economic integration and wto

7/30/2019 .Economic Integration and WTO

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MAHESH COLLEGE OF MANAGEMENT

Meaning of Economic Integration

Economic integration has emerged as an alternative to the policy of free trade . It is anarrangement in which certain countries having common economic interests and politicalsystem, agree upon to reduce or remove tariff and other trade barriers among themselveswhile retaining them against the rest of the world . In recent decades, the movementtowards the formation of regional economic groups has gained considerable momentum.

In its broadest sense, economic integration refers to the unification of distinct economiesinto a single lager economy. Some of the definitions of the term economic integration areas under:

(1) According to D. Salvatore, economic integration means the "commercial policy ofdiscriminatively reducing or eliminating trade barriers only among the nations joiningtogether".

(2) In the opinion of J.Timbergen, economic integration refers to "the creation of themost desirable structure of international economy removing artificial hindrances tothe optimum operation and introducing deliberately all desirable elements ofcoordination and unification".

(3) B. Balassa defines economic integration "as a process and as a state of affairs". Asa process, economic integration consists of measures which aim at abolishingdiscrimination between economic units belonging to different nations.As a state ofaffairs, it can be represented by the absence of various forms of discriminationbetween countries.

Economic integration is characterized by two important features:

(i) Re-introduction of free trade among the member nations.

(ii) Imposition of a common external tariff policy against the non-member countries.

In the light of these two features, economic integration may be viewed as a

synthesis between free trade and protection.Objectives

The following are the main objectives of economic integration:

(1) To reap economic benefits from achieving a more efficient production structure byexploiting economies of scale.

(2) To pursue non-economic objectives such as strengthening political relations andmanaging migration flows.

(3) To ensure increased security of market access for smaller countries by theformation of regional trading blocs.

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(4) To develop regional infant industries which cannot survive without a protectedregional market. .

(5) To prevent further damage to their trading strength due to further trade diversionfrom third countries.

It may be noted that regional agreements have political objectives and even non-economic dimensions, including national security, increasing of bargaining strengthetc.

5.2 Types of Economic Integration

The essence of economic integration is the economic cooperation among theparticipating countries. Hence, on the basis of the degree of cooperation, economicintegration assumes the following forms:

(i) Preferential trade area or association

(ii) Free trade area

(ill) Customs union

(iv) Common Market, and

(v) Economic union

(vi) Economic integration

Now we have to explain the above different forms of economic integration.

(i) Preferential Trade Area or Association

This is considered to be the most loose form of economic integration. In this case,the member countries lower tariffs on imports from each other. That is, they offerpreferential treatment to the member countries. As regards the non-membercountries, they ikpose their individual tariffs. The classic example of this form ofeconomic integration is the Commonwealth System of Preferences established in1932. It is headed by Britain and comprises of all Commonwealth countries -countries which were the colonies of Britain.

(ii) Free Trade Area

Under this system, the member countries abolish completely both tariff and

quantitative restrictions among themselves. But each country has the freedom tomaintain its own trade barriers against the non-member countries. Examples of thiskind of arrangement are - European Free Trade Association (EFTA) formed in 1959and Latin American Free Trade Association (LAFTA) formed in 1961.

(iii) Customs Union

Customs union constitutes a more formal type of economic integration. In acustoms union, the following features are found:

(a) Member countries abolish all tariffs and other trade barriers amongthemselves.



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(b) They adopt a common external tariff and commercial policy to the nonmembers.

(c) Customs union and free trade area are similar with regard to the abolition of alltrade barriers for the member countries. But the customs union differs from thefree trade area in respect of common external tariff to the non-membercountries.

(d) The customs union is a more close form of economic integration than a freetrade area. In a customs union, all the member countries act as a singleeconomic unit against the non-member countries.

The most well-known customs union is the European Economic community (EEC)formed in 1957 by West Germany, France, Italy, Belgium, Netherlands andLuxemberg.

It was Jacob Viner who put forth the theory of customs union for the first time. Otherwriters who contributed to the theory of customs union include J.E.Meade,R.G.Lipsey, H.G.Johnson, J.Vanek and others.

(iv) Common Market

The Common Market represents a more unified arrangement among group ofcountries than a customs union. Its features are as under:

(a) Abolition of tariff and trade restrictions among the member countries.

(b) Adoption of common external tariff.

(c) Free movement of labour and capital among member countries. There is afree and integrated movement of goods and factors among. the membercountries. The best example of the common market is the European CommonMarket.

