Returns to Scale Definition

The concept of “returns to scale” describes the rate of increase in production relative
to the associated increase in the factors of production in the long run. In other words,
it describes how effectively and efficiently—in other words, profitably—a particular
company or business is producing its goods or services. At this point, all factors of
production are variable (not fixed) and can scale up. Therefore, the scale of production
can be changed by changing the quantity of all factors of production.

Conceptualizing “returns to scale” is an effort to specifically understand how

production increases relative to factors contributing to production. Production
functions typically include capital as well as labor.

The difference between economies of scale and returns to scale is that economies of
scale show the effect of an increased output level on unit costs, while the return to
scale focus only on the relation between input and output quantities.

The Law of Returns to Scale

Returns to scale are actually governed by three separate laws:

1. Law of Increasing Returns to Scale

If production increases by more than the proportional change in factors of production,
this means there are increasing returns to scale.

2. Law of Constant Returns to Scale

If production increases by the same proportional change as all factors of production
are also changing, then there are constant returns to scale.

3. Law of Diminishing returns to Scale

If production increases by less than that proportional change in factors of production,
there are decreasing returns to scale.
 Increasing Returns to Scale

Increasing returns to scale happen when all the factors of production are increased; at
this point, the output increases at a higher rate.

For example, if all inputs are doubled, the overall output will increase at more than
twice the rate—this is the increase in output relative to inputs that “increasing”
describes.

Diminishing Returns to Scale

Decreasing or decreasing returns to scale are taking place when all the factors of
production increase in a given proportion, but the output increases at a lesser rate than
that of the increase in factors of production. To compare this to increasing returns to
scale: for decreasing returns to scale, increasing inputs leads to smaller increases in
output; for increasing returns to scale, increasing inputs leads to the opposite—larger
increases in output.

For example, if the factors of production are doubled, then the output will be less than
doubled.

Constant Returns to Scale

Constant returns to scale occur when the output increases in exactly the same
proportion as the factors of production. In other words, when inputs (i.e. capital and
labor) increase, outputs likewise increase in the same proportion as a result. As an
example of constant returns to scale, if the factors of production are doubled, then the
output will also be exactly doubled.

Here is a graph representing the concept of constant returns to scale—the increase is

represented by a straight line at a 45-degree angle since increases on the X-axis
(inputs—units of labor/capital) are always equal to increases on the Y-axis (overall
output).
Constant Returns to Scale & Economies of Scale
In a situation where a firm experiences constant returns to scale, there are likely to be
fewer economies of scale, but this is balanced out by fewer diseconomies of scale.
Nevertheless, it is still possible for a firm to enjoy economies of scale while
experiencing constant returns to scale, because they may experience bulk buying
economies (purchasing larger quantities of inputs lowering their cost per unit) and
financial and marketing economies.

Multipliers for Returns to Scale

Our multiplier, in this case, will be m. If we double our inputs of capital and labor,
then m = 2. The question is whether our outputs are greater than double, double
exactly, or increase by less than double. Our three forms of return to scale (described
above) can be described as such in these terms:

 Increasing returns to scale: When the input increases by m, and the output
increases by greater than m.
 Constant returns to scale: When the input increases by m, and the output also
increases by exactly m.
 Decreasing returns to scale: When the input increases by m, and the output
increases by less than m.

Reference:

https://www.intelligenteconomist.com/constant-returns-to-scale/#:~:text=Returns%20to
%20Scale%201%20The%20Law%20of%20Returns,Scale.%20Constant%20returns%20to%20scale
%20occurs%20when%20

