1. WTO and Trading
Blocks
MODULE 3

2. WTO
“The World Trade Organization is
‘member-driven, with decisions taken
by General agreement among all
member of governments and it deals
with the rules of trade between nations
at a global or near-global level.

3. WTO
The World Trade Organization (WTO) is the only
international organization that deals with global
rules of trade between nations.
It provides a framework for conduct of
international trade in goods and services. It lays
down the rights and obligations of governments in
the set of multilateral agreements.

4. History
The World Trade Organization (WTO) came into being on January 1st
1995.
The WTO was essentially an extension of GATT.
It extended GATT in two major ways.
GATT became only one of the three major trade agreements that went
into the WTO (the other two being the General Agreement on Trade in
Services (GATS) and the agreements on Trade Related Aspects of
Intellectual Property Rights (TRIPS)).

5. The WTO was put on a much sounder institutional footing than GATT.
With GATT the support services that helped maintain the agreement
had come into being in an ad hoc manner as the need arose.
The WTO by contrast is a fully fledged institution (GATT was only an
agreement between contracting parties and had no independent
existence of its own while the WTO is a corporate body recognized
under international law).

6. Objectives
To ensure the reduction of tariffs and other barriers to trade.
To eliminate discriminatory treatment in international trade relations.
To facilitate higher standards of living, full employment, a growing volume
of real income and effective demand, and an increase in production and
trade in goods and services of the member nations.
To make positive effect, which ensures developing countries, especially
the least developed secure a level of share in the growth of international
trade that reflects the needs of their economic development.
To facilitate the optimal use of the world’s resources for sustainable
development.
To promote an integrated, more viable and durable trading system
incorporating all the resolutions of the Uruguay Round’s multilateral trade
negotiations.

7. WTO vs. GATT
GATT remained a ‘provisional’ agreement and organization
whereas WTO commitments are permanent.
GATT rules mainly applied to trade in goods whereas the WTO covers
other areas, such as services, intellectual property, etc.
GATT had contracting parties whereas the WTO has members.
GATT was essentially a set of rules of the multilateral treaty with no
institutional foundation whereas the WTO is a permanent institution
with its own Secretariat.

8. FUNCTIONS OF WTO
Administering WTO trade agreements
Forum for trade negotiations
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for developing
Countries
Cooperation with other international organizations

9. PRINCIPLES OF WTO
Trade Without Discrimination
1. Most-favoured-nation (MFN): treating other people equally Under
the WTO agreements, countries cannot normally discriminate between
their trading partners. Grant someone a special favour (such as a lower
customs duty rate for one of their products) and you have to do the
same for all other WTO members.
2. National treatment: Treating foreigners and locals equally Imported
and locally-produced goods should be treated equally — at least after
the foreign goods have entered the market. The same should apply to
foreign and domestic services, and to foreign and local trademarks,
copyrights and patents.

10. Freer trade: gradually, through negotiation
Lowering trade barriers is one of the most obvious means of
encouraging trade. The barriers concerned include customs duties (or
tariffs) and measures such as import bans or quotas that restrict
quantities selectively
Predictability: through binding and transparency
Sometimes, promising not to raise a trade barrier can be as important
as lowering one, because the promise gives businesses a clearer view of
their future opportunities. With stability and predictability, investment
is encouraged, jobs are created and consumers can fully enjoy the
benefits of competition — choice and lower prices. The multilateral
trading system is an attempt by governments to make the business
environment stable and predictable.

11. Promoting fair competition
The WTO is sometimes described as a “free trade” institution, but that
is not entirely accurate. The system does allow tariffs and, in limited
circumstances, other forms of protection. More accurately, it is a system
of rules dedicated to open, fair and undistorted competition.
Encouraging development and economic reform.
The WTO system contributes to development. On the other hand,
developing countries need flexibility in the time they
take to implement the system’s agreements. And the agreements
themselves inherit the earlier provisions of GATT that allow for special
assistance and trade concessions for developing countries.

