Key Factors in International Trade

by Gregory Hamel - Updated September 26, 2017

International trade occurs when one country trades with another. Trade between nations
is an essential part of the global economy. Certain raw materials can only be produced
in certain parts of the world; many countries must trade for materials they are unable to
produce themselves, and many choose to trade for goods that can be produced more
efficiently elsewhere. There are many key issues that impact international trade.

Exchange Rates
Exchange rates are the rates at which world currencies can be exchanged for one
another. Exchange rates determine how costly it is to buy a different world currency with
your home currency, and therefore how expensive it is to purchase goods from that
foreign country. For instance, if a dollar could buy 100 yen, you would be able to import
more goods with $1000 than if a dollar could only buy 50 yen. Exchange rates are in a
constant state of fluctuation, which can affect the way nations trade. When the value of
a currency goes down with respect to other currencies, the country with the currency
that is losing value typically imports fewer goods and exports more goods.

Trade Agreements and Barriers

Individual countries, or groups of countries, can set their own conditions that affect
international trade. Trade agreements encourage trading between two or more
countries by setting preferential conditions that give advantages to participating
members. Barriers make it harder to trade internationally. For example, tariffs may add
government levies or fees to imports. Taxing imports makes it more difficult for imported
goods to compete with domestic ones.
VIDEO OF THE DAY

Three Reasons Why WTO Membership Is So Important

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BY KIMBERLY AMADEO

Updated July 10, 2018

There are 164 members of the World Trade Organization. That's 84 percent of the 196
countries in the world. They joined to enjoy the benefits of greater international trade
conferred by the WTO.

WTO Membership Benefits

The WTO helps trade throughout the world flow smoothly through its trade agreements.
Members of the WTO know what the rules are. They understand the penalties for
breaking the rules. They know how to play the global trade game. As such, it creates a
safer trading arena for everyone.
The WTO also provides its members with a fair method to resolve trade disputes. They
don't have to resort to violence or war. How the WTO resolves trade disputes is
important. It prevents trade protectionism, a practice that retards economic growth.

The WTO negotiates improved trade arrangements among its members. Its most recent
round of negotiations took place in Bali. The largest agreement would have been
the Doha Round of Trade Talks. It failed because the United States and Europe were
not willing to reduce agricultural subsidies.

Membership also lowers the costs of doing business by removing volatility. These
general benefits extend to all members.

Three Specific Benefits

The WTO confers three specific benefits to all its members. These specific benefits
enable the general benefits mentioned earlier.

First, the WTO grants each member Most Favored Nation status, which means that
WTO members must treat each other the same. They give no preferential trade benefit
to any one member without giving it to all.

Second, WTO members have lower trade barriers with each other. That
includes tariffs, import quotas, and regulations. Lower trade barriers allow members
larger markets for their goods. Larger markets lead to greater sales, more jobs, and
faster economic growth.

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Thirty-six WTO members are categorized as least-developed countries or LDCs. The

United Nations grants that status to low-income countries with severe blocks to
sustainable economic growth. The U.N. and other agencies provide them extra
assistance in development and trade.

Responsibilities
A membership in th][po e WTO comes with responsibilities. Members agree to avoid
trade barriers and abide by the WTO's resolution of any dispute. That prevents
retaliatory trade warfare. These escalating trade restrictions help individual countries in
the short term but hurt world trade in the long term. This type of trade protectionism, in
fact, worsened the Great Depression of 1929. As global trade slowed, countries sought
to protect domestic industries. They erected trade barriers. These created a downward
spiral.

As a result, world trade shrank by 25 percent.

WTO Members by Category

The WTO has 76 founding members. They started the organization on January 1, 1995.

Asia has six LDC members. They are Afghanistan, Bangladesh, Cambodia, Laos,
Myanmar, and Nepal. Its founding members are Bahrain, Bangladesh, Brunei, Hong
Kong, India, Indonesia, Japan, Korea, Kuwait, Macao, Malaysia, Myanmar, Pakistan,
Philippines, Singapore, and Thailand.

Its other members are Armenia, China, Georgia, Israel, Jordan, Kazakhstan, Kyrgyz
Republic, Maldives, Mongolia, Oman, Papua New Guinea, Qatar, Russia,
Samoa, Saudi Arabia, Sri Lanka, Taipei, Tajikistan, Turkey, United Arab Emirates, Viet
Nam, and Yemen.