Offshoring, the practice of outsourcing operations overseas,

usually by companies from industrialized countries to less-
developed countries, with the intention of reducing the cost of doing
business. Chief among the specific reasons for locating operations
outside a corporation’s home country are lower labour costs, more
lenient environmental regulations, less stringent labour regulations,
favourable tax conditions, and proximity to raw materials.
The offshoring of jobs and infrastructure became a significant factor
in global economic development in the mid-20th century.
Companies initially focused their outsourcing efforts on low-skilled
or unskilled manufacturing jobs and simple assembly tasks (see
maquiladora). By the early 21st century, however, the work being
exported increasingly included skilled jobs. As communications
technologies advanced and educational opportunities increased,
many developing countries were able to provide sophisticated
labour forces. Corporations around the world began tapping these
new workers to staff customer-call centres and to fill jobs in
financial management and f (IT). In countries such as India, the
Philippines, and Malaysia, a growing pool of university graduates in
technology quickly became capable of managing complex tasks that
included software engineering, computer chip design, and code
writing.
A major factor driving IT offshoring has been the vast disparity in
both salaries and cost of living between U.S. technology workers
and their counterparts in less-developed countries. In the early 21st
century, analysts estimated that the average Indian IT worker
earned roughly 13 percent of his American counterpart’s salary.
Similar factors spurred the growth of offshoring in the financial
services industry and brought new jobs in banking, insurance, and
securities trading to a global workforce newly qualified to handle
the tasks.
Although offshoring has produced economic benefits, it has also
created some problems: for example, work performed in remote
locations may fail to meet the quality standards expected by a
parent company; exploitation of workers may occur; and lower
environmental standards, especially in developing countries, may
damage the local environment or pose health threats. One of the
more vocal criticisms of offshoring originates from workers in
developed countries who claim that the number of jobs available to
them has been reduced by the practice of hiring cheaper labour in
other countries.
Reference:
https://www.britannica.com/topic/offshoring
Outsourcing refers to an organization contracting work out to a 3rd
party, while offshoring refers to getting work done in a different country,
usually to leverage cost advantages. It's possible to outsource work but
not offshore it; for example, hiring an outside law firm to review contracts
instead of maintaining an in-house staff of lawyers. It is also possible to
offshore work but not outsource it; for example, a Dell customer service
center in India to serve American clients. Offshore outsourcing is the
practice of hiring a vendor to do the work offshore, usually to lower costs
and take advantage of the vendor's expertise, economies of scale, and
large and scalable labor pool.

Comparison chart

Offshoring versus Outsourcing comparison chart

Offshoring Outsourcing
Definition Offshoring means getting work Outsourcing refers to contracting work out
done in a different country. to an external organization.

Risks Offshoring is often criticized for Risks of outsourcing include misaligned

and transferring jobs to other
criticism countries. Other risks include
geopolitical risk, language
differences and poor
communication etc.
interests of clients and vendors,
increased reliance on third parties, lack of
in-house knowledge of critical (though not
necessarily core) business operations etc.

Benefits Benefits of offshoring are usually Usually companies outsource to take

lower costs, better availability of advantage of specialized skills, cost
skilled people, and getting work efficiencies and labor flexibility.
done faster through a global
talent pool.

Overview and History

Outsourcing refers to the contracting out of an entire business function, a
project, or certain activities to an external provider. The term entered the
business lexicon in the 1980s. In the second half of the 20th century, as
companies tended to grow larger and skills were required to be more and
 more specialized, companies found that external providers were often able to
get work done faster and more efficiently owing to skills they possessed. This
led to more hiring of external providers to manage business functions and
projects where specialized skills were required.
Towards the end of the twentieth century, with improvements in shipping
technology and telecommunications infrastructure, it became increasingly
efficient to get work done in other geographical locations, especially in
developing countries where wages are lower. This practice came to be
known as offshoring. Not all offshore work was outsourced, however. Captive
offshore refers to multinational corporations (MNCs) establishing subsidiaries
in several countries and getting different types of work done in different
countries. Factors that MNCs consider when offshoring include costs of
factors of production (wages, raw material, transportation costs, utilities such
as electricity), taxes (many countries offer subsidies to entice MNCs to set up
shop) and skills available among the work force.

Benefits
There are several reasons for companies to both offshore and outsource.