12. WTO and India
India is a founder member of World Trade Organization, and also treated
as the part of developing countries group for accessing the concessions
granted by the organization. As a result, there are several implications for
India for the various agreements that are signed under WTO. Let us
understand each agreement in general, what it means and its implications
for India in specific.
India was a signatory of the General Agreement on Tariffs & Trade
(GATT), and as a part of the commitment had to change several laws and
policies; the major changes that were incorporated were as a follows

13. WTO and India
Reduction of peak and average tariffs on manufactured products Commitments
to phase out the quantitative restrictions over a period as these were considered
non-transparent measure in any countries policy structure.
The result of this agreement as mentioned earlier was limited as, GATT was only
an agreement and there was no enforcing agency to strictly implement the
clauses and punish the country which breaks the clauses. Thus the impact was
partial. However, with WTO coming into effect, the competition from imports for
the domestic firms has increased.
WTO had the deadline till 2005, for the domestic policy was supposed to phase
out the QR's; for those countries which face severe balance of payments
problems special concession period was given. Thus it is very clear that only
those firms that have competitive advantage would be able to survive in the
long run, and those firms which are weak would fade into history in the process.

14. Structure of WTO

15. The Ministerial Conference (MC) is at the top of the structural
organisation of the WTO. It is the supreme governing body which takes
ultimate decisions on all matters. It is constituted by representatives of
(usually, Ministers of Trade) all the member countries.
The General Council (GC) is composed of the representatives of all the
members. It is the real engine of the WTO which acts on behalf of the MC.
It also acts as the Dispute Settlement Body as well as the Trade Policy
Review Body.
There are three councils, viz.: the Council for Trade in Services and the
Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS)
operating under the GC. These councils with their subsidiary bodies carry
out their specific responsibilities

16. LPG Policies
July 1991,India has taken a series of measures to structure the economy
and improve the Business position. The new economic policy introduced
changes in several areas.
The policy have salient feature which are: -
1.Liberlisation (internal and external)
2.Extending Privatization
3.Globalisation of the economy
Which are known as “LPG”. (liberalisation privatisation globalisation)

17. Reasons for implementing LPG
Excess of consumption and expenditure over revenue resulting in heavy
govt. borrowings.
Growing inefficiency on the use of resources.
Over protection to industries.
Mismanagement of the firm and the economy.
Increase in losses for public sector enterprises.
Various distortion like poor technological development, shortage of
foreign exchange and borrowing from abroad.
Low foreign exchange reserves.
Inflation

18. Liberalization
Liberalization is a very broad term that usually refers to fewer
government regulations and restrictions in the economy.
Liberalization refers to the relaxation of the previous government
restriction usually in area of social and economic policies.
When government liberalized trade , it means it has removed the tariff
,subsidies and other restriction on the flow of goods and services
between the countries.

19. The Path of liberalization
Relief for foreign investors
Devaluation of Indian rupees
New industrial Policy
New trade policy
Removal of import Restrictions
Liberalization of NRI remittances
Freedom to import technology
Encouraging foreign tie-ups
Privatization of public sector

20. Advantages of Liberalization
Industrial licensing
Increase the foreign investment.
Increase the foreign exchange reserve.
Increase in consumption and Control over price.
Check on corruption.
Reduction in dependence on external commercial borrowings

21. Disadvantages of Liberalization
Increase in unemployment.
Loss to domestic units.
Increase dependence on foreign nations
Unbalanced development

22. Privatization
Privatization means transfer of ownership and/or management of an
enterprise from the public sector to the private sector .
It also means the withdrawal of the state from an industry or sector
partially or fully.
Privatization is opening up of an industry that has been reserved for
public sector to the private sector.
Privatization means replacing government monopolies with the
competitive pressures of the marketplace to encourage efficiency,
quality and innovation in the delivery of goods and services.

23. Need for Privatisation.
Though the PSUs have contributed heavily to develop the industrial base
of the country, they continue, even today, to suffer from a number of
shortcomings which are identified
A sizable number of PSUs have been incurring and reporting losses on a
continual basis.
Consequently, a large number of PSUs have already been referred of loss
giving units;
Multiplicity of authorities to whom the PSUs are Accountable
Delay in implementation of projects leading to cost escalation and other
consequences;

24. Need for Privatisation.
Ineffective and widespread inefficiency on management;
With a view to provide opportunities for more and more unemployed
youths, more number of people, than required, were recruited and
therefore, many PSUs are over-staffed resulting in lower labour
productivity, bad industrial relations, etc.;
A number of sick companies (40 companies) which were in the private
sector was taken over by public sector mainly to protect the
employees.
These sick units are causing a big drain on the resources of the state;
etc.

