The World Trade Organisation Opportunities and Threats

The WTO and the pursuit of free trade

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The WTO and the pursuit of free trade

Given these guiding principles, the GATT/WTO has, since its inception in 1947, sought to create a world trading system based on free trade.

The main advantage attributed to free trade is that allows international production to be organised in the most efficient way. Countries, playing to their economic strengths, specialise in the production of goods and services in which they hold a comparative advantage. By exporting products in which they have a comparative advantage and importing products in which they have a comparative disadvantage, countries gain by consuming beyond their production possibility curve.

For exporters the outcomes of free trade are obvious: more jobs, higher earnings and a larger market. The larger market allows for greater efficiency, lower costs and enhanced profitability. For the consumer, the cutting of tariff barriers improves choice. Also, with greater levels of competition on the domestic market, prices are likely to fall and non-price aspects, such as product quality and after-care service, are likely to improve.

What about import-competing domestic producers: surely they lose from free trade? Import-competing domestic producers will, without doubt, need to improve their competitiveness if they are to survive in such an environment. As such, over the longer term there may well need to be some structural shifts in the economy from import-competing to export-orientated production. Although import-competing domestic producers might find the enhanced competition tough, a greater volume of imports will provide the economy with some positive spin-offs: not only will they help consumers by driving down domestic prices through competition, but will create jobs in transport, retailing, maintenance, etc. Despite the fact that imports into the USA between 1990 and 2000 increased by an average of 9.3 per cent per year, unemployment fell from 5.6 per cent to 4.1 per cent. If there were any net direct job losses from trade, these were more than offset by gains from economic growth: growth which was helped by trade.

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