We are now in an age of globalization. The biggest event that has symbolized this is the World Trade Organization, which was formed in January 1995 with 123 members. What does this mean for businesses? And how can it impact your bottom line?
Before I delve into this, you have to understand just what the WTO means and how it works. Simply put: no tariffs or trade barriers on trade between countries (or parties) that sign the agreement and its rules and regulations must be followed by all members. This means one thing: free trade, as long as everyone plays by everyone else’s rules – something we could call a “level playing field.”
While there are many positives about such an agreement, like easy market entry (for both goods and services, not just low-skilled/low-wage trades), increased trade volume, and a reduction in the cost of exporting, there are also a number of negatives.
The biggest negative is that it can be extremely costly for small businesses to comply with these rules and regulations. Many times, the costs associated with the necessary technology, software updates, training workers on how to use them properly (and retain such knowledge for future needs), and general managerial time/capital used to get up to speed outweigh potential profits from selling abroad or producing increased revenue from increased exports. In other words: taking advantage of free trade isn’t always profitable if you aren’t able to recoup your investment in compliance quickly enough. This means many small- and medium-sized enterprises won’t even bother trading abroad until tariffs are reduced, trade barriers removed, and economies of scale can be achieved – this is known as “trade liberalization.”
So what does all of this mean for you, the consumer? It basically boils down to this: you’ll pay more at home (in developed nations) than you otherwise would if things were free globally. This hurts everyone in developed nations by eroding their buying power. The global market becomes distorted as a result because one side isn’t playing by the same rules as the other. This means developing nations have a tough time breaking into a larger bilateral/multilateral world that’s already skewed against them from being “latecomers” to globalization.
While the WTO attempts to make sure developing nations can compete on a fair and level playing field (by offering them preferential access or duty-free quotas), this is difficult to obtain and comes with strict conditions: you must follow human rights, environmental, and labour laws – basically, if you’re producing goods/services of a lower quality than developed nations, even after world market prices come down as a result of free trade agreements like these, then tariff reductions will only exacerbate the problem by giving your country’s businesses an advantage over quality businesses in developed nations. When it comes to competing against low-wage/low-skill industries from developing countries… well, this is one area where developed countries have a significant edge they won’t give up easily.
The other problem: free trade agreements like the GATT and WTO (and all of its predecessor organizations and treaties) take a long time to negotiate and ratify. Why? Because every country who party to it has something different to gain or lose… and everyone wants their “fair share.” In fact, negotiations can take so long that politicians for one administration might not see the results put in place before they leave office – this is sometimes due to elections being held too close together from when negotiations started. This makes it very difficult for businesses who want to begin exporting immediately after an agreement goes into effect…
So what does this mean for you? It means that while free trade may be a good idea, in theory, it’s slow going. If you have a background in economics, it’s a fascinating topic. Everyone else: enjoy your cheap bananas and shoes for now!