(v) Economic Union

Economic union constitutes the most advanced form of economic ' integration. Itsfeatures are as follows:

(a) Two or more countries form a common market.

(b) Member countries try to harmonise and unify their fiscal, monetary, exchangerate, industrial and other socio-economic policies.

(c) Member countries seek to have a common currency and banking system. Thebest example of an economic union is the European union, earlier known asthe European Economic Community.

(vi) Economic Integration:

It is the ultimate and full form of economic integration. It is characterised by thecompletion of the removal of all barriers to intra-bloc movement of goods andfactors and unification of social as well as economic policies. All the members arebound by super national authority consisting of executive, judicial and legislativebranches.



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5.3 Advantages of Economic Integration

The following are the advantages of economic integration:

(i) Economies of Scale

In the case of individual countries, having small internal market have limitedcapacity to expand production.As a result of economic integration, there willbe unrestricted access of the products produced by any member country. Thisinduces expansion of production and helps the full exploitation of theeconomies of scale.

(ii) International Specilisation

Economic integration leads to the attainment of a greater degree of

specilisatton in both production and processes. Specialisation, based on theprinciple of comparative cost advantage stimulates production on a largescale.

(iii) Qualitative improvement in output

Regional economic co-operation among a number of countries fosters quicktechnological Changes. It facilitates larger and easier capital movements . Thishelps the member countries to bring about qualitative improvement inproduction. .

(iv) Expansion of Employment

The advantage of economic integration lies in that it expands employment.

This is due to the unrestricted flow of labour within the region. Expansion ofemployment leads to an increase in income also.

(v) Employment in Terms of Trade

As a result of economic integration, there will be an increase in the bargainingstrength of the member countries vis-a-vis the rest of the world. Thiscontributes to a considerable improvement in the terms of trade of the membercountries.

(vi) Increase in economic efficiency

Economic integration encourages competition in the region. Competition helpsto maintain a higher level of economic efficiency of the group as a whole.

(vii) Improvement in living standard

Economic integration goes a long way in improving the living standards of thepeople of the member counties. This is made possible by availability ofsuperior varieties of goods at reasonable or competitive prices. The increasein employment rise income also helps to improve the living standards of thepeople of he member countries.

(viii) Better allocation of resources

Since economic integration involves removal of trade restrictions it leads tobetter allocation of resources in the countries concerned.



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(ix) Achievement of common goals

Economic integration helps the member countries to achieve common goals

like full employment, high rates of economic growth, reduction in incomeinequalities etc.

(x) Trade creation:

Trade creation effect of a customs union refers to the expansion of tradebetween the member countries owing to the elimination of inter -union tariffs.By shifting the production from a higher cost sources to a lower cost source,trade creation effect constitutes a movement towards freer trade within theunion.

5.4 Benefits of Economic integration to the developing economies:

In the context of the developing economies, economic integration has acrucial role to play in accelerating their pace of economic development. Thedeveloping economies enjoy the following benefits from economicintegration.

(1) Expansion of trade:

By removing trade barriers, economic integration helps the member countriesto expand their trade.

(2) Trade creation:

The formation customs union brings about trade creation in the developing

economies. It means that goods which were produced b~ ~gh-cost partnersare now replaced by low-cost producers within the region.

(3) Increase in Gains from Trade:

By facilitating the movement of resources from less efficient tomore efficient lines of production, economic integration increases the gainsfrom trade to the developing economies.

(4) Expansion of Market:

Economic integration contributes much to the development and expansion ofmarkets in the developing economies.

(5) Advantages of Competition:Economic integration confers advantages of competition to the developingcountries. They include - increase in efficiency, innovation, reduced costs etc.

(6) Economies of scale:

By integrating their economies, the developing economies can reapeconomies of scale. This is made possible by the establishment of newindustries and expansion of the existing industries.

(7) Foreign Investment:

Economic integration helps the developing economies to attract foreign



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investment in the new manufacturing industries that enjoy economies of scale.

(8) Improvement in Terms of Trade:

It is a well known fact that the developing economies suffer from adverseterms of trade. Economic integration is helpful to them to improve theircommodity terms of trade. This is possible by the production of importsubstitutes and increasing exports to the non-member countries.

5.5 Effects of Economic Integration

Economic integration, especially the formation of a customs union, brings aboutsignificant and farreaching effects on the countries concerned. These effects areclassified into Static Effects and Dynamic Effects.

