SESSION THEME: INTERNATIONAL TRADE

Effectiveness of Bilateral vs. Multilateral Trade

Amir Hamza Syed*

B.A. (Hons.) Economics
Part-I
Shri Ram College of Commerce
University of Delhi
India

June 2007

*Paper prepared for presentation at the session “International Trade” of “International Conference of Young
Economists” (ICYE) 2007 at Dhaka, Bangladesh, Jun 16-20, being organised by the Young Economists Forum
(YEF), the Department of Economics-North South University. I would like to express my sincere thanks to all my
professors for their constructive comments. Comments received from all my seniors are duly acknowledged. The
usual disclaimers apply. To post your comments please do write into [email protected]

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 ABSTRACT

Trade negotiations occur through time and between the governments of many countries. An
important issue is how and why the developing countries should liberalize trade and there by
allow the FDIs enter into the market. Here we first discuss the International Organizations then
study the goals and the reasons for which GATT and WTO were established. We next identify
the advantages of liberalization and also look into the various trade agreements that have been
signed. We even discuss the future of WTO and the reasons for the failure of the Doha round.
Our main finding is that the two central rules of GATT --Non-discrimination (MFN) and
Reciprocity -- effectively mimic the reciprocal market access rule. We review the legal provisions
of the WTO regime that have important implications for national and international policies. We
finally conclude with discussion on the trade links between India and China and the
development strategies they have adopted.

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 CONTENTS

1. Introduction 4
2. International Trade Organizations 5
(i) GATT (General Agreement on Trade and Tariffs) - Policies 5
(ii) WTO-(World Trade Organization) 6
3. Types of Trade Agreements 7
(i) Trade Agreements and Forms of Economic Integration 7
(ii) The GATT and the WTO 7
(iii) WTO and the Devel`oped Countries 8
(iv) WTO and the Developing Countries 8
(v) Regional Trade Agreements 9
4. International Trade 10
(i) Effectiveness of Bilateral and Multinational Trade 10
5. The Future of WTO 12
(i) Doha was on the Wrong Track 12
(ii) The Alternatives of Doha Round 13
(iii) Next Steps for WTO 14
6. India in the International Trade 15
(i) India-China Trade Relations 15
7. A Study-Why Should Developing Countries Liberalize Trade? 16
8. Conclusion 18
9. References 19
10. Acknowledgements 19

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1. Introduction:

The multilateral trading system has evolved continually since its inception following the Second
World War. With successes in lowering barriers to trade, along with advances in technology, the
world has witnessed unprecedented economic globalization in recent decades. Countries have
become more interdependent through the exchange of goods and services and flows of capital,
information, and to some extent, labor. How economic globalization and its governing
institutions affect the environment—locally, nationally, and globally—has been a subject of
heated debate among policymakers, journalists, academicians, businesses, labor unions, and
most dramatically, street protestors at some international conferences. The policy debate is often
characterized in terms of free trade versus fair trade. Fair-trade advocates would modify trade
liberalization policies by incorporating more domestic environmental and other social concerns.
A free-trade advocate seeks the free flow of goods and services through market mechanisms
with minimal intervention by national governments, whatever their political and social goals.

While economists have evaluated the broad incentives created by trade liberalization, legal
analysts have considered the institutional aspects. They have focused on what international trade
agreements such as the General Agreement on Tariffs and Trade (GATT), with the
accompanying World Trade Organization (WTO), or the North America Free Trade Agreement
(NAFTA) mean for the governing institutions pursuing national and global environmental goals.
Indeed, these institutional concerns are at the forefront of the globalization debate. Fair-trade
and anti-globalization advocate’s raise concerns that trade agreements impose trade liberalization
values over other social agendas, preventing individual countries from protecting themselves
from legitimate harm.