Africa has the most members that are designated as least developed. They are
Angola, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Congo
Democratic Republic, Djibouti, Gambia, Guinea, Guinea-Bissau,
Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nigeria, Rwanda,
Senegal, Sierra Leone, Tanzania, Togo, and Uganda.

Its founding members are Cote d'Ivoire, Kenya, Mauritius, Morocco, Namibia, Senegal,
South Africa, Swaziland, Tanzania, and Uganda.
Its other members are Botswana, Cameroon, Congo Republic, Egypt, Gabon, Ghana,
Niger, Seychelles, Tunisia, Zambia, and Zimbabwe.

Europe has the most founding WTO members. Austria, Belgium, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,
Luxembourg, Malta, Netherlands, Norway, Portugal, Romania, Slovak Republic,
Sweden, and the United Kingdom. In addition, the European Union is a founding
member.

Its other members are Albania, Bulgaria, Croatia, Cyprus, Estonia, Latvia, Lichtenstein,
Lithuania, Macedonia, Moldova, Montenegro, Poland, Slovenia, Spain, Switzerland, and
Ukraine.

Central and North America have just one LDC member: Haiti. Its founding members
are Antigua and Barbuda, Barbados, Belize, Canada, Costa Rica, Dominica,
Honduras, Mexico, Saint Lucia, Saint Vincent and the Grenadines, and the United
States.

Its other members are Cape Verde, Cuba, Dominican Republic, El Salvador, Grenada,
Guatemala, Jamaica, Nicaragua, Panama, Saint Kitts and Nevis, and Trinidad and
Tobago.

Oceana has two LDC countries: Solomon Islands and Vanuatu. Its founding member
is Australia. The other three members are Fiji, New Zealand, and Tonga.

South America has no LDC members. Its founding members are Argentina, Brazil,
Chile, Paraguay, Peru, Uruguay, and Venezuela. Its other members are Bolivia,
Colombia, Ecuador, Guyana, and Suriname.

Prospective WTO Members

The WTO has a category called Observer. These 20 countries have applied to become
members. Except for the Vatican, they have five years to complete the process. How a
country becomes a WTO member depends on its government’s ability to negotiate the
six-step process.

The prospective members are Algeria, Andorra, Azerbaijan, Bahamas, Belarus, Bhutan,
Bosnia and Herzegovina, Comoros, Equatorial Guinea, Ethiopia, Iran, Iraq, Lebanon,
Libya, Sao Tome and Principe, Serbia, Sudan, Syria, Uzbekistan, and the Vatican.

Countries Outside the WTO

Twelve countries aren't members and haven't applied to become members. They are
Eritrea, Kiribati, Marshall Islands, Micronesia, Monaco, Nauru, North Korea, Palau, San
Marino, Somalia, South Sudan, Turkmenistan, and Tuvalu.

GATT, Its Purpose, History, with Pros and

Cons
How GATT Saved the World
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BY KIMBERLY AMADEO

Updated September 22, 2018

The General Agreement on Tariffs and Tradewas a free trade agreement between 23
countries that eliminated tariffs and increased international trade. It was the first
worldwide multilateral free trade agreement. It was in effect from June 30, 1948 until
January 1, 1995. It ended when it was replaced by the more robust World Trade
Organization.

Purpose

The purpose of GATT was to eliminate harmful trade protectionism. That had sent
global trade down 65 percent during the Great Depression. GATT restored economic
health to the world after the devastation of the depression and World War II.

Three Provisions

GATT had three main provisions. The most important requirement was that each
member must confer most favored nation status to every other member. All members
must be treated equally when it comes to tariffs. It excluded the special tariffs among
members of the British Commonwealth and customs unions. It permitted tariffs if their
removal would cause serious injury to domestic producers.

Second, GATT prohibited restriction on the number of imports and exports. The
exceptions were:

 When a government had a surplus of agricultural products.

 If a country needed to protect its balance of payments because its foreign
exchange reserves were low.
 Emerging market countries that needed to protect fledgling industries.

