Sunday, June 17, 2007

Advantages and disadvantages of WTO

Readers Question: What are the advantages and disadvantages of the WTO formally the GATT?

The WTO is a body designed to promote free trade through organizing trade negotiations and act as an independent arbiter in settling trade disputes. To some extent the WTO has been successful in promoting greater free trade.

Free trade has many advantages, such as:
  1. Lower prices for consumers. Removing tariffs enables us to buy cheaper imports
  2. Free trade encourages greater competitiveness. Firms face a higher incentive to cut costs. For example, a domestic monopoly may now face competition from foreign firms.
  3. Law of comparative advantage states that free trade will enable an increase in economic welfare. This is because countries can specialise in producing goods where they have a lower opportunity cost.
  4. Economies of scale. By encouraging free trade, firms can specialise and produce a higher quantity. This enables more economies of scale, this is important for industries with high fixed costs, such as car and aeroplane manufacture.
  5. Free trade can help increase global economic growth.
Disadvantages of WTO
  • However, the WTO has often been criticised for ignoring the plight of the developing world.
  • It is argued the benefits of free trade accrue mostly to the developed world.
  • Free trade may prevent developing economies develop their infant industries. For example, if a developing economy was trying to diversify their economy to develop a new manufacturing industry, they may be unable to do it without some tariff protection.
  • see also :Disadvantages of Free Trade
In response to this the WTO may say that free trade has been an important engine of growth for developing countries in Asia. Although there may be some short term pain, it is worth it in the long run.

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