I. Static Effects

Static Effects of it customs union "involve a reallocation of resources amongexisting industries, using existing supplies of the factors and existingtechnology".

Static effects are classified into Production Effects and Consumption Effects.

Production Effects:

These effects were analysed by Jacob Viner. They refer to the changes in thesources of supply or production bases of a commodity resulting from the

formation of the customs unions.Jacob Viner has analysed the Production Effects in terms of the TradeCreation Effect and the Trade Diversion Effect.

Trade Creation Effect:

It refers to the beneficial effect of the customs union of shifting supply from ahigh-cost domestic source of a partner.

The concept of Trade Creation is illustrated with the help of the followingexample. Let us assume that the home country A is the least efficient countryand its unit cost of producing a calculator is Rs.300. In its partner country, let

us say country B, which has greater efficiency, the unit cost production of thecalculator is Rs.240. The rest of the world is represented by non-membercountry C, which is the most efficient and the average cost of producing thesame calculator is 200. If before the formation of the trade union, the homecountry A imposes 100 percent tariffs on all imports, the unit costs in Band Cbecome Rs.480 and Rs.400 respectively, as shown in the following table:

Trade Creation



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CountryUnit Cost

(in Rs.)

Unit Cost(in Rs.)

After 100%import tariff

Unit Cost(in Rs.)

After formationof customs union.

A 300 300 300

B 240 480 240

C 200 400 400

In this context, it is desirable for the home country A to produce calculators at home. If thecustoms union is formed and duty is removed on imports from B, while it remains enforcedon imports from C, the partner country B becomes the least cost country. Now, the homecountry will prefer to import calculators from B rather than produce it domestically. So theformation of the customs union results in trade creation.

Trade Diversion Effect:

It refers to the diversion of trade in a commodity from one country to another as a result ofthe formation of customs union. It is illustrated with the help of the following table:

Trade Diversion

CountryUnit Cost

(in Rs.)

Unit Cost(in Rs.)

After 50%Uniform duty

Unit Cost(in Rs.)

After formationof customs union.

A 300 300 300

B 240 360 240

C 180 270 270

It is clear from the above table that before the formation of the customs union, country Cwas the least cost or the most efficient country and home country. A was the highest costcountry. As the home .country A imposes 50 percent tariff on all imports, the unit costs InA, B and C become Rs.30D, Rs.360 and Rs.270 respectively. Since C is the least costcountry calculators will be imported by A from this country.

After the formation of the customs union, the import duty is abolished on imports from Bwhile it remains in the non-member country C. In this situation, the unit cost in A, B and Cwill be Rs.300, Rs.240 and 270 respectively. With result, country A will prefer to importcalculators from country B rather than from country C. Thus, the formation of trade unionresults in the diversion of trade from an outside country to the Partner Country. This iscalled trade diversion effect.

Consumption Effects:



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Consumption Effects of the formation of customs union were recognized by Meade,Lipsey, Johson and other.

The formation of a customs union may have both positive and negative consumptioneffects.

The formation of the customs union facilitates the access to the low-cost source of supplyof products. This increases the real income of the consumer because a given amount ofmoney income can buy more goods as prices decline. This is what is called PositiveConsumption Effect of a customs union.

The Negative Consumption Effect is parallel to the negative production effect. Theformation of the customs union requires a uniform tariff on import of a commodity fromnon-members. Before the formation of the customs union, if a member country wasimporting a commodity duty free from a non-member, it will now have to impose

a duty on it resulting in the diversion of the consumer purchases from low-cost out sideproducers to high-cost producers inside the customs union. This fall in consumer welfareresulting from the decline in the real income due to rise in price is known as the NegativeConsumption Effect of the formation of the customs union.

II. Dynamic Effects

The Dynamic Effects of the Customs Union have been stressed by writers likeTScitovsky, B.Balassa, W.M.Corden and others.

These effects relate to some developments that increase the economic efficiency ofresource utilisation. The following are the important dynamic effects of the formation

of customs union:

(1) Increased Competition

The most significant dynamic effect of the formation of a customs union is theincrease in the intensity of competition within the union. Competitionstimulates managerial efficiency and technological progress.

(2) Economies of Scale

The formation of a customs union creates economies of scale made possibleby expansion in the size of market, competition, increased specilisation etc.the experience of the formation of EEC is a clear example of the economies of

scale created by a customs union.(3) Encouragement to Investment

Economies of scale, competition, technological process, expansion of the sizeof market etc. stimulate the rate of investment . Even foreign investment isattracted.