In addition, countries could restrict trade for reasons of national security. These
included protecting patents, copyrights, and public morals.

The third provision was added in 1965. That was because more developing countries
joined GATT, and it wished to promote them. Developed countries agreed to eliminate
tariffs on imports of developing countries to boost their economies. It was also in the
stronger countries' best interests in the long run. It would increase the number of
middle-class consumers throughout the world.

History
GATT grew out of the Bretton Woods Agreement. The summit at Bretton Woods
also created the World Bank and the International Monetary Fund to coordinate global
growth.

The summit almost led to a third organization. It was to be the highly ambitious
International Trade Organization. The 50 countries that started negotiations wanted it to
be an agency within the United Nations that would create rules, not just on trade, but
also employment, commodity agreements, business practices, foreign direct
investment, and services. The ITO charter was agreed to in March 1948, but the U.S.
Congress and some other countries' legislatures refused to ratify it. In 1950, the Truman
Administration declared defeat, ending the ITO.

At the same time, 15 countries focused on negotiating a simple trade agreement. They
agreed on eliminating trade restrictions affecting $10 billion of trade or a fifth of the
world’s total. Under the name GATT, 23 countries signed the deal on October 30, 1947.
It was put into force on June 30,1948. GATT didn’t require the approval of Congress. It
was technically just an agreement under the provisions of U.S. Reciprocal Trade Act of
1934. It was only supposed to be temporary until the ITO replaced it.

Throughout the years, rounds of further negotiations on GATT continued. The main goal
was to further reduce tariffs. In the mid-1960s, the Kennedy round added an Anti-
Dumping Agreement. The Tokyo round in the seventies improved other aspects of
trade. The Uruguay round lasted from 1986 to 1994 and created the World Trade
Organization.

GATT and WTO

GATT lives on as the foundation of the WTO. The 1947 agreement itself is defunct. But,
its provisions were incorporated into the GATT 1994 agreement. That was designed to
keep the trade agreements going while the WTO was being set up. So, the GATT 1994
is itself a component of the WTO Agreement.

Member Countries
The original 23 GATT members were Australia; Belgium; Brazil; Burma, now called
Myanmar; Canada; Ceylon; Chile; China; Cuba; Czechoslovakia, now Czech Republic
and Slovakia; France; India; Lebanon; Luxembourg; Netherlands; New Zealand;
Norway; Pakistan; Southern Rhodesia, now Zimbabwe; Syria; South Africa; the United
Kingdom and the United States. The membership increased to 100 countries by 1993.

Pros

For 47 years, GATT reduced tariffs. This boosted world trade 8 percent a year during
the 1950s and 1960s. That was faster than world economic growth. Trade grew from
$332 billion in 1970 to $3.7 trillion in 1993.

It was such a success that many more countries wanted to join. By 1995, there 128
members, generating at least 80 percent of world trade.

By increasing trade, GATT promoted world peace. In the 100 years before GATT, the
number of wars was 10 times greater than the 50 years after GATT. Before World War
II, the chance of a lasting trade alliance was only slightly better than 50/50.

By showing how free trade works, GATT inspired other trade agreements. It set the
stage for the European Union. Despite the EU's problems, it has prevented wars
between its members.

GATT also improved communication. It provided incentives for countries to

learn English, the language of the world's largest consumer market. This adoption of a
common language reduced misunderstanding. It also gave less developed countries
a competitive advantage. English gave them insight into the developed country's
culture, marketing, and product needs.

For example, most Indians know English. It allows them to work in call centers that
support U.S. countries. It has been a major reason for call center outsourcing.

Cons
Low tariffs destroy some domestic industries, contributing to high unemployment in
those sectors. Governments subsidized many industries to make them more
competitive on a global scale. U.S. and EU agriculture were major examples. In the
early 1970s, the textile and clothing industries were exempted from GATT. When
the Nixon Administration took the U.S. dollar off the gold standard in 1973, it lowered
the value of the dollar compared to other currencies. That further lowered the
international price of U.S. exports.

By the 1980s, the nature of world trade had changed. GATT did not address the trade of
services that allowed them to grow beyond any one country's ability to manage
them. For example, financial services became globalized. Foreign direct investment had
become more important. As a result, when U.S. investment bank Lehman Brothers
collapsed, it threatened the entire global economy. Central banks scrambled to work
together for the first time to address the 2008 financial crisis. They were forced to
provide the liquidity for frozen credit markets.