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2. International Trade Organizations- GATT and WTO:

(i) GATT-Policies: (General Agreement on Trade and Tariffs)

Over its 50 year history, GATT has served remarkably well to encourage multilateral trade
liberalization. This liberalization has been accomplished through a series of agreements
negotiated among the member countries, and an important role of GATT has been to provide a
continuous negotiating forum for this purpose. Each of these agreements amounts essentially to
a web of bilateral reciprocal exchanges of market access "concessions" between negotiating
governments, secured by commitments to reduce tariffs and other trade barriers, and
"multilateralized" by the most-favored-nation (MFN) principle, which requires that each GATT
member offer to every other GATT member access to its markets on nondiscriminatory terms.
The liberalization that has been achieved through GATT negotiations is especially noteworthy
in light of the fact that negotiations occur through time and between the governments of
various countries. This feature raises the possibility that the market access implied by existing
tariff commitments may be altered by tariff commitments made at some point in the future. A
particular concern is that the value of concessions that a government wins today may be eroded
in a future bilateral negotiation to which it is not party. A multilateral trade organization such as
GATT (now the WTO) is thus more likely to effectively achieve its objectives.

This discussion suggests a pair of interesting theoretical questions. First, in the absence of rules
that govern the nature of negotiations, to what extent are the governments engaged in a bilateral
negotiation able to appropriate welfare from non-participating governments? Second, if this
concern is indeed legitimate, then how effective are GATT's rules in protecting the welfare of
non-participating governments and thereby alleviating this concern? Two of GATT's central
rules are non-discrimination and reciprocity. The former refers to the requirement that all tariffs
conform to the MFN principle. The latter refers to the convention that negotiations result in
tariff adjustments that generate equal changes in import and export volumes across negotiating
partners. We are interested in the extent to which these essential elements of GATT law and
practice may limit the ability of negotiating governments to appropriate welfare from non-
participating governments.

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(ii) WTO-(World Trade Organization):

After the Uruguay round the parties assessing on the following needs formed WTO.
The Parties to this Agreement,

Recognizing that their relations in the field of trade and economic endeavour should be
conducted with a view to raising standards of living, ensuring full employment and a large and
steadily growing volume of real income and effective demand ,
Recognizing further that there is need for positive efforts designed to ensure that developing
countries, and especially the least developed among them, secure a share in the growth in
international trade commensurate with the needs of their economic development,
Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to
trade and to the elimination of discriminatory treatment in international trade relations,
Determined to preserve the basic principles and to further the objectives underlying this
multilateral trading system, the parties agreed to follow these:

i. Establishment of the Organization

ii. Scope of the WTO
iii. Functions of the WTO
iv. Structure of the WTO
v. Relations with other organizations
vi. The Secretariat
vii. Budget and Contributions
viii. Status of the WTO
ix. Decision Making
x. Amendments
xi. Original Membership
xii. Accession
xiii. Withdrawal
In addition to the above mentioned, there are some other “articles” under which the WTO is
framed.

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3. Types of Trade Agreements:

Trade Agreements are either, bilateral, involving only two countries or multilateral-involving
more than two countries. They are usually intended to lower trade barriers between participating
countries (though not necessarily between those countries and other non-participating countries)
and, as a consequence, increase the degree of economic integration between the participants.
The Reciprocal Trade Agreements Act of 1934 (RTA) authorized the President of the United
States to fix tariff rates. Between 1934 and 1947, the United States negotiated bilateral trade
agreements with 29 nations. In 1947, however, GATT emerged as the primary forum for trade
negotiations and the RTA declined in importance as a mechanism for trade liberalization. Since
1947, generally, although not always, the United States has pursued trade liberalization in
multilateral settings. Typically, trade agreements that increase access to each member country’s
markets are supported by sectors that export their products but are opposed by sectors that face
competition from imports.

(i) Trade Agreements and Forms of Economic Integration:

For the most part, trade agreements entered into by the United States have created free trade
areas as one form of economic integration. In a free trade area, tariff and non-tariff barriers to
trade between member countries are removed. Trade barriers with the rest of the world differ
among members and are determined by each member’s policy makers. In customs unions, trade
barriers between members are eliminated and identical barriers to trade with non-members is
established, typically by common external tariffs. A common market is a customs union in
which the free movement of goods and services, labor, and capital is also permitted among
member nations. An economic union is the most complete form of economic integration.
National agricultural, social, taxation, fiscal, and monetary policies are harmonized or unified
among member countries, and a common currency may be adopted.