Outsourcing Benefits
Why do companies outsource? There are several reasons why a company
might outsource. While this can be a politically sensitive topic, management
experts generally agree that outsourcing - when done right - increases
competitive advantage with a natural division of labor that evolves in any
society. Reasons for outsourcing include:

 Cost advantage: Costs are arguably the chief motivation behind

outsourcing. Often companies find that contracting work out to a 3rd party is
cheaper.
 Focus on core competency:There are a lot of business functions in a
company. For example, human resources, information technology,
manufacturing, sales, marketing, payroll, accounting, finance, security,
transportation and logistics among others. Most of these are not "core" to the
company. A "core" activity is one which offers the company competitive
advantage over its competitors. It is an activity that the company does better
than the competition, which is the main reason its customers do business
with the company. Having to handle non-core functions is a distraction, so
many companies outsource them.
 Quality and Capability:Often companies don't have in-house expertise
for certain activities. In these cases, it is more efficient to outsource, and
resulting products and services tend to be of higher quality when provided by
outsourcing vendors.
 Labor flexibility: Outsourcing allows a company to ramping up and
down quickly as needed. For example, a company may need a large number
software programming experts for 6-8 months to develop an application. It
would be infeasible to hire people for only 6 months. Outsourcing, however,
 can provide flexibility so the company does not have to worry about hiring
and firing.

Benefits of offshoring
Offshoring provides many of the same benefits as outsourcing, including:

 Cost savings: Companies usually offshore manufacturing or services to

developing countries where wages are low, thus resulting in cost savings.
These savings are passed on to the customers, shareholders and managers
of these companies.
 Skills: The competitive advantage of nations often means that some
countries or regions develop a much better ecosystem for certain types of
industries. This means there is better availability of skilled human resources
in that region for specific types of tasks. For example, India and the
Phillipines have a large pool of English-speaking, college educated youth; as
well as a mature training infrastructure; that makes it ideal for business
process outsourcing. Therefore, many companies choose to offshore certain
business functions (e.g. call centers for customer support) to these locations.
These can either be captive or outsourced.

Note that you do not need to outsource in order to offshore. Captive offshore
units are set up to leverage the benefits of offshoring without having to
outsource to vendors. This is usually done when companies believe that their
offshore centers for production/service will provide them with an edge over
the competition.

Risks and Criticism

Offshoring and outsourcing have both been subject to a lot of criticism,
especially from a political standpoint. Politicians and laid-off workers often
blame offshoring for "stealing jobs". Most economists, however, agree that
offshoring lowers costs for companies and passes on benefits to consumers
and shareholders.
There are, however, risks associated with offshoring. These include project
failure due to poor communication; civil or political unrest impacting
production or service delivery; arbitrary changes in economic policy of
governments may force unncessary restrictions on MNCs; and poor
infrastructure in the developing country may affect quality or timeliness.
While the benefits of outsourcing and offshoring largely overlap, they do not
face the same disadvantages. Outsourcing, when done within the country,
does not face the same political criticism of loss of jobs. Risks associated
with outsourcing can largely be attributed to the vendor's lack of familiarity
with the client's business. Another risk is a lack of alignment of long-term
business objectives of the client and the vendor.
Offshore Outsourcing
When outsourcing is combined with offshoring, not only is work contracted
out to a third party, but it is also agreed that the work will be performed in a
different country. The reasons are usually to take advantage of the benefits of
outsourcing and offshoring both.

Benefits of offshore outsourcing

Offshore outsourcing combines the benefits of outsourcing, such as easier
resource ramp up and ramp down, and more specialized skills; with the
benefits of offshoring, such as lower costs and higher productivity.
In the past decade and a half of increasing globalization, offshoring has been
the fastest growing segment of the outsourcing market. This is especially true
in the case of manufacturing - with China being a leader - and information
technology services, with India leading that space. Business process
outsourcing is another area of offshoring that has grown tremendously.