Like other free trade agreements, GATT reduced the rights of a nation to rule its own
people. The agreement required them to change domestic laws to gain the trade
benefits. For example, India had allowed companies to create generic versions of drugs
without paying a license fee. This helped more people afford medicine. GATT required
India to remove this law. That raised the price of drugs to a level out of reach for many
Indians.

Trade agreements like GATT often destabilize small, traditional economies. Countries
like the United States that subsidize agricultural exports can put local family farmers out
of business. Unable to compete with low-cost grains, the farmers migrate to cities
looking for work, often in factories set up by multi-national corporations. Often these
factories can move to other countries with lower-cost labor, leaving the farmers
unemployed.

Farmers that stay often grow opium, coca, or marijuana, just because they can't grow
traditional crops and stay in business. Violence from the drug trade may force them to
emigrate to protect themselves and their children.
 Other Trade Agreements: NAFTA | TTIP | TPP | CAFTA | FTAA | Doha | U.S.
Regional Agreements

WTO accession: implication for business

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BUSINESS VOICE IN POLICY MAKING
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o How to influence trade negotiations

o Impacting trade policy
o WTO accession: implication for business
o Public-private dialogue for export strategy
o Sectoral Export Strategies
 Business enterprises directly benefit when their countries become a member of the
World Trade Organization (WTO). The effects are tangible for businesses that work in
both the international and national markets, but those benefits can only be used to the
best advantage when companies fully understand the accession process and the
changes it implies in trade.
Information
Accession to the WTO creates a number of rights for the business community. The
improved rule-based system is designed to promote the expansion of international
trade. The system’s primary goal is to provide liberal, secure and predictable access to
foreign markets for the goods and services of exporting enterprises. This allows
business enterprises to work within the parameters of clearly identified arrangements.

WTO accession helps to ensure that enterprises can market their products
internationally under competition conditions that are equitable and predictable without
the disruptions caused by the sudden imposition of restrictions. The implementation
of accession commitments measures can create both opportunities and challenges
for the business community.

Business communities in countries with which ITC works, however, are often not
adequately equipped to understand the opportunities and challenges which stem
from the WTO trading system. This is mainly due to the complexity of the system,
which sometimes prevents business communities from taking an interest in, and
 getting acquainted with, its rules. ITC provides assistance to the business
community to understand the commercial implications of WTO accession.

For further information, see our two-pager.

Data and Research
ITC provides the latest information on trade rules and their commercial implications. It
also provides specific updates on countries going through the accession process.

Case studies on the experience of implementing the trade policy and regulatory
reforms:

o Fostering trade through private-public dialogue – business implications of WTO

accession
o Thailand in Global automobile networks

ITC’s Business Briefing e-mail newsletter targets the business community. It

provides a regular summary of all of the news on WTO debates, accessions and
disputes, as well as information on the Doha Development Round. The electronic
version of the World Trade Net Business Briefing is updated on a daily basis.
Advisory Services
ITC provides information to the business community about the commercial implications
of WTO accession, including explaining rules of the multilateral trading system in clear
and concise language, providing regular updates on WTO negotiations, and online
briefings of the latest trade news and views.

Before and during the accession process, companies are often unable to articulate
their view to government negotiators. ITC provides mechanisms for discussions
among the parties. It also assists enterprises, including SMEs, to articulate their
interest and priorities to trade negotiators.

ITC shares the actual experience of countries that recently joined the WTO in seizing
new business opportunities and coping with challenges. This enables the acceding
country to take an informed position in the accession process.

ITC guides the stakeholders to develop coherence among trade policy and regulatory
regimes for export development.
Training
ITC provides customised training on "Trade Policy for Business managers," which
focuses on commercial perspectives of integrating with the global economy.ITC also
provides training in use of trade and tariff databases and their analysis to enable
business managers to seek products and market diversification strategies.
Projects
Expand this section to see our ongoing projects.

o WTO Accession: Ethiopia

o WTO Accession: Laos
o WTO Accession: Pacific LDCs
o WTO Accession: LDCs in early phase of accession