Executive Insights:

The World Trade Organization

Perspectives and Prospects
This article is based on a presentation made by the author to the
staff of the International Trade Gentre and the GATT in Geneva in
the summer of 1994. It highlights the similarities between the Inter-
national TYade Organization (ITO) which was proposed in 1948 and
subsequently rejected, and the newly proposed World Trade Organi-
zation (WTO). A changed world environment is seen as favorable to
the WTO. However, caution is expressed against overloading the
WTO with issues and causes not germane to trade and investment.
ABSTRACT
In 1948, after years of negotiations, more than 50 nations
signed the Havana Charter to create the ITO, the Intemational
TYade Organization. Several major principles were to govern
world trade fi'om then on. One of the principles was the non-
discriminatory treatment of parties, and a commitment to re-
duce tariffs and other trade barriers and eliminate quotas.
Services were to be covered just as well as products, owners
of patents, and intangible assets were to be protected. Foreign
direct investment was to receive fair treatment and domestic-
content requirements and public subsidies were to be regu-
lated. But in the 1950s, President Truman decided not to
re-submit the ITO charter to Congress for ratification due to
perceived threats to national sovereignty and the danger of
too much ITO intervention in markets [Guide 1994).
In 1994, the focus was on a totally new organization which
the Uruguay Round negotiators agreed onthe World Trade
Organization (WTO). And this WTO, as if by magic, has a lot
of components which sound remarkably similar to the provi-
sions of the ITO .
But the world has changed since then. In 1948, total world
trade was valued at just above $58 billion, with the United
States accounting for 34 percent of fi"ee world trade flows
[Yearbook 1956). Japan's imports exceeded her exports by
160 percent. Today, world trade exceeds $ 4 trillion, the
United States has a share of 12 percent, and Japan has a his-
tory of major trade surpluses. But one needs to look beyond
the numbers to understand some of the macro-economic
changes that have occurred.
Michael R. Czinkota
Submitted August 1994
Revised September 1994
October 1994
C Joumal oflnternational Marketing
Vol. 3, No. 1, 1995, pp. B5~92
ISSN 1069-031X
85
The traditional participants in trade, the Western, industrial-
ized nations have been joined by new playersthe dragons
or tigers of AsiaHong Kong, Singapore, Taiwan and South
Korea, who are now industrialized nations in their own right.
Other countries have been industrializing (for example In-
donesia, Malaysia, Thailand, Argentina, Chile) while still
others such as China are preparing to become important trade
players. In addition, the entire region, which used to be
known as the Eastern Bloc, has been converted into emerging
market economies, eager and sometimes even ready to enter
the world trade field.
Collaborative blocs are emerging among these participants.
They range from loose agreements for general collaboration
to well defined economic arrangements such as NAFTA and
include intricate political formations such as the European
Union. These blocs change the way nations deal with each
other; for example, negotiators now often talk to bloc repre-
sentatives rather than to individual countries.
Simultaneously, blocs have also disappearedparticularly the
Commimist one. This disappearance has opened up trade and
business relations in areas that were off limits only a few years
ago. The framework and the way we look at Third World
countries and our decisions about whether and how to sup-
port them also have been affected. For example, the cold war
threat by governments of "changing sides," which often trig-
gered gushers of aid payments, has become meaningless today.
Exchange rates are another area where there has been major
change. Currency values used to be fixed; later they started to
float. But a key component of exchange rate theory was al-
ways that they were the result of international currency de-
mand and supply, which in turn was triggered largely by
trade flows and interest rates. Today, financial flows exceed
trade flows by vast multiples. For example, the total value of
U.S. merchandise exports is about $550 billion per year. In
contrast, the value of worldwide currency trades exceeds
$1.5 trillion per day. Therefore, currency prices are no longer
mainly the result of financial flows that have been caused by
trade. Rather, the financial flows around the world set cur-
rency values and often impose the level of interest rates. Fi-
nancial flows can now determine trade flows, since higher
currency values mean higher prices for exports and lower
ones for imports. Concurrently, a new phenomenon called "
sticky prices " manifests itself when trade volumes do not be-
have the way they should in response to changes in the val-
ues of currencies. This occurs, for example, when the
Japanese yen shifts from a level of 250 to the U.S. dollar, to
less than 100 to the dollar, and the wave of imports still
keeps on coming.