Risks of offshore outsourcing

Just as offshore outsourcing combines the benefits, it is also susceptible to
the risks of both business practices. Critics claim that these risks are
magnified because of the complexity being multiplied. For example, while it
can be challenging to work with an external organization for projects that
require knowledge of your business operations, these challenges could
increase manifold when members of the external organization are located in
a different country. Risks include poor communication, incorrect setting of
expectations and disconnected control structures.

Best Practices
There are several best practices that have evolved over the past two
decades to mitigate risks and improve outcomes of projects that are
offshored and outsourced. Many of these practices are related to business
processes. Process maturity models like CMMi and Six-sigma measure not
only the quality of processes that outsourcing vendors employ, but also how
well companies monitor their processes, measure key metrics and how they
continually improve these processes.

Industry Trends
On the whole, both outsourcing and offshoring are on the rise. The worldwide
economic recession has forced companies to explore all options to increase
efficiencies and cut costs. Companies are getting increasingly comfortable
outsourcing (as well as offshoring) larger parts of their businesses as they
realize they are not core.
 Another trend - especially in information technology (IT services) outsourcing
- is industry consolidation, with larger companies acquiring smaller vendors.
For example, HP acquired EDS in 2008.
Political backlash has also been growing with unemployment rising in the
developed world.
Reference:

https://www.diffen.com/difference/Offshoring_vs_Outsourcing

What Is the Difference Between Tariffs & Import Quotas?

Tariff
A tariff is a tax imposed on an imported good. In some cases, the taxes are so
exorbitant that no buyer wishes to import them overseas, and the buyer must seek
local vendors to supply the item instead. James D. Gwartney, author of
“Economics: Public and Private Choice,” states that the average tariff on goods
imported to the United States in 1930 was a whopping 60 percent. In 2011,
however, the figure is closer to 4.5 percent.

Import Quota
An import quota restricts the quantity of goods entering the country. The
government decides which businesses can sell products by issuing licenses. These
certificates specify the number of units permissible for sale to a vendor within the
nation. In countries plagued by corruption, the issuance of licenses is sometimes
subject to firms offering the highest bid. Other times, a lottery system determines
which businesses receive the license. Robert Carbaugh cites in his textbook
"International Economics" examples of goods subject to import quotas in the United
States. The products include evaporated milk from the Netherlands, blue-mold
cheese form Chile and Swiss cheese from Romania.

Considerations
Governments impose tariffs and quotas for similar reasons. In both cases, these
restrictions compel businesses to buy from local sources. These trade mechanisms
are designed to protect domestic industries from competition abroad. The
industries that receive protection through the imposition of tariffs tend to have
strong political lobbies -- auto and steel are two examples. The government also
gains revenue from the tax imposed from tariffs and the sale of licenses from
import quotas. A consequence of tariffs and quotas, however, is consumers paying
higher prices and creating dead-weight loss, or wasted money. University of
Michigan economics professor Alan Deodorff argues the net losses of these
restrictions exceed the benefits to the government and domestic producers.
Tips
Use alliteration to remember the difference between a tariff and an import quota:
Equate tariff with “tax” and quota with “quantity.” Additionally, think of concrete
examples to associate with a tariff and a quota. In the example of a tariff, continue
with the "T" alliteration and picture tobacco, a commodity that is heavily taxed in
the United States.

How Do Tariffs Work?

We live in an era of international trade where companies buy and sell goods overseas and
do business across national borders. This allows businesses to sell their products
wherever there's a market and to share goods worldwide. Look closely at international
trade, however, and you'll see that most domestic governments impose some sort of
intervention to protect themselves from incoming cheaper goods. The most common
protectionary measures are known as tariffs.
A tariff is a tax on goods coming into or leaving a country. Governments impose tariffs to
discourage consumers from buying products made in another country by making them
more expensive.