(ii) The GATT and the WTO:

From the perspective of agricultural producers in many countries, the 1994 General Agreement
on Tariffs and Trade (GATT), which created the World Trade Organization (WTO), is an

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extremely important multilateral trade agreement. The World Trade Organization (WTO) is a
voluntary group of nations that negotiates, monitors, and enforces global rules for international
trade. The WTO describes itself as dedicated to reducing barriers to trade between nations and
ensuring that members adhere to predetermined rules for international trade. Prior to the
Uruguay Round agreement in 1994, many nations, including the United States, were signatories
to the General Agreement on Tariffs and Trade (GATT), but no official “Global Organization”
regulated trade.
Market access provisions include:
(1) Converting non-tariff barriers to tariffs,
(2) Creating minimum market access for small import quantities at low or zero tariffs (typically
three percent of domestic consumption expanding to five percent over time) when imports had
been prohibited or almost prohibited,
(3) Reducing all tariffs by an average of 36 percent over a 6-year period (or 24 percent over 10
years for developing countries), and
(4) Requiring a minimum cut of 15 percent for every tariff.

(iii) WTO and the Developed Countries:

During the Uruguay Round negotiations, the United States was generally a strong proponent of
improved market access and reductions in internal supports that provided incentives for
expanded domestic production. Given that the United States is a major exporter of many
agricultural commodities, the U.S. administration may well retain a focus on further reductions
in barriers to trade and output expanding domestic subsidies. In those respects, it is likely to find
supporters for its negotiation positions among other major agricultural exporting nations such
as Canada, Australia, Argentina, New Zealand, and other members of the CAIRNS group. This
was a group of countries that developed a common set of freer trade oriented negotiation
positions in the Uruguay round.

(iv) WTO and the Developing Countries:

Since the Uruguay Round, developing countries have played a larger role in the WTO. Of the
140 WTO member countries, 105 are classified as developing and, of those, 29 are least

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developed. Although developing countries differ in many ways, they have much in common and,
since the 1960s, have attempted to influence trade negotiations by forming coalitions with
common objectives, such as increasing access to industrialized country markets. Several trade
issues have emerged as important to developing countries. Expanding access to developing
country markets may have adverse consequences for some, especially the poorest countries. One
concern is that higher and more volatile food prices will reduce real disposable incomes for
many poor households in some developing countries. Some developing countries have also
objected to policy making being determined in the WTO, arguing that the process sacrifices
national sovereignty, and they have argued or a halt to the WTO process. Nevertheless, some
developing countries argue that reducing tariffs and expanding tariff-rate quotas in developed
countries, especially for commodities like sugar and textiles, could improve market access for
many poor countries.

(v) Regional Trade Agreements:

Trade Agreements are often regional, involving only a relatively small number of countries.
Several important regional trade agreements have been negotiated in the Western Hemisphere
over the past twelve years. Two of these agreements, the Canada- United States Trade
Agreement (CUSTA) and the North American Free Trade Agreement (NAFTA), have
substantially reduced trade barriers for agricultural commodities, manufactured goods, and
services in North America. Both CUSTA and NAFTA are free trade agreements that eliminate
many tariffs and other trade barriers between member countries, but they have no impacts on
their trade policies with non- participants.

In the context of U.S. agriculture, the European Economic Community (EEC) is clearly the
most important regional trading bloc.MERCOSUR is a customs union agreement among
Argentina, Brazil, Uruguay, and Paraguay with common external tariffs for imports from other
countries and (with a few exceptions) zero tariffs for commodities traded within the customs
union bloc. MERCOSUR was formed on January 1, 1991, and has provided considerable
advantages to member countries over third countries in terms of market access for key
agricultural commodities such as wheat and oilseeds.

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The Andean Pact, established in 1969, the Central American Common Market (CACM),
established in 1960, and a series of bilateral trade agreements between Chile and several other
countries are some of the agreements of the western world. Andean pact countries, which
include Bolivia, Colombia, Ecuador, Peru, and Venezuela, generally impose common external
tariffs and enjoy free trade within the trading bloc. Chile has also signed a trade agreement with
MERCOSUR that will gradually eliminate all tariff barriers between MEROSUR and Chile, but
it does not require Chile to impose MERCOSUR’s common external tariffs on third country
imports.

Other important regional trade agreements include (1) the Closer Economic Relations (CER)
agreement between Australia and New Zealand initiated in 1983, (2) the Association of
Southeast Asian Nations (ASEAN) Free Trade Area agreement and (3) the proposed Asia
Pacific Economic Cooperation Forum.

