Below is the speech what I delivered today (July 18, 2007) in Japanese Language Class at Yokohama National University, Japan.WTO stands for World Trade Organization and its goal is to liberalize and ensure fair trade practices internationally by means of implementation of rules through negotiations and their applications in member countries. It is a successor of GATT (General Agreement on Tariffs and Trade) established in 1995 and is the supreme body dealing with trade matters worldwide. It is a global body having around 150 member countries, both developed and developing, from all around the world with 30 more in way of negotiation to be a part of it. Decision taken by this organization use to have a deep and significant impact on world trade and it affects interests of the member countries greatly. It also has a provision for a member country to launch complains and negotiate its disputes against another member countries regarding trade related matters.
WTO has witnessed some big successes – “liberalization of telecommunication services” and “tariff-free trade in the field of information technology” are the two great achievements to exemplify. However, there are various disputes arising between the member countries nowadays, mostly between developed countries and developing countries. Both of them are blaming each-other of unfair practices and not complying with WTO rules and regulations. Developed countries are accusing their counterparts for not opening their markets to foreign countries, whereas, in reverse, developing countries are complaining about inappropriate implementation of already negotiated matters, such as SDT (Special and Different Treatment), and are concerned of severe effect on domestic level businesses and industries if they allow a free flow of foreign goods inside.
Two of the biggest issues WTO is facing with these days are about currency manipulation by active interference of governments and huge subsidy in agriculture products. At first, lets consider the alleged currency manipulation.
1. Currency manipulationCurrency manipulation is defined as government's intervention in currency exchange market on large scale to keep value of a currency unaltered with respect to some other currency. Instead of letting value of the currency determined freely by economic conditions of the market, the government starts supplying extra amount of the target currency time to time. This practice maintains enough supply of the target currency in market and hence the exchange rate remains unchanged, even if demand of the target currency has increased. Otherwise, according to the well known demand-supply relationship, with increment in demand of the currency, its value should have gone high.
Now, question arises that why governments do so and why WTO is so much concerned about it. This is practiced to increase export of the local goods to outside countries. If the local currency is devalued, the exported products will be cheaper and the consumers will prefer these cheaper products. Hence, products of this particular country will have an advantage upon products from other countries, what are comparatively expensive. This phenomenon can be made clear by means of a real world example. Malaysia, Taiwan, China and, to some extent, Japan are accused of being involved in this currency manipulations. Because of large Chinese economy and its big impact on world trade, let’s take example of China and its currency RMB. According to China’s economic conditions, 1 US$ should worth around 5 RMB. However, because of the alleged manipulation, the current value is somewhere around 8 RMB. Lets say that current production cost of a china-made wallet is 80 RMB. It is exported to USA and is to be sold there in 80/8 = 10 US$. However, if the RMB would have not been manipulated and its value would have been determined by realistic economic conditions, the same 80 RMB china-made wallet would have been sold in USA in 80/5 = 16 US$. It means that China-made wallet is 6 US$ cheaper in comparison with the same quality wallet made in some other country, say Thailand. If Thailand’s currency is determined by worldwide economic conditions, its production cost would be equivalent to 16 US$ and it can’t sell a similar wallet in less than 16 US$ in USA. Now, a typical consumer in USA, say Mr. Brian, wants to buy a wallet. He goes to a shop and sees two wallets of similar quality, one is “Made in China” having a price tag of US$10, and another one “Made in Thailand” with a price tag of US$16. Now, Mr. Brian will think, why the hell should I pay $16 for a similar wallet which is available in $10 as well. Naturally, he will buy that China-made wallet after paying US$10 using his favorite credit card [remember, he doesn’t have wallet and therefore no cash :-) ]. In this way, China-made product got an advantage over a Thailand-made product of same quality.
Now, what are the benefits to the China Central Bank, and hence to the Chinese government, which was so busy in printing new currency notes and buying US$ in exchange market to control RMB’s exchange rate?!! The bank got more US$ reserves after selling highly demanded RMB, (currently around US$300 billion and it is expected to rise next year) and hence more things to do on international level, e.g. buying more weapons, more investment in foreign market, buying more treasury bonds, which ultimately strengthens its international position. Also, it leads to a sort of monopoly because of large quantity of Chinese products in international market.
Now, why WTO is concerned about this issue?! It is because it hurts other countries’ economy as their products are at a disadvantage level in terms of price and it is against WTO’s goal of fair trade. This issue is getting a gradual momentum and a large scale conflict may arise among concerned countries in near future. As mentioned before, along with China, few other countries (Taiwan and Malaysia) are also alleged to have involved in such kind of practices. After burst of the economy boom in 1990s, Japan is also said to have practiced it to increase its trade surplus until as recently as 2004. In 2004, one can see a sharp rise of Yen against US$.
Nowadays, because of its large economy, member countries are much concerned about currency manipulation in China. Some European countries and USA are also considering a 27.5% of extra import tax (called tariff) on Chinese goods to make it artificially expensive, which, in turn, may lead to greater level of dispute in WTO.
2. Subsidy and free-trade of agriculture productsSubsidy in agriculture is the biggest issue these days in WTO. Negotiations are being carried out at different levels but the issue is still far from getting resolved. At first, what is subsidy? Subsidy is a financial assistance given by governments to their people by various means to bring down overall production cost. Developing countries are complaining of huge amount of subsidy given by developed countries to their farmers. Also, developed countries are demanding a big cut on tariff by developing countries and to let their agriculture products being sold inside without restrictions. If implemented, it would have a devastating effect on developing countries’ farmers because their governments are not capable of providing any subsidy to them. No subsidy means high production cost and hence their products will not to able sustain in market in front of their highly subsidized and low cost foreign counterparts. To maintain a fair competition level, developing countries use to impose a high amount of tariff to make the imported products expensive and competitive to domestic products.
The agriculture products, such as cotton, where negotiations have been successful to cut down the tariff, a severe effect is visible throughout the developing world. The farmers are not getting appropriate price for their products and are facing a substantial decrement in export of cotton products. USA has given a subsidy of more than $4.0 billion in 2004 on cotton and it is increasing year by year. USA, Japan, and European Union have poured a total subsidy of US$16 billion on rice per year. By these subsidies, the production cost of rice has been cut by 72% in USA and hence, if this rice is allowed to be sold without appropriate tariff in a country where there is no subsidy on rice, say India or China, these foreign rice will be much cheaper than the domestic one and local farmers will not be able to compete with these low priced rice. Many countries, including India, are facing a collapse of domestic cotton industries after establishment of open trade in cotton. In developing countries, percentage of people dependent on only agriculture is much more (65% in India) than in developed countries (only 2% in USA) and hence these governments are reluctant in accepting a free trade policy on agriculture products, which is leading to another level of dispute among member countries at WTO.
There doesn’t seem to be an easy solution of these problems because of involvement of other issues, such as politics, in it, unless there is a strong willingness to play fair. Various rounds and meetings have been carried out to resolve these disputes but a success is yet to come. People’s sentiments are also deeply attached with these issues and it can be seen in the scale of demonstrations during WTO meetings.
If someone has a different opinion or comment, please feel free to express.
Thank you.