The Problem with Free Trade

The easiest way to explain free trade is to look at an example: Consider two
countries, the United States and Vietnam. Both countries produce fashion clothing
of similar style and quality. Looking at the hypothetical supply and demand for
shirts manufactured and sold within the U.S., let's assume the average price per
shirt is $25, and U.S. producers sell 75 million shirts every year. In Vietnam, the
average price is $7 per shirt.

If the U.S. allowed foreign businesses to trade freely within the country,
Vietnamese producers would be able to import as many shirts as they liked at $7
per shirt. Consumers invariably will purchase more Vietnamese shirts because they
are cheaper. This raises demand for Vietnamese shirts and reduces the demand
for domestic shirts. U.S. manufacturers might then sell only 40 million shirts per
year, which significantly cuts their profits and could even drive some producers out
of business.

Tariff Definition
A tariff is a tax on goods coming into or leaving a country. That tax might be an ad
valorem tax, which is a fixed percentage of the product's price from time to time, or
a specific tax that stays the same no matter what happens to the product's price.
Either way, the aim of import tariffs is to stop cheap goods from coming into the
country from overseas and stealing market share of domestic producers. In this
sense, tariffs are a form of protectionism, imposed to save industries that are
especially vulnerable to competition from overseas.
Supporters say tariffs protect jobs and wages from cheaper foreign labor. Without
tariffs, a company could lay off its expensive U.S. workforce, move its
manufacturing operations to Asia, then ship the goods back into the country to sell
at a profit. If the tariffs were higher than the costs associated with outsourcing, then
companies would start to use domestic labor to produce goods instead.

Free Trade and Tariffs Example

Returning to our free trade example, suppose the government imposes a $10 tariff
on every shirt coming into the country from Vietnam. The price of a Vietnamese
shirt would rise to $17. This upsets the demand because now consumers are
buying fewer Vietnamese shirts due to the increased price. Vietnamese producers
will suffer because of higher selling prices, although they should continue to export
goods to the U.S. as long as they are still selling shirts at the higher price of $17
per shirt. Domestic producers are the winners in this situation. They will lose much
less market share than they would have lost through free trade. Tariffs give them
more power in the fashion market.

Who Benefits From a Tariff?

Import tariffs are taxes on imports, so this means that the U.S. government will
earn money every time someone imports a product from overseas. In the case of
our Vietnamese shirts, the government would make $10 for every shirt that arrives
in the country from Vietnam. If 15 million Vietnamese shirts were imported, the
government would make $150 million. So, the benefits of a tariff are twofold: The
government earns money through the taxation of imports, and U.S. producers are
able to produce and sell more goods and gain greater market power.

Arguments Against Tariffs

Not everyone agrees with the idea of import tariffs. Opponents argue that, for every
action, there is an equal and opposite reaction. When a government imposes
tariffs, it can start a tit-for-tat retaliatory trade war, with other countries imposing
ever-higher import tariffs of their own. This essentially blocks exporters from selling
their goods overseas and exploiting their own country's natural resources.

A tariff that is prohibitive, or so high that it stops goods from being imported,
reduces competition. Consumers end up paying far more for products as the tariff
gets added to the price of goods, or they don't get access to cheap products at all.
As with most government interventions, it's a balancing act between domestic
protectionism and revenue-raising versus lower prices for consumers.

Reference:

https://bizfluent.com/info-8458339-difference-between-tariffs-import-quotas.html
What are Common Reasons for Governments
to Implement Tariffs?
A tariff is a tax that a governing authority imposes on goods or services
entering or leaving the country. Tariffs typically focus on a specified industry or
product, and are set in place in a controlled effort to alter the balance of trade
between the tariff-imposing country and its international trading partners. For
example, when a government imposes an import tariff, it adds to the cost of
importing the specified goods or services. This additional marginal cost will
theoretically discourage imports, thus affecting the balance of trade.