86 Michael R. Czinkota
There are also major changes in trade and investment orien-
tation. Investments used to be the culmination of a long trade
relationship and, due to their distance and riskiness, were in-
frequent and long term in nature. Today, the rate of global in-
vestment growth far exceeds the growth of trade. Such
investments have thoroughly affected trade fiows both on the
export and the import side (Okamatsu 1994). The transplant
effect in the automotive sector serves as example for in-
creases in exports and market penetration. The effects of in-
vestments on the import side can be seen when scrutinizing
outsourcing investments which are designed to create cap-
tive sources of supply. In addition, investments today are of-
ten of a short-term nature, moving from country to country in
order to benefit from resource and wage advantages.
Major shifts in orientation are also in evidence with regard to
trade. Historically, for example, the United States has been
"Europe oriented" in its trade outlook. This is easily seen in
the number of staffers in government departments who deal
with Europe. However, since 1978 U.S./Asia merchandise
trade has exceeded U.S./European trade, and the excess is
growing rapidly. At the same time, this change is dynamic and
has shifted the trade orientation of other nations as well. For
example, the United States has eilready declined dramatically
as an export destination for Asia's exports. From a high of 38
percent the U.S. market now accounts for only 28 percent of
Japanese exports. The United States is the recipient of only 23
percent of South Korea's exports, rather than the 36 percent it
was in the past. Overall, in spite of the mutual feeling of belea-
guerment, the exports of Asian countries to the United States
average only about 23 percent of their total exports.
The new orientation in trade is accompanied by trade imbal-
ances at unprecedented levels. Today, the United States is
running an annual merchandise trade deficit of about $120
billion, with Japan accumulating a global surplus of about
the same size. It is hard to remember that in 1972 President
Nixon abandoned the gold standard because of a trade deficit
of $2.5 billion.
Finally, there is a global recognition of new issues that are too
large to be addressed successfully by any one country, yet too
important to be ignored. Society is increasingly preoccupied
by concerns such as air and water pollution, global warming,
ecosystem maintenance, and new diseases. Patterns of long-
term structural vmemployment, systemic weaknesses in edu-
cational approaches, and growing safety and health care
concerns are just a few other issues which are not local, but
global in nature. Goverrunents that attempt to address these
issues find out quickly that for reasons of resource con-
straints or global linkages, their powers are limited, and the
effectiveness of their actions is often only minor.
Executive Insights: The World Trade OrganizationPerspectives and Prospects 87
In sum, on a macro level, there are seas of change. These in-
clude changing blocs, changing relations, changing fiows of
funds, changing flows of trade, and a decreasing ability by
governments to affect these changes.
^^^^'^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Change is not confined to governments alone. At the global
IHE CORPORATE PERSPECTIVE corporate level many parameters, which were believed to be
fixed, have become fiuid. Competition has increased drasti-
cally from expected and unexpected quarters. Not meeting
the competition no longer results in slight decreases in mar-
ket share, but in a threat of corporate extinction. At the same
time, the capability to stay ahead is getting to be more expen-
sive, with costs of research and development rising exponen-
tially. The speed and ease of technology transfer causes
innovations to be diffused very quickly. Today, competitors
can copy or improve innovative products rapidly, providing
the creator often with only limited opportunity to recoup the
investment made. An example illustrates the type of techno-
logical progress achieved. The current innovation period of
computer chips is only 18 months. More than 70 percent of
the sales of the data processing industry were the result of
the sale of devices that did not exist only two years ago. Ex-
perts estimated that this percentage would rise to 80 percent
by 1995 (U.S. Senate Committee 1994).
Advances in information and communications technology
have transformed the ability of firms to select their inputs
and their locations. These advances allow the separation be-
tween the origination and delivery of a product or service,
thus offering firms new options for sourcing and foreign di-
rect investment. While the traditional battle in the interna-
tional market has been one for the right of establishment, the
delocalization made possible by telecommunication ad-
vances may soon require a striving for the right to operations
without establishment. These advances also enable firms to
carry out product adaptations and market targeting with sur-
gical precision. However, the competition and consumer ex-
pectations often require such changes, whether they be cost
effective or not.
