a developing country did not provide product patent protection in a particular area of technology when the TRIPs Agreement came into force, it has upto 10 years to introduce the protection.
Impact on Developing Countries: Stricter IPR regime under their TRI's agreement can have the following effects on the developing countries.
(a) It may result in price increases in areas where IPR protection has been strengthened. The impact on prices is likely to be more on pharmaceuticals and chemical products.
(b) Better IPR protection could exert a favourable effect on the supply of innovations.
(c) Developing countries could benefit to the extent that they are actual or potential producers of new technology.
(d) The transfer of technology intensive stages of production to developing countries may have been hindered by weak IPR protection regime. The IPR protection could help the transfer of R&D.
Inspite of its possible benefits, it is generally believed that the short run impact of the TRIPs agreement on the developing countries is likely to be negative.
The General Agreement on Trade in Services (GATS) is the first and only set of multilateral rules governing international trade in services. It was incorporated in response to the huge growth of the services economy over the past 30 years and the greater potential for trading services brought about by the communications revolution.
The General Agreement on services has two major across the board requirements. The first is non-discrimination on the basis of the most favoured nation (MFN) and the second is transparency. There is no requirement for an across the board opening up of the services sector. Prior to the Uruguay Round, there was no common set of rules and disciplines governing trade in services.
Objectives: The agreement has 3 main objectives:
(i) To create a multilateral framework of principles and rules for trade in services, including the elaboration of possible disciplines for individual sectors.
(ii) To expand trade in services under conditions of transparency and progressive liberalisation.
(iii) To promote the economic growth of all trading partners and the development of developing countries.
Important Features of Agreement
1. The General Agreement on Trade in Services (GATS) provides a set of multilateral rules which should govern trade in services under conditions of transparency and progressive liberalisation.
2. It spells out certain general obligations such as extension of MFN principles maintenance of transparency and progressive liberalisation.
3. Complete coverage of all service sectors with no service activity being excluded.
4. An obligation to provide national treatment and market access to service suppliers of other members.
5. An obligation not to discriminate between service suppliers of other members (the MFN obligation).
6. Increasing participation in world trade in services for developing countries.
7. Members are free to decide which services will be subject to market access and national treatment commitments in their national schedules.
The Agreement provides flexibility for developing countries to pursue their own development priorities and to open fewer sectors or to liberalize fewer types of transactions in further negotiations.
Narrow Impact: The scope and potential impact of GATS is quite narrow due to the adoption of "positive list" approach to negotiations. Under this approach, countries volunteer the sectors that they wish to open up, as well as the nature of concessions they propose to grant. The positive list approach was favoured by developing countries, since it allowed them to choose the sectoral coverage and extent of liberalisation depending on their development policy objectives.
Countries were required to make binding commitments in terms o market access and national treatment. It is upto each country to decide how far it wishes to go on specific commitments. The initial result of commitments is to introduce transparency, and their binding nature is an assurance that these rules cannot be arbitrarily tightened. All commitments under GATS are non-discriminatory.
There were only limited results achieved by GATS at the Uruguay Round. Therefore, it was decided to continue negotiations in at least three areas i.e., movement of natural persons, financial services and basic telecommunications.
Impact on developing countries: A number of developing countries have taken the opportunity the GATS provides to schedule commitments thereby binding their own domestic reform process. Improvements in the quality of services that will result from liberalization and increased competition will contribute more generally to improved efficiency, consumer welfare and growth in developing countries.
Further, most developing countries have committed themselves to bind or liberalize tourism and travel services, including the liberalisation of foreign investment restrictions for hotel and resort operations. These commitments are likely to improve the supply capacity of this key sector which provides the major source of foreign exchange earnings in a number of island developing countries and least-developed countries.
Shortcomings: GAIS has several shortcomings. They are:
(1) An important short coming of positive list is that it does not prevent an increase in restrictions on categories that have not been included.
(2) The leeway given to governments to specify different types of restrictions according to modes of supply could create incentives to design restrictions so as to divert investment.
(3) The decision to focus negotiations on specific sectors is a recognition of the inherent difficulty of reaching a broad based agreement given heterogeneous modes of delivery.
The Trade Related Investment Measures (TRIMs) Agreement applies only to measures that affect trade in goods. Investment measures are crucial for their impact on trade flows. Investment decisions exert indirect influence via the industrialisation policy, trade policy, employment policy, etc. Under TRIMs industrialized countries had been demanding outright prohibition of measures which have a direct and significant impact on trade, such as export obligation, local manufacturing obligations, indigenization, maximum possible equity participation, etc. On the other hand, developing countries contested this demand on the plea that regulations of foreign investment are not trade related, but are based on development considerations. These countries contended that the GATT provisions were adequate to address the trade effects and no additional provisions were necessary in this regard.