Governments may opt to impose tariffs for a multitude of reasons, including

the following goals:

 To protect nascent industries

 To fortify national defense programs
 To support domestic employment opportunities
 To combat aggressive trade policies
 To protect the environment

KEY TAKEAWAYS

 A tariff is a specific type of tax that a governing body places imposes on

goods or services entering or leaving the country. 
 In theory, when a government initiates a tariff program, the additional
costs saddled upon the affected items discourages imports, which in
turn impacts the balance of trade.
 There are a myriad of reason governments initiate tariffs, such as
protecting nascent industries, fortifying national defense, nurturing the
employment domestically, and protecting the environment.
Infant Industries
Tariffs are commonly used to protect early-stage domestic companies and
industries from international competition. The tariff acts as an incubator that
theoretically affords the domestic company in question the ample runway time
it may need to properly nurture, develop, and grow its business into a
competitive entity, on the international landscape. This is essential to startups,
because statistically speaking, nine out of 10 businesses fail to endure past
one year.

National Defense
If a particular segment of the economy provides products that are critical to
national defense, a government may impose tariffs on international
competition to support and secure domestic production. This can happen both
during times of peace and during times of conflict.

Domestic Employment
It is common for government economic policies to focus on fostering
environments that provide its constituents with robust employment
opportunities. If a domestic segment or industry is struggling to compete
against international competitors, the government may use tariffs to
discourage consumption of imports and encourage consumption of domestic
goods, in hopes of supporting associated job growth, especially in the
manufacturing sector.

Aggressive Trade Practices

International competitors may employ aggressive trade tactics such as
flooding the market, in an attempt to gain market share and put domestic
producers out of business. Governments may use tariffs to mitigate the effects
of foreign entities employing unfair tactics.

Environmental Concerns
Governments may use tariffs to diminish consumption of international goods
that do not adhere to certain environmental standards.

[Important: There are potential downsides to tariffs, namely, they can

trigger a spike in the price of domestic goods, which can reduce the
buying power of consumers in the nation that imposes the tariffs.]

Reference:

https://www.investopedia.com/ask/answers/041715/what-are-common-reasons-
governments-implement-tariffs.asp

Export subsidy
Export subsidy is a government policy to encourage export of goods and discourage sale of
goods on the domestic market through direct payments, low-cost loans, tax relief for
exporters, or government-financed international advertising. An export subsidy reduces the
price paid by foreign importers, which means domestic consumers pay more than foreign
consumers. The World Trade Organization (WTO) prohibits most subsidies directly linked to
the volume of exports, except for LDCs.[1] Incentives are given by the government of a
country to exporters to encourage export of goods.

Export subsidies are also generated when internal price supports, as in a guaranteed minimum
price for a commodity, create more production than can be consumed internally in the
country. (These price supports are often coupled with import tariffs, which keeps the
domestic price high by discouraging or taxing imports on the difference between the world
price and the mandatory minimum.) Instead of letting the commodity rot or destroying it, the
government exports it. Saudi Arabia is a net exporter of wheat, Japan often is a net exporter
of rice.[citation needed]

At the WTO's Tenth Ministerial Conference, which was held in Nairobi, Kenya from 15 to 19
December 2015, the WTO member states agreed to eliminate export subsidies for agricultural
products; least-developed nations had until the end of 2018 to eliminate agricultural export
subsidies (until 1 January 2017 in relation to cotton exports), while developed nations agreed
to eliminate most such subsidies immediately. [2][3][4]

Export subsidies can cause inflation: the government subsidises the industry based on costs,
but an increase in the subsidy is directly spent on wage hikes demanded by employees. Now
the wages in the subsidised industry are higher than elsewhere, which causes the other
employees demand higher wages, which are then reflected in prices, resulting in inflation
everywhere in the economy.[citation needed]

Some countries provide indirect export subsidies in the form of tax reductions. In the United
States closely held exporters of U.S. made goods may get a reduction of tax using an Interest
Charge Domestic International Sales Corporation (IC-DISC).[5]