(4) Mobility of Production Factors

The formation of customs union or the common market facilitates the mobilityof labour, capital and enterprise among the countries concerned. This leads tooptimum utilisation of resources.



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(5) Technological Progress

B.Balassa argues that the expansion of the market and competition stimulate

research and development. There will be important technological changes.(6) Risk and Uncertainty

Economic integration helps to reduce risk and uncertainty in the economicintercourse of the member countries.As a result, development is fostered.

(7) Improvement in Terms of Trade

The formation of customs union results in raising of external tariffs against thenon-member countries leading to a reduction in imports. This strengthens thebargaining power of the member countries leading to an improvement in theirterms of trade.

It has been pointed out by several writers that the above dynamic effects havebeen responsible for the economic integration of the European Countries.Further empirical studies have indicated that the dynamic effects of economicintegration are five to six times larger than the static gains.

5.6 EUROPEAN UNION

European Union (EU) or. the European Economic Community (EEC) has been themost prominent development in the field of economic integration with a populationOne-third larger than that of the United States, the EU represents the mostsuccessful of the regional economic integration schemes. The EU accounts for

roughly a quarter of the world trade.

Historical Background:

The genesis of the present European Union could be traced back to the EuropeanCoal and Steel community formed in 1951 by the Treaty of Paris. This communitywas formed by West Germany, France, Italy and the BENELUX countries - BelgiumNetherlands and Luxumburg. It removed all import duties and quota restrictions oncoal, iron ore, steel and scrap on intra-community trade. The main objective of theformation of ECSC was to reap the economies of scale in iron ore, coal andsteelindustries in order to effectively compete with the U.S. and other foreign

producers of these commodities.The second stage in the establishment of the EU goes back to the year 1957 inwhich the Treaty of Rome was signed leading to the establishment of the EuropeanEconomic Community (EEC). This Treaty was signed by six countries - WestGermany, France, Italy and the three BENELUX countries . The Treaty of Romemay be considered as a turning point as it was the foretunner of the present EU.This Treaty came into force from January 1958.

In the year 1973, the membership of the EEC increased from six to nine, with theinclusion of Denmark, Ireland and United Kingdom.

Greece joined the Community in 1981 increasing the strength of the membership to



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ten.

Further, in 1986, Portugal and Spain became the members of the Community.

The next enlargement of the Community took place in 1995 with the inclusion ofAustria, Finland and Sweden.

In 2004 the membership of the Community increased to 25 when the followingcountries joined it:

(a) Cyprus

(b) Lithuania

(c) Czech Republic

(d) Estonia

(e) Hungary

(f) Latvia

(g) Malta

(h) Poland

(i) Stovakia

(j) Slovenia

With the inclusion of Bulgaria and Romania in 2007, the Community's strength isnow 27.

The European Community was renamed as the European Union by the famousMaastricht Treaty in 1992.

Objectives of EU:

According to the Treaty of Rome, the following are the broad objectives of the EEC or EU:

(i) The abolition of tariff and non-tariff quantitative and other restrictions in regard tothe import and export of goods between the member states;

(ii) The abolition of all restrictions upon the free movement of persons, services andcapital between the member states;

(iii) The establishment of common customs tariff and of a common commercial policytowards the non-member countries;

(iv) The establishment of a common farm policy'

(v) The adoption of a common transport policy;

(vi) The establishment of a system ensuring that competition shall not be distorted inthe common market;

(vii) The application of the procedures for ensuring the coordination of the economicpolicies of the member states and for remedying their balance of paymentsdisequilibria;

(viii) The creation of a European Social Fund for improving the possibilities of



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employment for the workers and for ensuring a rise in their standard of living;

(ix) The establishment of a European Investment Bank to facilitate the economic

expansion of the Community by opening up fresh resources; and-(x) The approximation the legislations of the member states for the efficient functioning

of a common market.

It is, therefore, c ar from the above, that the cardinal objectives of the EEC sought torealize the, elimination of all restrictions from the movement of goods, labour, capital andservices, maintenance of common external tariffs against the non-member countries, theestablishment of common policies in the spheres of transport and agriculture and closerintegration in the fields of monetary and fiscal matters in the entire region.