25. Advantages of Privatization
Privatization helps to reduce the burden on Govt.
It will help profit making public sector unit to modernize and diversify
their business.
It will help in making public sector unit more competitive.
It will help to improving the quality of decision making, because the
decisions are free from any political interference.
Privatization may help in reviving sick units which are the liability of the
public sector.
Industrial growth.
Increase the foreign investment.
Increase in efficiency.

26. Disadvantages of Privatization
Industrial sickness.
Lack of welfare.
Class struggle.
Increase in inequality
Opposition by employees.
Problem of financing.
Increase in unemployment.
Ignores the weaker sections.
Ignores the national importance

27. Examples of privatization in India
Lagan Jute Machinery Company Limited (LJMC)
Videsh Sanchar Nigam Limited (VSNL)
Hindustan Zinc Limited (HZL)
Hotel Corporation Limited of India (HCL)
Bharat Aluminium Company limited (BALCO)

28. Lagan Jute Machinery Company
Limited (LJMC)
https://dipam.gov.in/lagan-jute-machinery-co-ltd-ljmc-subsidiary-
bharat-bhari-udyog-nigam-ltd-hereinafter-referred-bbunl

29. Videsh Sanchar Nigam Limited
(VSNL)
https://dipam.gov.in/videsh-sanchar-nigam-ltd-vsnl

30. Globalization
Globalization implies integration of the economy of the country with
the rest of the world economy and opening up of the economy for
foreign direct investment by liberalizing the rules and regulations and by
creating favourable socio-economic and political climate for global
business.

31. Features of Globalization
Opening and planning to expand business throughout the world.
Erasing the difference between domestic market and foreign market.
Buying and selling goods and services from/to any countries in the
world.
Locating the production and other physical facilities on a consideration
of the global business dynamics ,irrespective of national consideration.

32. Advantages of Globalization
Free flow of capital and increase in the total capital employed.
Free flow of technology.
Increase in industrialization.
Spread of production facilities throughout the globe.
Balanced development of world economies.
Increase in production and consumption.
Commodities at lower price with high quality.
Increase in jobs and income.
Higher Standard of living.
Balanced human development

33. Disadvantages of Globalization
Loss of domestic industries
Exploits Human resource
Decline in income
Unemployment
Transfer of natural resources
Lead to commercial and political colonism
Widening gap between rich and poor
Dominance of foreign institutions

34. Regional Trade Blocks
Regional Trade Blocks or Regional Trade Agreements (or Free Trade
Agreements) are a type of regional intergovernmental arrangement,
where the participating countries agree to reduce or eliminate barriers
to trade like tariffs and non-tariff barriers.
The RTBs are thus historically known for promoting trade within a
region by reducing or eliminating tariff among the member countries.
Over the last few decades, international trade liberalisations are taking
place in a serious manner through the formation of RTBs.

35. Integration Between Countries
Free trade area. This is the most basic form of economic cooperation.
Member countries remove all barriers to trade between themselves but
are free to independently determine trade policies with non-member
nations. An example is the North American Free Trade Agreement
(NAFTA).
Customs union. This type provides for economic cooperation as in a
free-trade zone. Barriers to trade are removed between member
countries. The primary difference from the free trade area is that
members agree to treat trade with non member countries in a similar
manner.

36. Integration Between Countries
Common market. This type allows for the creation of economically
integrated markets between member countries. Trade barriers are
removed.
Like customs unions, there is a common trade policy for trade with non
member nations.
The primary advantage to workers is that they no longer need a visa or
work permit to work in another member country of a common market.
Economic union. This type is created when countries enter into an
economic agreement to remove barriers to trade and adopt common
economic policies. An example is the European Union (EU).