4. International Trade:

(i) Effectiveness of Bi-lateral and Multi-lateral Trade:

By their very nature, Preferential Trade Agreements (PTAs) require member countries to grant
tariff reductions to each other that are typically not extended to non-attention from economists
and policy-makers alike. Furthermore, in recent years there has been widespread concern
regarding the potential adverse effects of PTAs on the process of multilateral trade liberalization.
These PTAs are also called as Regional Trade Agreements. The two most commonly occurring
PTAs are Free Trade Agreements (FTAs) and Customs Unions, with an overwhelming majority
of them being FTAs. Once Jagdish Bhagwati (1991) put it- Is FTA building or stumbling bloc
for multilateral trade liberalization? While the meaning of the phrase ‘stumbling bloc’ is relatively
clear, what does the phrase ‘building bloc’ precisely mean? Does it mean that the process of
bilateral trade liberalization eventually converges to multilateral free trade? Or does it mean that
FTAs lay the foundation for multilateral trade liberalization in the sense that the freedom to
pursue FTAs is necessary to attain global free trade? Existing literature has often tended to take
the view that FTAs are building blocs so long as their pursuit does not prevent the obtainment
of global free trade.

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The possibility of preferential trade liberalization amongst others can induce a country to
participate in multilateral trade liberalization. Since markets are assumed to be segmented, from
each country’s perspective, an FTA embodies the following trade-off. On the one hand, forming
a bilateral FTA lowers a country’s domestic surplus relative to no agreement because of the
tariff concession it grants to the other member. On the other hand, the reciprocal tariff
reduction granted by the other member increases its export profits. It is true that too many
bilateral agreements skip the sensitive issues and therefore don’t create new trade.

Over the last five decades the GATT and the WTO have made remarkable progress in lowering
tariff barriers and progressively liberalizing trade. As a member-led organization, in which every
member has an effective right of veto, the WTO cannot move faster than its collective ambition
will allow. The WTO locks in progressive liberalisation, but in necessarily small and consolidated
steps. Bilateral agreements between partners, obviously, have an important role in driving down
tariffs for our country’s exporters. Reforming governments like that of India or members of
ASEAN see bilateral trade negotiations with partners like the EU first as a means of increasing
their access to the markets, creating opportunities for growth and development in their
countries. Bilateral trade can also help to drive forward regional economic integration which is
also good for development.

Just as an example; the ten countries of ASEAN have more than 30 free Trade Agreements
among themselves - each with its own slightly different rules, all of which have to be navigated
by exporters. The prospect of an EU-ASEAN bilateral trade agreement is one of the strongest
incentives to replace that complexity with a more unified market: replacing thirty sets of rules
with one.

India is a good example of these potential benefits. India’s strategic choice in the early 1990s for
economic reform and openness has been the basis of its economic growth. India of course is
facing huge challenges. But it is committed to a policy of openness. India’s growing role in the
WTO is an important sign of that. India is committed to a Doha agreement and yet at the same
time they are pressing for a bilateral trade and investment agreement with the EU. Why?
Because, India wants access to the markets and strengthen relations with the European Union.

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They want to maintain the dynamic of integration into the global economy and reform within
India. India sees bilateral and multilateral trade policy as reinforcing each other.

5. The Future of WTO:

“The recent failure at the Doha Agreement trade negotiations requires the causes be identified and key objectives
addressed when talks resume”.

When the Doha Round of global trade negotiations derailed, many observers proclaimed a crisis
that threatens the global trading system. This alarm was misleading. The failed negotiations were
on the wrong track and unlikely to produce a balanced and widely beneficial new agreement.
The aftermath of the crash provides an opportunity to set resumed talks on a better course to
achieve the agreed objective of rebalancing trade rules so that developing countries can benefit
more.

The World Trade Organization itself will survive this crash. The alternatives to the global trade
regime—bilateral or regional free trade agreements—do not offer the advantages to any country
that the WTO provides. This Policy Outlook analyzes the causes of the recent failure and
identifies key objectives that must be addressed when talks resume. It explains that the WTO
remains indispensable and will survive. However historical patterns and the political calendar
suggest that the Doha Round may not be completed until 2009 or thereafter.