Today, firms also have many more options for their organiza-
tional structure across borders. Joint ventures, value adding
partnerships, strategic coalitions, strategic alliances, cooper-
ative agreements, and industry consortia are only some ex-
amples of organizations that allow firms to avoid getting
bigger (Naisbitt 1994), yet enable them to exercise their mar-
keting muscle and maximize their production capabilities
across national boundaries. Overall, on the micro level, firms
see more change, an increase in the speed of change, increas-
ing risk, more capabilities, but also more demands.
88 Michael R. Gzinkota
What are the governmental goals in the context of worldwide ====!^==!^=^^^^^^=
competition? They are threefold and linked to each other: TH E CONTEXT OF A NE W
ensuring success for its firms, both at home and abroad; ere- GLOBAL TRADE FRAMEWORK
ating employment; and increasing the standard of living.
Governments attempt to achieve these goals through both in-
ward and outward oriented activities by focusing on market
access, stable rules, and market skills. Pressure for action is
exerted within the country through domestic constituents
such as voters and special interest groups. From outside the
country pressure is exercised by trading partners, trade and
investment agreements, and multilateral institutions. As a re-
sult of these pressures, all government activities are affected
by domestic and international influences. Yet, in the intema-
tional trade and investment setting, preponderant orienta-
tions can be discovered. When governments need to ensure
market access for firms, this task requires mainly an outward
orientation directed at other countries. Assuring the stability
of rules is, again, mainly an outward-oriented activity. The
assurance of market skills for firms in terms of product de-
velopment, process capabilities, and innovation is mainly an
inward-looking, domestic activity.
From a long-term perspective, a major shift in priorities can
be discovered for these activities. In 1948, during ITO days,
the United States was an economically overwhelming global
power. When it came to market access, the only issue of con-
sequence was the access to the U.S. market. The stability of
rules essentially depended simply on the desire for stability
on the part of the United States. Market skills were highly
concentrated in U.S. firms. Therefore, within a 20- to 25-year
time frame, the ITO and its new rules were offering gains for
everyone except the United States. It is no wonder that there
was no desire to give up any sovereignty.
But today, things are different. The U.S. govemment is dis-
covering the limits of policy implementation due to the ac-
tions of its trading partners. The importance of market access
now is increasingly critical for U.S. firms if they are to be
successful. There are now changes in rules and definitions
that do not emanate from the United States and are not nec-
essarily in its favor.
The new medium-term perspective, looking forward to the
next 20-25 years, shows us that there is major world growth
taking place. Access to these growing markets will be crucial
for the success of global firms. This growth occurs in Asia,
Latin America, and perhaps in the former Eastern E urope.
One result of this growth is a new assertiveness by countries
around the globe now that the strong bonds forged by the
cold war threat have disappeared (Czinkota 1994). One might
speculate, for example, that the caning in Singapore was not
just a woodshed, but perhaps a watershed of a newly defined
U.S. relationship with Asia.
Executive Insights: The World Trade OrganizationPerspectives and Prospects
89
Today, there are key benefits to be gained for the United States
by entering into trade agreements. NAFTA, for example, pro-
vides U.S. firms vdth access to a market located next door. It
is hard to overestimate just how crucial such access is. Re-
search has shoviTi, for example, that firms decide to go inter-
national based on a phenomenon called "psychic distance,"
which is a variable composed of geographic distance, culttiral
similarity and market access (Wiedersheim-Paul 1978). More
than 60 percent of U.S. firms start to export to markets that are
psychically close. NAFTA has brought Mexico psychically
much closer and therefore affords new opportxmities for U.S.
companies to get started in intemational business and grow
into multinational corporations. On a global level, the WTO
can now assist countries in achieving the important goals of
market access and rules stability, which they might not be
able to secure anymore by themselves.