The Agreement on TRIMs prohibits investment measures inconsistent with national treatment or prohibition of quantitative restrictions. Other measures such as local equity requirements, participation of local employees in the foreign firm, remittance restrictions on the profits of foreign firms, foreign exchange restrictions, controlling the use of imported inputs, product marketing requirements, technology transfer requirements, use of specific production technology, import restrictions limiting the import of specified products, etc. are equally considered as deterrents from the foreign investors point of view. The TRIMs agreement provides for discretion in its applicability.
In order to promote the expansion and progressive liberalisation of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners especially developing countries, agreement on TRIMs make the following provisions:
(i) On the grounds of balance of payments the developing countries are permitted to deviate from complying the TRIMs temporarily.
(ii) Each member country is required to eliminate TRIMs within two years from the date of entry into WTO agreement. But this time period is 5 years for developing countries and 7 years for the least developed countries.
(iii) On request, the Council for Trade in Goods may extend the transition period for the elimination of TRIMs for developing countries including least developed countries.
Criticisms of TRIMs
The Agreement on TRIMs has been criticized from the point of view of developing countries for the following reasons:
(i) There is no provision in the agreement to deal with the restrictive business practices of foreign investors.
(ii) The provisions of the TRIMs agreement, when applied to developing countries are likely undermining the strategy of self-reliant growth based on technology, capital goods, etc.
(iii) While reviewing the implementation of the agreement on TRIMs developed countries are bound to make attempts to extend the frontiers of TRIMs prohibited in the list of the agreement.
The WTO agreement has ensured the continuation of an open world trading system, based on nondiscrimination and settlement of disputes within a multilateral framework. The WTO agreement represents the most thorough reform of the world trading system since the first GATT was signed in 1947.
Achievements: The main achievements of WTO Agreements are:
1. It has extended the application of multilateral rules to areas previously excluded, including trade in agricultural products, and textiles and clothing. In addition, the General Agreement on 'Trade in Services (GATS) and the agreements on trade related intellectual property rights (TRIPs) and trade related investment measures (TRIMs) extended the coverage of multilateral trade rules.
2. The establishment of WTO strengthened the mechanisms for reviewing policies, implementing rules, and settling disputes among trading partners.
3. It resulted in significant tariff reductions in industrial goods, as both developed and developing countries are committed to reducing their tariffs.
4. It has incorporated trade in textiles and clothing into the main body of multilateral rules and disciplines. Since 1962, such trade has been governed by quota restrictions agreed bilaterally in violation of GATT's MFN rules.
5. It has taken the initial steps toward integrating international trade in agriculture into the WTO framework. The Uruguay Round requires countries to cap and reduce domestic and export subsidies to agricultural products since they had a distorting influence on international trade.
6. The Uruguay Round did not achieve immediate liberalisation of services but GATS lays down a framework to define multilateral rights and obligations in this area. GATS is the first step in defining rights and obligations in trade in services.
7. Other achievements of the Uruguay Round are the agreements on TRIPs and TRIMs. It has made significant progress in curbing the use of non-tariff barriers and strengthened the rules relating to antidumping, countervailing measures, and the use of safeguard mechanisms.
8. It has made the dispute settlement mechanism more comprehensive and transparent.
Failures: Inspite of substantial achievements of WTO, the WTO has not succeeded in solving some old contentious issues, like the slow pace of trade liberalisation in textiles and clothing. Further the WTO is burdened with new issues which have brought into force the differences between the developed and less developed countries. i There is wide divergence of views and lack of convergence amongst the developed and developing countries, especially on agriculture.
Similarly, the negotiations on market access for non-agricultural products have lacked a convergence on establishing modalities and formulae for actual tariff cutting negotiations so far.
The growing regional trade agreements (RTAs) may undermine their importance of multilateral system of WTO. Thus, there is an urgent need to clearly define the criteria of RTAs.
The critics have pointed out the 10 major drawbacks of the WTO They are:
1. The WTO dictates policy measures.
2. The WTO is for free trade at any cost.
3. Commercial interest takes priority over development.
4. Commercial interest takes priority over environment.
5. Commercial interest takes priority over health and safety.
6. WTO destroys jobs and worsens poverty.
7. Small countries are powerless in the WTO.
8. WTO is the tool of powerful lobbies.
9. Weaker countries are forced to join WTO.
10. The WTO in undemocratic.
Reference-
1. Business Economics P.N Chopra
2. Business Economics by H.L Ahuja