This is because “Many developing countries believe that previous rounds of global trade talks created rules that
primarily benefited the high-income industrialized countries that dominated global trade”

(i) Doha was on the Wrong Track:

When the current round was launched in Doha, Qatar in 2001, it was officially named the
"Doha Development Agenda," indicating the priority of helping developing countries gain more
from trade liberalization. More pragmatically, the development agenda reflected the reality that
developing countries now constitute the majority in the World Trade Organization and,
therefore, can determine whether new trade rules are adopted or not. A rebalancing of global

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trade policies was needed to provide opportunities for all countries and to take into account the
special vulnerabilities of poorer countries.

The talks failed as the many of the major players, including the United States and the European
Union (EU), soon gave a short shrift to development agenda and reverted to their traditional
priority of gaining market access for their own competitive firms and sectors. However, a new
balance of power has emerged in the global trading system, as large developing countries led by
India and Brazil sit at the negotiating table and insist that any deal must address their
development concerns. Although the proximate cause of the July breakdown of negotiations
was disagreement between the United States and the EU over agricultural trade, major
disagreements with the developing countries over agriculture, manufacturing, services, and other
issues were just below the surface. If talks had not collapsed because of U.S.-EU disagreements,
they would have foundered later because of differences with India, China, Indonesia, South
Africa, and a host of other developing countries. It is with these countries that the crux of a
successful new trade deal must be found.

The daunting task at the center of the Doha Round is to find a trade deal that captures the
positive potential of global trade to accelerate economic growth and job creation, while
recognizing and allowing sufficient flexibility to deal with the reality of extensive job destruction.
This challenge has been avoided or denied by many developed country negotiators. Until it is
addressed with the seriousness that it requires—and with more than a little of the spirit of global
solidarity that launched the round—there will be no agreement on a new trade regime.

(ii) The Alternatives of Doha Round:

While there is broad recognition that the Doha Round was not on track to achieve an ambitious
or balanced outcome, some lament the collapse of the round nonetheless, arguing that it will
unleash a frenzy of bilateral and regional trade deals. These deals would exclude some countries,
and if negotiated between unequal partners, might be even worse for the weaker countries than
the deal on offer at the WTO. However, it is not at all clear that negotiations for smaller trade
deals will accelerate or that they will undermine the WTO.

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In Asia, regional and bilateral trade pacts have been proliferating rapidly. The ongoing WTO
negotiations have had no impact on the pace of those talks, and the collapse of Doha will
neither accelerate nor decelerate Asian integration. The trade talks in Asia are meant to facilitate
integrated production in the region, in addition to consolidating the economic interests of major
Asian powers. Those countries depend on outside markets, particularly the rich markets of the
United States and Europe, to take their export production, so they have no incentive to turn
away from the WTO, regardless of how many regional pacts they conclude.

In Europe, an ambitious negotiating agenda has been underway for several years to replace
current preferential trade arrangements that benefit countries in Africa, the Caribbean, and the
Pacific with free trade agreements by the end of 2008. These talks have run into substantial
obstacles because of development concerns. Europe may pursue other bilateral deals over the
next two years, but there is little reason to think that any big agreements will be easy to achieve.

(iii) Next Steps for WTO:

“What is needed is leadership in acknowledging and addressing the profound concern about the impact of trade
policy on employment that exists in a majority of WTO member countries.”

The head of the WTO, Pascal Lamy, hoped to bring the Doha Round to a swift conclusion.
What is needed here is leadership in acknowledging and addressing the profound concern about
the impact of trade policy on employment that exists in a majority of WTO member countries.
These concerns are well-noted in industrialized countries, but the problems loom even larger in
the developing world, where job fears encompass both the agricultural and manufacturing
sectors. Until the issue is acknowledged and put on the table, a way forward cannot be found.
Any ultimate agreement will have to allow an extended implementation period and real flexibility
in the sequencing of liberalization measures to foster greater job creation than job destruction in
countries with very different capacities for adjustment.

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6. India in the International Trade:

(i) India-China Trade Relations:

Among the most encouraging recent developments in India-China ties is the rapid increase in
bilateral trade. A few years ago, India Inc. had a fear of being swamped by Chinese imports.
Today, India enjoys a positive balance of trade with China. In 2004, India's total trade to China
crossed US $13.6 billion, with Indian exports to China touching $ 7677.43 million and imports
from China at US $ 5926.67 million. But major industry players in India feel there is no need to
give the Chinese a free ride into the domestic market so early. This is particularly, when India
and China have been directly competing across several product categories. Indian industry's
ambivalence over the proposed Indo-China FTA stems from concerns over previous FTAs
signed by the government. There's a feeling that some of these FTAs were signed in haste, and
without adequate homework.
Result: There has been confusion about the country of origin issue as well as the items to be put
in the early harvest lists.