5.7 Organisation of European Union:

The organizational set up of the EU consists of the following bodies and institutions:

(i) The Executive Commission

(ii) The Council of Ministers

(iii) The European Parliament

(iv) The Court of Justice

(v) The Economic and Social Committee

(vi) The Monetary Committee

(vii) The Court of Auditors

A brief explanation of the above organs of the EU is necessary.

(i) The Executive Commission

It is the key institution of the EU. It functions autonomously of the nationalgovernments of the member countries. The following are the functions of theExecutive Commission:

(a) Initiating, evolving and execution of the economic policies of the Community.

(b) Ensuring the proper compliance of agreed policies by the member countries.

The Commission's directives are binding upon all the members. TheCommission is constituted by commissioners, appointed by the member

countries. The Commission has a significant achievement in the field of anti-trust legislations.

(ii) The Council of Ministers

The Council of Ministers constitutes an important decision-making inter-governmental body. Its functions are:

(a) Taking decisions relating to political issues which impinge upon the economicand commercial policies.

(b) Taking decisions upon important technical matters.

(c) Laying guidelines for political and economic policies.



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All issues are decided by the Council of Ministers through majority decision.

(iii) The European Parliament

Its role is of a general consultative. and informative nature. It comprises ofmembers elected by the member countries. It has the power to approve orreject the draft budget prepared by the Commission. It can also dismiss theCommission. Generally, the European Parliament holds eight sessions a year.

(iv) The Court of Justice

It is based in Luxurnburg. It settles any dispute arising out of the differentprovisions of the Treaty of Rome. It has the power to overrule the decisionstaken by the national courts on matters related to EU policies and actions.

(v) The Economic and Social Committee

It is constituted by the representatives of workers, employers and professionalorganizations of the member countries of the EU. It is essentially aconsultative body.

(vi) The Monetary Committee

It is constituted by experts and central bank officials of the member countriesof the EU. It advises the Executive Commission and the Council of Ministerson international monetary issues.

(vii) The Court of Auditors

It audits the budget of the EU, monitors its expenditure and lays downprocedures for the collection of duties and levies.

5.8 Working and achievements of the EU

The EU has emerged as the most successful economic integration in the post-warperiod. Its working and achievements are discussed below:

(i) Formation of Customs Union

The main objective of the EC was the creation of a customs union. For thispurpose, the Treaty of Rome provided 12 years for the elimination of internaltariff s and other trade barriers and the adoption of a common external tariff forindustrial goods. Both these goals were achieved on 1 July 1968 and thus the

objective of the creation of a Customs Union was achieved.(ii) Common Agricultural Policy (CAP)

The salient features of CAPare as under:

(a) All the member countries now adopt a common policy related toagriculture.

(b) Support prices are now fixed by the Council of Ministers.

(c) There is a "green rate" at which the support prices are converted intonational prices.

(d) There is no barrier on the movement of agricultural products from one



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member country to another.

(e) If there is a shortage of farm products, imports are permitted from the

non-member countries.(f) A variable import levy is imposed to restrict imports of agricultural

products.

(g) In the case of a surplus of farm products, subsidies are given to thefarmers to export these products.

Thus, the adoption of the CAP has contributed in making the EU self-sufficientin agriculture.

(iii) Common Fisheries Policy(CFP)

The EU adopted the CFP in February 1971. It is related to the marketing of

fresh, frozen and preserved fish. It provided for equal access to fishing areasfor all the member countries, off-shore fishing facilities and common marketingstandards.

(iv) Common Transport Policy (CTP)

The need to adopt a CTP was laid down by the Treaty of Rome. The EU hassucceeded in removing the obstacles in transport in the way of theestablishment of common market as a whole. But certain problems persist.

(v) Factor Mobility

The achievements in this area are:

(a) Workers and their families can move from one member country to

another without a permit;

(b) They have the same rights to work and social security;

(c) They are subject to same taxation on par with the nationals.

(vi) Regional Development Policy (RDP)

The EU has evolved an integrated RDP to promote equitable andbalanced regional development. The EU has adopted the policy ofproviding necessary financial assistance to the relatively backwardregions within the Community.

The EU provides regional development assistance through theEuropean Investment Bank (EIB), the European Social Fund (ESF) andthe European Regional Development Fund (ERDF).

The EIB performs three important functions:

(a) Giving loans and guarantees to improve basic infrastructure in theunderdeveloped regions;

(b) Providing financial aid to projects for modernization, conversion ordevelopment; and

(c) Helping finance projects in which member countries have a



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common interest.