But the WTO vkdll not fix all trade ills. The key third dimen-
sion of successsuperior market skillsrepresents mainly a
domestic issue in spite of the importance of sharing manage-
rial insights beyond national borders. For the United States,
export trade is only one, albeit an important component of
the economy. In light of 120 million employed in the United
States, and the fact that about 20,000 jobs are associated with
a $1 billion increase in U.S. exports (Davis 1992), even a ma-
jor trade liberalization with $10 billion in new U.S. exports
will only create 200,000 jobs. Of much greater importance is
a nation's ability to maintain its global competitiveness on a
relative basis. CATT economists predict that by the year 2002
annual increases in global exports will be in excess of $755
billion (Uruguay 1994). To persevere against this wave of
trade fiows, the key to economic progress has been, and con-
tinues to be, the fostering of market skills for firms and em-
ployees. Encouraging those skills will require stimulating
and implementing reforms in the educational system, re-
training the labor force, and promoting scientific awareness
and progress (Simai 1994). Such an educational push must
consist of a two-pronged approach: It needs to include major
efforts to get people ready for economic processes, and it
must redefine the processes to get them ready for the work
force. An example of the latter approach can be found in the
computer industry. Its success in penetrating markets is not
the result of a major increase in the programming skills of the
population at large, but rather of the growing user friendli-
ness of the machines and software.
^^^^- It is meaningful and of value for the United States to be part of
THE FUTURE OF THE WORLD the WTO. Congressional ratification was the right step. But the
TRADE ORGANIZATION WTO must have the opportunity to become a successful orga-
nization. As to the prospects for such success, one must refiect
on all the "social causes" that are now being introduced into
90 Michael R. Gzinkota
trade decisions. It is debated whether the WTO should also
deal with issues such as labor lavv^s, competition, and emigra-
tion freedoms. Clearly, there are many important issues other
than trade, in addition to the social issues mentioned above.
Religion, health care, the safety of animals, the pursuit of
happiness, all of these are worthwhile concems and desires.
There is something of an irony if one considers that all these
issues might have been easily included by the United States
in the ITO back in 1948.
Today, however, the genie is out of the bottle. There are now
125 govemments that participated in the Uruguay Round. They
have diverse perspectives, histories, relations, economies, and
ambitions. Many of them fear that social causes can be used to
devise new rules of protectionism against their exports. There
is the question as to how much companies^which, after all,
are the ones doing the trading and investingshould be bur-
dened with concems not germane to their activities. There is
today no single country with sufficient global market impor-
tance to unilaterally impose its will.
To be successful, the WTO needs to be able to focus on its core
mission, which deals with intemational trade and investment.
The piling on of social causes may appear politically expedi-
ent, but will be a key cause for divisiveness and dissent within
the WTO and thus inhibit progress on further liberalization of
trade and investment. Failure to achieve such progress would
leave the WTO without teeth and would negate much of the
progress achieved in the Uruguay Round negotiations.
There are other organizations that can take on social causes,
for example the International Labor Organization, for labor
issues. Such groups can and should study ways of further im-
proving the well-being of human kind.
What the WTO can help with is the implementation of activ-
ities that work in support of social causes. For example, the
Intemational TYade Centre, cosponsored by UNCTAD/GATT,
could provide training on how to utilize rain forests or how
to improve labor conditions. The core contribution of the
WTO, however, will be in the fact that the flag follows trade
and investment. Over time, increased economic ties will
cross-pollinate cultures, values, and ethics between eco-
nomic partners and, together with the income effects on indi-
viduals and countries, cause changes in the social arena.
Together with the other pillars of the global economythe
World Bank for development and the Intemational Monetary
Fund for financethe WTO can form the underpinnings for a
world economic platform. After that platform is secxired, fur-
ther societcd dimensions can be built on top of it.
THE AUTHOR
Michael R. Czinkota teaches in-
ternational marketing and busi-
ness at Georgetown University. His
latest book. The Global Marketing
Imperative, was published by NTC
Business Books in 1995.
Executive Insights: The World Trade OrganizationPerspectives and Prospects 91
^ ^ ^ ^ ^ ^ ~ ~ ~ Czinkota, Michael R. "Global Neighbors, Poor Relations." Market-
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92 Michael B. Czinkota