Reference:

https://en.wikipedia.org/wiki/Export_subsidy

Subsidy
A subsidy or government incentive is a form of financial aid or support extended to
an economic sector (business, or individual) generally with the aim of promoting
economic and social policy.[1] Although commonly extended from government, the
term subsidy can relate to any type of support – for example from NGOs or as
implicit subsidies. Subsidies come in various forms including: direct (cash grants,
interest-free loans) and indirect (tax breaks, insurance, low-interest loans,
accelerated depreciation, rent rebates). [2][3]
Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The
most common forms of subsidies are those to the producer or the consumer.
Producer/production subsidies ensure producers are better off by either supplying
market price support, direct support, or payments to factors of production. [1]
Consumer/consumption subsidies commonly reduce the price of goods and services
to the consumer. For example, in the US at one time it was cheaper to buy gasoline
than bottled water.[4]

Types[edit]
Production subsidy[edit]

A production subsidy encourages suppliers to increase the output of a particular product by

partially offsetting the production costs or losses.[2] The objective of production subsidies is to
expand production of a particular product more so that the market would promote but without
raising the final price to consumers. This type of subsidy is predominantly found in
developed markets.[1] Other examples of production subsidies include the assistance in the
creation of a new firm (Enterprise Investment Scheme), industry (industrial policy) and even
the development of certain areas (regional policy). Production subsidies are critically
discussed in the literature as they can cause many problems including the additional cost of
storing the extra produced products, depressing world market prices, and incentivizing
producers to over-produce, for example, a farmer overproducing in terms of his land's
carrying capacity.

Consumer/consumption subsidy[edit]

A consumption subsidy is one that subsidises the behaviour of consumers. This type of
subsidies are most common in developing countries where governments subsidise such things
as food, water, electricity and education on the basis that no matter how impoverished, all
should be allowed those most basic requirements.[1] For example, some governments offer
'lifeline' rates for electricity, that is, the first increment of electricity each month is subsidised.
[1]
Evidence from recent studies suggests that government expenditures on subsidies remain
high in many countries, often amounting to several percentage points of GDP. Subsidization
on such a scale implies substantial opportunity costs. There are at least three compelling
reasons for studying government subsidy behavior. First, subsidies are a major instrument of
government expenditure policy. Second, on a domestic level, subsidies affect domestic
resource allocation decisions, income distribution, and expenditure productivity. A consumer
subsidy is a shift in demand as the subsidy is given directly to consumers.

Export subsidy[edit]

An export subsidy is a support from the government for products that are exported, as a
means of assisting the country's balance of payments.[2] Usha Haley and George Haley
identified the subsidies to manufacturing industry provided by the Chinese government and
how they have altered trade patterns.[5] Traditionally, economists have argued that subsidies
benefit consumers but hurt the subsidizing countries. Haley and Haley provided data to show
that over the decade after China joined the World Trade Organization industrial subsidies
have helped give China an advantage in industries in which they previously enjoyed no
comparative advantage such as the steel, glass, paper, auto parts, and solar industries.[5]

Export subsidy is known for being abused. For example, some exporters substantially over
declare the value of their goods so as to benefit more from the export subsidy. Another
method is to export a batch of goods to a foreign country but the same goods will be re-
imported by the same trader via a circuitous route and changing the product description so as
to obscure their origin. Thus the trader benefits from the export subsidy without creating real
trade value to the economy. Export subsidy as such can become a self-defeating and
disruptive policy.

Import subsidy[edit]

An import subsidy is support from the government for products that are imported. Rarer than
an export subsidy, an import subsidy further reduces the price to consumers for imported
goods. Import subsidies have various effects depending on the subject. For example,
consumers in the importing country are better off and experience an increase in consumer
welfare due to the decrease in price of the imported goods, as well as the decrease in price of
the domestic substitute goods. Conversely, the consumers in the exporting country experience
a decrease in consumer welfare due to an increase in the price of their domestic goods.
Furthermore, producers of the importing country experience a loss of welfare due to a
decrease of the price for the good in their market, while on the other side, the exporters of the
producing country experience an increase in well being due to the increase in demand.
Ultimately, the import subsidy is rarely used due to an overall loss of welfare for the country
due to a decrease in domestic production and a reduction in production throughout the world.
However, that can result in a redistribution of income.[6]