China and India established diplomatic relations on April 1, 1950 and India was the second
country to do so with China among the non-socialist countries. In 1954, Chinese Premier Zhou
Enlai and Indian Prime Minister Nehru exchanged visits and jointly initiated the famous Five
Principles of Peaceful Coexistence. The two sides issued a joint statement that stressed the need
to restore friendly relations on the basis of the Panch Sheel. India and China agreed to broaden
bilateral ties in various areas, working to achieve a "fair and reasonable settlement while seeking a
mutually acceptable solution" to the border dispute.

In 1976, the two countries decided to restore ambassadorial-level diplomatic ties after a gap of
15 years. The next major step was foreign minister Vajpayee's visit to China in February 1979.
The first high-level visit between the two countries since 1960 was seen in 1984. In this India &
China signed a trade agreement, providing for Most Favoured Nation (MFN) treatment. In 1994
the two countries signed the agreements on avoiding double taxation. Agreements for
cooperation on health and medical science, MOUs on simplifying the procedure for visa
application and on banking cooperation between the two countries have also been signed.

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Recently Chinese Premier Wen Jiabao visited India, where he said that India and China must
take their trade to $30 billion level by 2010. Seeing the whopping growth in Sino-Indian trade,
China outlined a five-point agenda, including reducing trade barriers and enhancing multilateral
cooperation to boost bilateral trade.

TRADE PATTERN (value in USD millions)

Year China's Exports to India China's Imports from India

2000 1560.75 1353.48
2001 1896.27 1699.97
Percent Growth 21.5 25.6
2002 2617.73 2274.18
Percent Growth 40.9 33.8
2003 3343.59 4251.49
Percent Growth 22.2 87
2004 5926.67 7677.43
Percent Growth 77.3 80.6

According to a CII (Confederation of Indian Industry) study, special focus on investments and
trade in services and knowledge based sectors, besides traditional manufacturing, must be given,
in view of the dynamic comparative advantage of India. Indian companies could enter the $615
billion Chinese domestic market by using it as a production base. Presently, Iron ore constitutes
about 53% of India's total exports to China. Among the potential exports to China, marine
products, oil seeds, salt, inorganic chemicals, plastic, rubber, optical and medical equipment and
dairy products are the important ones.

7. A Study- Why Should Developing Countries Should Liberalize Trade?

Why is the Doha round sleepwalking closer to collapse? We think a major fault-line is this
round's vaunted "development dimension". NGOs and most developing-country governments
interpret it to mean one-sided liberalization: the North should open its markets, but the South
should be exempt from further liberalisation and rules commitments, in addition to receiving

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more aid. With the notable exception of China, the global momentum in favour of more
markets and less government intervention has slowed down considerably. Many factors are at
play, but the climate of ideas has changed. There is less enthusiasm for trade liberalisation in the
developing world and there is greater all-round enthusiasm for aid. Critics make three arguments.
First, there are weak links between trade liberalisation, growth and poverty reduction. A stronger
version holds that trade liberalisation damages developing countries and makes the poor poorer.
Second, developed countries should liberalize trade, but developing countries should not. And
third, developing countries should use interventionist industrial policies to promote infant
industries. This requires more flexible WTO rules.

The “new globalisers” have seen dramatic reductions in poverty and improvements in human welfare indicators.