The ESB provides financial assistance for reemployment of

workers thrown out of work as a result of EC policies.The ERDF lends and grants money for the development of thebackward regions of the Communlty.

(vii) Trade creation and Trade Diversion Effects

A significant achievement of the EU has been a substantial increase intrade creation. Trade diversion effect became significant in agricultureafter Britain joined the Community in 1973.

(viii) Reduction in Unemployment

There has been a reduction in unemployment in the EU. This has been made

possible by the expanded market, utilisation of productive capacity, adoptionof latest technology etc.

(ix) Common Social Policy (CSP)

The achievements in this area became significant after the adoption of theSocial Charter in 1989. CSP relates to laws covering health, employment,safety at work, equal for pay for men and women for the same work etc.

(x) Monetary Union

The developments in this field are as under:

(a) The establishment of the European Monetary system following theBremen Declaration of 1978;

(b) The creation of the European Currency Unit (ECU)

(c) The establishment of the European Monetary Co-operation Fund to actas a clearing house to the EEC Central banks.

(d) The establishment of the European Central Bank on June 30, 1998 atFrankfurt.

(e) The adoption of a single currency 'Euro', in place of ECU, from 1 January1999.

(f) The circulation of Euro notes and coins from 1 July 2002. The Euro is theofficial currency of the Eurozone, adopted now by 13 member countries

of the EU.(xi) Single or Common Market

On January 1, 1993 the EU emerged as a single frontier - free market. Itbecame fully operational from January 1 1995. Thus EU is not only a customsunion but also a common market. There are 282 proposals, applicable tovarious areas, in the Single European Act adopted throughout the union.

Thus the achievements of the EU are many and varied. But, there are certaindefects of the working of the EU which are as under:

(a) Unequal expansion of trade



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The disturbing feature of the expansion of EU trade is that while tradeinvolving new members has increased rapidly, the same is not true of the

original member countries.(b) Inability to harmonise

The member countries of the EU have failed to harmonise properly theirmonetary, transport and fiscal policies.

(c) Defects of CAP

The Common Agricultural Policy has led to huge surpluses and high storagecosts. The subsidy issue has been a bone of contention between the UnitedStates and the EU. It has not been able to enncourage farmers to seekalternative occupations. It has led to income inequalities. The policy of highfarm prices has adversely affected the interests of the consumers,

(d) Adverse effect of Trade Diversion

The EU trade diversion has been at the expense of the countries of LatinAmerica, Middle East, U.S.A., Japan etc.

(e) Imbalances in Regional Development

The EU has failed to reduce or avoid imbalances or inequalities in regionaldevelopment. While some regions have attained high level of economicdevelopment, other regions such as Southern Italy, the south of France, eastof Germany etc.

(f) Problems in Common Transport Policy

Problems relating to evolving a Common transport Policy include problemsinvolved in infrastructure pricing, entry controls and rate controls of theindividual member countries relating to handing of goods by rail and roadtransport etc.

(g) Sacrifice of Sovereignty

In the EU some countries are required to sacrifice their sovereignty in decision- making. In fact, some of the member countries have ratified the MaastrichtTreaty but have declined to participate in some parts of this Agreement.

(h) Failure to achieve a complete union

It may be observed that even after five decades of its establishment , the EU isyet to achieve a complete economic and political union.

In conclusion, it may be observed that despite the above deficiencies, theachievements of the EU have been quite significant. The EU has considerablysucceeded in realizing its objectives. It has made a definite positivecontribution in the rapid economic development of its member countries.



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5.9 World Trade Organisation (WTO)

The WTO came into existence on January 11995 as a result of the culmination of

the Uruguay Round of Talks. The WTO has fully replaced GATT. The agreement toestablish WTO was signed by 117 countries. WTO now serves as a singleinstitutional frame work encompassing GATT and all the results of the UruguayRound. The WTO is directed by a Ministerial Conference that will meet at least oncein 2 years. The WTO Secretariat is based in Geneva, Switzerland.

Differences between GATT and WTO

(1) While GATT had no legal status, WTO has a legal Status.

(2) While GATT was ad hoc and provisional, WTO and its agreements arepermanent.

(3) GATT had contracting parties while WTO has members.

(4) While GATT was less powerful WTO is more powerful.

(5) Under GATT dispute settlement system was slow. But under WTO disputesettlement is quicker and more efficient.

