World Trade Organization

Updated on January 31, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is World Trade Organization (WTO)?

The World Trade Organization (WTO) is a global regulatory organization that deals with rules for trade between various nations. It guides producers, exporters, and importers of goods and services in conducting their businesses. WTO is where trade agreements are negotiated, and problems arising from trade are solved.

World trade organization

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The WTO also assists its members in utilizing trade to improve people’s lives, create employment opportunities, and raise living standards. It further aims to expand global trade with maximum utilization of resources.

Key Takeaways

  • The World Trade Organization is a global regulatory organization that deals with rules for trade between various nations.
  • One of the critical functions of the WTO is to ensure the enforcement of fair and transparent trade practices by providing a dispute settlement mechanism.
  • The WTO endeavors to lower tariffs, eradicate discriminatory practices, and promote fair competition among member countries, facilitating market expansion and stimulating economic growth.
  • The WTO provides technical assistance and capacity-building programs to developing countries, helping them integrate into the global trading system.

World Trade Organization Explained

The World Trade Organization is an organization established to facilitate trade between countries. The world trade organization headquarters is located in Geneva, Switzerland, and was established on January 11, 1995. There are 160+ world trade organization members as of 2023. The WTO was established to deal with goods and services, whereas its predecessor, the GATT (General Agreement on Tariffs and Trade), only dealt with trade in goods.

The Ministerial Conference is the highest-level decision-making body in the WTO structure. Under the ministerial conference, which meets every two years, the general council meets (the meeting can also happen for trade policy review and dispute settlement). The general council consists of ambassadors and other officials sent by member countries. Goods Council, Service Council, and intellectual property Council, also known as the TRIPS function. It is mandated that all member councils participate in all councils and committees, with a few exceptions.

The organization works on certain fundamental principles (also termed as WTO purpose):

  • The WTO promotes non-discrimination by ensuring that countries do not discriminate against the products and services of their trading partners.
  • Low trade barriers (including taxes and tariffs) are to be set by countries to ensure and encourage trade.
  • The WTO encourages investments in its member countries by providing stability and predictability through its steps.
  • It encourages fair competition by avoiding export subsidies, product dumping, etc.
  • It promotes trade in developing countries and gives importance to environmental protection. However, it prevents countries from using it as a deterrent or a tool for discriminatory practices. Etc.

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Functions

Let us look at some of the functions of WTO:

functions of WTO

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  1. Trade negotiations: The WTO facilitates trade between the borders of various countries. They deal with both liberalizations of trade policies and exceptions. Therefore, it covers multiple regulations on goods and services and intellectual property rights. These regulations are often negotiated between members and are not static.
  2. Policy monitoring and implementation: As the international watchdog for trade, the WTO requires governments to make their policies transparent. The member countries must share the details of the laws in place and their measures with the WTO. All WTO members are required to have their trade policies periodically reviewed, with each evaluation involving reports from the country in question and the WTO Secretariat.
  3. Dispute settlement: The WTO recommends procedures to settle disputes. Resolving trade quarrels can ensure a smooth trade flow between countries. Countries can approach the WTO if their rights are breached, and experts will be assigned to deal with it.
  4. Enhancing trade capacity: To build trading capacity, especially for developing countries, the WTO has implemented special provisions such as more extended deadlines for implementing agreements, improvement measures for trading opportunities, etc., which support these nations in developing the required skills and infrastructure.
  5. Outreach: The WTO regulates trade between countries and engages with parliamentarians, non-governmental organizations, and other international organizations.

Examples

Let us look at some examples to understand WTO better:

Example #1 

Suppose a trade dispute emerged between two countries over the ban imposed by one country on the import of poultry, chicken eggs, and other agricultural products due to concerns related to avian influenza outbreaks. The opposing country contested this ban, arguing that the country implementing the ban had more influenza than its own.

This trade dispute raised questions about fair trade practices and the potential impact on domestic producers. Both countries brought the matter before the WTO to address the issue and ensure a balanced trade environment.

Example #2

In October 2022, the U.S. introduced rules that, unfortunately, put China’s semiconductor industry at a disadvantage. The U.S. restricted American tool-made chips from being exported to China and semiconductors designated for artificial intelligence applications (AI). This export curb resulted in China not getting its high-tech components, so it accused the U.S. of abusing export control measures and hindering regular international trade.

The U.S., however, stated it as a regulation based on national security since the issue was described as a national security issue. Even though the issue falls under export and trade, the WTO becomes inappropriate as a platform to discuss the issue, which is still ongoing.

Advantages And Disadvantages

Some of the advantages and disadvantages of WTO are given below:

Advantages

  1. The WTO is a global regulatory body that protects trade policies and provides members with a platform to exercise fair trade rights.
  2. The dispute mechanism provided by the organization helps the countries resolve issues. It settles and solves problems, paving the way for better business and investment opportunities.

Disadvantages

  1. There are conflicts between the trade interests of developed countries and those of developing countries.
  2. The WTO promotes trade practices, and countries need adjustments to align with the policy developments. The least developed nations, in particular, find it difficult to cope due to a lack of physical and human capital or infrastructure.

Frequently Asked Questions (FAQs)

1. What is the quad of the World Trade Organization?

The “quad” or “quadrilateral in the WTO context refers to the meetings between four countries. These four are the largest trading entities in the WTO: Canada, the European Union, Japan, and the United States.

2. How does the world trade organization influence global economic activity?

In a nutshell, it promotes fair trade, opposes barriers, and provides protection through dispute settlements. All these measures ensure the improvement of trading activities. These bring money into the economy through the sale of goods and services. Trading activity hence influences the gross domestic product along with economic growth.

3. How can the world trade organization promote biodiversity?

The WTO can frame laws that prevent the trade of animals and organisms, especially endangered ones that need the utmost protection. The WTO can also frame new trade policies and ensure green and sustainable packaging to reduce the environmental burden.

4. How does the world trade organization help developing countries?

It helps developing countries by breaking trade barriers and improving their capacity to trade through these practices; trade and income increase, eventually enhancing their quality of life.

This article has been a guide to What Is World Trade Organization (WTO). We explain the concept with its functions, examples, advantages, and disadvantages. You may also find some useful articles here –

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