According to World Bank and Organization for Economic Cooperation and Development
(OECD) figures, since 1980 developing countries with a total population of about three billion -
mostly in Asia - have more than doubled their Trade-to-Gross Domestic Product (GDP) ratios-
doubled real per capita incomes and have cut average import tariffs by more than one-third. If
long-run productivity gains were added, welfare gains to developing countries from full
liberalisation of merchandise trade would rise to $200 billion per annum and about 127 million
people - more than 10% of the world's very poor - would be lifted out of extreme poverty.
Much greater gains would result from radical liberalisation of developing country services
markets and from all-round opening of labour markets to workers from developing countries.
Liberalisation must be part of broader market-based reforms and be buttressed by market-
supporting institutional reforms - as Adam Smith and David Hume pointed out more than two
centuries ago. But the central point remains that more prosperous developing countries are
those that have liberalized external trade and Foreign Direct Investment (FDI) massively as part
of a general move towards a market economy - none more so than China and Vietnam. The
World Bank estimates a developing country gain of $142-billion a year from major agricultural
liberalisation. But only $32-billion of that would result from developed country liberalization;
the rest-$110billion - would come from developing countries' liberalisation of their highly
protected agricultural markets.

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It is unskilled rural labour - the poorest of the poor - who would gain most as such liberalisation,
would reduce the anti-agricultural bias in domestic economies. In North-East Asia, there is scant
evidence to show that protection of infants actually led to higher social rates of return and
higher overall productivity growth. Southeast Asia's conspicuous success is in FDI-led
electronics exports - a result of drastically lower tariffs and an open door to inward investment.
Finally, infant-industry protection in Latin America, South Asia and Africa has been a disaster
not dissimilar to industrial planning in ex-command economies. The fact is that most
developing-country markets are too small to support infant-industry promotion and their states
are too weak, incompetent and corrupt to efficiently administer the complex instruments
required. As for WTO rules, it makes sense for developing-country governments to voluntarily
enter into commitments with other WTO members that bind in sensible policies (for example,
to restrict subsidies and performance requirements), and provide external discipline against silly
and harmful government intervention. This contradicts the argument that WTO agreements
should be renegotiated to give developing countries "policy space".

“An alliance of old-style protectionist interests and new-style ideological forces threatens to slow down
globalization’s advance and more generally the advance of the market economy. That would deprive the world's
least advantaged people of the life-chances that economic freedom and freer markets offer.”

8. Conclusion:

Most developing-country markets are too small to support infant-industry promotion and their
states are too weak, incompetent and corrupt to efficiently administer the complex instruments
required. There are clear evidences to show that infant industry argument is more or less a
failure. The important role of government is seen here in the sense that government should
intervene in places where market forces fail and in others it should act as a facilitator. As for
WTO rules, it makes sense for developing-country governments to voluntarily enter into
commitments with other WTO members that bind in sensible policies. We have thus studied
the prospects, future and development strategies of WTO that help in the development of the
developing economies. It was once put forth in an International Forum as-

“What can trade development organizations do to overcome the lack of public concern — and even hostility —
resulting from the lack of awareness on the benefits of international trade? With whom can they communicate?”

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9. References:

(i) Bagwell, Kyle, and Robert. W. Staiger, 1997 “Multilateral Tariff Co-operation during the Formation
of Free Trade Areas.” International Economic Review 38, 291-319.

(ii) Baldwin, Richard E., "Politically Realistic Objective Functions and Trade Policy,”Economics Letters,
24 (1), 1987, pp. 287-290.

(iii) Hoekman, B. and M. Kostecki, “The Political Economy of the World Trading System: From GATT
to WTO”, Oxford University Press, 1995.

(iv) Bhagwati, Jagdish “The World Trading System at Risk”, 1991, Princeton University Press,
Princeton, NJ.

(v) Ornelas, Emanuel, 2005, “Endogenous Free Trade Agreements and the Multilateral Trading System.”
Journal of International Economics 67: 471-497.

(vi) Riezman, Raymond, 1999. “Can Bilateral Trade Agreements Help Induce Free Trade?” Canadian
Journal of Economics 32, 751-766.

(vii) World Bank, 2005 “Global Economic Prospects: Trade, Regionalism, and Development”, The World
Bank, Washington, D.C.

(viii) World Trade Organization, 2003. World Trade Report

(ix) Bhagwati, Jagdish. (2002) “Free Trade Today” (Princeton, NJ: Princeton University Press).

(x) Economy Watch, News Letter, “Indo-China Trade Relations.”

10. Acknowledgements:
i. I would like to thank all my teachers who helped me in preparing the paper
ii. I am very much thankful to my seniors, Mr. Andrew Rozara, Mr. Vignesh Obli Raja,
for their role in making the paper the way it is.
iii. Finally, I am indeed thankful to my parents and friends for giving me the idea about
how to go on with the paper.

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