37. Strategic alliance
A strategic alliance is an agreement between two or more parties to
pursue a set of agreed upon objectives needed while remaining
independent organizations.
Typically, two companies form a strategic alliance when each possesses
one or more business assets or have expertise that will help the other by
enhancing their businesses.
Strategic alliances can develop in outsourcing relationships where the
parties desire to achieve long-term win-win benefits and innovation based
on mutually desired outcomes.

38. Advantages
Shared risk: The partnerships allow the involved companies or countries
to offset their market exposure.
Shared knowledge: Sharing skills (distribution, marketing, management),
brands, market knowledge, technical know-how and assets leads to
synergistic effects, which result in pool of resources which is more
valuable than the separated single resources in the particular company or
country

39. Advantages
Opportunities for growth: Using the partner´s distribution networks in
combination with taking advantage of a good brand image can help a
company to grow faster than it would on its own.
Speed to market: Speed to market is an essential success factor In
nowadays competitive markets and the right partner can help to distinctly
improve this.

40. Advantages
Complexity: As complexity increases, it is more and more difficult to
manage all requirements and challenges a company has to face, so
pooling of expertise and knowledge can help to best serve customers.
Innovation: The parties in an alliance can jointly determine their mutual
desired outcomes and craft a collaborative contract that features
incentives designed to spur investments in innovation.
Costs: Partnerships can help to lower costs, especially in non-profit areas
like research & development.

41. Advantages
Access to resources: Partners in a Strategic Alliance can help each other
by giving access to resources, (personnel, finances, technology) which
enable the partner to produce its products in a higher quality or more cost
efficient way.
Access to target markets: Sometimes, collaboration with a local partner is
the only way to enter a specific market. Especially developing countries
want to avoid that their resources are exploited, which makes it hard for
foreign companies to enter these markets alone.
Economies of scale: When companies pool their resources and enable
each other to access manufacturing capabilities, economies of scale can
be achieved. Cooperating with appropriate strategies also allows smaller
enterprises to work together and to compete against large competitors.

42. Disadvantages
Sharing: In a strategic alliance the partners must share resources and
profits and often skills and know-how. This can be critical if business
secrets are included in this knowledge. Agreements can protect these
secrets but the partner might not be willing to stick to such an agreement.
Creating a competitor: The partner in a strategic alliance might become a
competitor one day, if it profited enough from the alliance and grew
enough to end the partnership and then is able to operate on its own in
the same market segment.
Opportunity costs: Focusing and committing is necessary to run a
Strategic Alliance successfully but might discourage from taking other
opportunities, which might be beneficial as well.

43. Disadvantages
Uneven alliances: When the decision powers are distributed unevenly, the
weaker partner might be forced to act according to the will of the more
powerful partner(s), even if he or she is actually not willing to do so.
Foreign confiscation: If a company is engaged in a foreign country, there is
the risk that the government of this country might try to seize this local
business so that the domestic company can have all the market on its
own.
Risk of losing control over proprietary information, especially regarding
complex transactions requiring extensive coordination and intensive
information sharing.
Coordination difficulties due to informal cooperation settings and highly
costly dispute resolution.

44. How to make Alliances work
The success of any alliance very much depends on how effective the
capabilities of the involved enterprises are matched and whether the full
commitment of each partner to the alliance is achieved.
Understanding: The cooperating companies need a clear understanding of
the potential partner´s resources and interests and this understanding
should be the base of set the alliance goals.
No time pressure: During negotiations time pressure must not have an
influence on the outcome of the process. Managers need time to establish
a working relationship with each other, develop a time plan, set
milestones, and design communication channels.

45. How to make Alliances work
Limited alliances: Some incompatibilities between enterprises might not
be avoidable, so the number of alliances should be limited to a necessary
amount, which enables the companies to achieve their goals.
Good connection: Negotiations need experienced managers. The
managers from large firms need to be connected very well so they have
the possibility to integrate different departments and business areas over
internal borders, and they need legitimations and support from the top
management.

46. How to make Alliances work
Creation of trust and goodwill: The best basis for a profit-yielding
cooperation between enterprises is the creation of trust and goodwill,
because it increases tolerance, intensity and openness of communication
and makes the common work easier. Further it leads to equal and satisfied
partners.
Intense relationship: Intensifying the partnership leads to the fact that
partners get to know each other better, each other's interests and
operating styles and increases trust.