(6) In the case of the GATT dispute settlement system was not binding on theparties to the dispute. But the WTO dispute settlement mechanism isautomatic and binding on the parties to the dispute ..

(7) The GATT rules applied mainly to trade in goods, but the WTO rules apply totrade in goods and services.

(8) The GATT had a small secretariat managed by a Director General, but the

WTO has a large secretariat and an elaborate organizational set - up.

5.10 Objectives of WTO

The WTO agreements have three main objectives:

(1) To help free flow of trade as much as possible.

(2) To achieve further liberalization of trade gradually through liberalization.

(3) To set - up an important means of settling disputes.

Organisational Structure

In the WTO, decisions are made by all the members. They are based on'consensus, Though there is provision for a majority vote, it has not been used sofar. The organizational structure of the WTO is as under:

(1) Ministerial Conference

In the WTO, Ministerial Conference constitutes the apex decision- makingbody. It comprises of representatives of all WTO members. This body meets atleast once in every 2 years. It has the authority to take decisions on all mattersrelating to Multilateral Trade Agreements.

(2) General Council

This body also comprises of all the members of the WTO. It oversees the



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January 1, 2005 the Government of India promulgated an Ordinance on December23, 2004. This was followed by the adoption of Patents (Amendment) Act in March,

2005. The new Patent regime provides for product patents in drugs and farmproducts.

4. TRIMs:

Under the TRIMs Agreement, the Government of India notified two TRIMs - thatrelating to local content requirements in the production of pharmaceutical productsand dividend balancing requirement in the case of investment in 22 categories ofconsumeritems.

5. GATs:

Under GATS, India has made commitments in 33 activities. Foreign service

providers will be allowed to enter these activities. The choice of the activities hasbeen guided by considerations of national benefit.

6. Customs Valuation Rules:

India's legislation on customs Valuation Rules, 1998, has been amended to bring itin conformity with the provisions of the WTO Agreement.

Impact of WTO on Indian Economy:

The effects of WTO Agreements on Indian Economy are as under:

1. Benefits on Trade Expansion:

It is estimated that India will gain from global trade expansion arising out of theimplementation of WTO Agreements. It is assumed that India's market share inworld exports from 0.5 per cent to 1 per cent. It is estimated that trade gains will be2.7 billion U.S. dollars extra exports per year.

2. Benefits from phasing out the MFA:

It has been pointed out that the phasing out of the Multi Fibre Arrangements by2005 will benefit India as the exports of textiles and clothing will increase. The newquota- free regime in textiles and clothing (existing since January 1, 2005) willincrease India's exports of these products and will flood the U.S. and Europeanmarkets.

3. Improved Prospects for Agricultural Exports:

Observers argue that Indian Agricultural exports will gain as a result of likelyincrease in the world prices of agricultural products due to reduction in domesticsubsidies and trade barriers India hopes that the reduction of subsidies in the USAand European Community will enable it to increase its export earnings fromagriculture.

4. Benefits from Multilateral Rules and Disciplines:

Indian will gain from multinational rules and disciplines strengthened by theUruguay Round Agreement. It will create a favourable environment for India in the



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(6) It has a system or mechanism to handle violation of trade agreements.

(7) The WTO undertakes considerable research in the area of global trade and in

the process disseminates a wealth of information.(8) All the member countries have praised the WTO for the transparency in its

working .

Drawbacks

The working of the WTO has been subject to severe criticism. The following are themain demerits of WTO:

(1) Its working has been controlled and dominated by developed countries.

(2) Many of the developing economies do not possess the financial and

knowledge resources to effectively participate in the WTO negotiations anddiscussions.

(3) The developing countries are very much at the mercy of the developedcountries and hence the latter exploit the former.

(4) Many a time, policy decisions are taken by the developed countries withouttaking the developing countries into confidence.

(5) The WTO has failed to impose the organization's discipline on the developedcountries.

(6) In general, the developing countries have been getting a raw deal from theWTO.

(7) There are many problems relating to the implementation of various decisionsand agreements concluded in the Ministerial Conferences.

(8) Most of the criticisms leveled against GATT and UR Negotiations hold good toWTO also.

In conclusion, it may be agreed that the developing countries have to organisethemselves and remain united if they have to reap the benefits of WTO. Thedeveloped countries, on their part, should have concern for the less developedcountries and work in the interests of the latter.



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economic integration and wto

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