Employment subsidy[edit]

An employment subsidy serves as an incentive to businesses to provide more job

opportunities to reduce the level of unemployment in the country (income subsidies) or to
encourage research and development.[2] With an employment subsidy, the government
provides assistance with wages. Another form of employment subsidy is the social security
benefits. Employment subsidies allow a person receiving the benefit to enjoy some minimum
standard of living.

Tax subsidy[edit]

Governments can create the same outcome through selective tax breaks as through cash
payments.[3] For example, if a government sends monetary assistance that reimburses 15% of
all health expenditures to a group that is paying 15% income tax. Exactly the same subsidy is
achieved by giving a health tax deduction. Tax subsidies are also known as tax expenditures.

Tax breaks are often considered to be a subsidy. Like other subsidies, they distort the
economy; but tax breaks are also less transparent, and are difficult to undo.[7]

Transport subsidies[edit]

Some governments subsidise transport, especially rail and bus transport, which decrease
congestion and pollution compared to cars. In the EU, rail subsidies are around €73 billion,
and Chinese subsidies reach $130 billion.[8][9]

Publicly-owned airports can be an indirect subsidy if they lose money. The European Union,
for instance, criticizes Germany for its high number of money-losing airports that are used
primarily by low cost carriers, characterizing the arrangement as an illegal subsidy.[citation needed]

In many countries, roads and highways are paid for through general revenue, rather than tolls
or other dedicated sources that are paid only by road users, creating an indirect subsidy for
road transportation. The fact that long-distance buses in Germany do not pay tolls has been
called an indirect subsidy by critics, who point to track access charges for railways.

Oil subsidies[edit]

The examples and perspective in this section deal primarily with the United
States and do not represent a worldwide view of the subject. You may
improve this section, discuss the issue on the talk page, or create a new
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An oil subsidy is one aimed at decreasing the overall price of oil. Oil subsidies have always
played a major part in U.S. history. These began as early as World War I and have increased
in the following decades. However, due to changes in the perceptions of the environment, in
2012 President Barack Obama ended the subsidies to the oil industry, which were, at the
time, $4 billion.[10] The Secretary-General of the United Nations António Guterres called for
an end of subsidies for fossil fuels.[11]

Housing subsidies[edit]

Housing subsidies are designed to promote the construction industry and homeownership. As
of 2018, U.S housing subsidies total around $15 billion per year. Housing subsidies can come
in two types; assistance with down payment and interest rate subsidies. The deduction of
mortgage interest from the federal income tax accounts for the largest interest rate subsidy.
Additionally, the federal government will help low-income families with the down payment,
coming to $10.9 million in 2008.[10] Removing energy subsidies is viewed as a necessary
measure to combat greenhouse gas emissions as it helps decrease energy consumption.[12]

Environmental externalities[edit]

As well as the conventional and formal subsidies as outlined above there are myriad implicit
subsidies principally in the form of environmental externalities.[4] These subsidies include
anything that is omitted but not accounted for and thus is an externality. These include things
such as car drivers who pollute everyone's atmosphere without compensating everyone,
farmers who use pesticides which can pollute everyone's ecosystems, again without
compensating everyone, or Britain's electricity production which results in additional acid
rain in Scandinavia.[4][13] In these examples the polluter is effectively gaining a net benefit but
not compensating those affected. Although they are not subsidies in the form of direct
economic support from a government, they are no less economically, socially and
environmentally harmful.

A 2015 report studied the implicit subsidies accruing to 20 fossil fuel companies and found
that, while highly profitable, the hidden economic cost to society was also large.[14][15] The
report spans the period 2008–2012 and notes that: "for all companies and all years, the
economic cost to society of their CO
2 emissions was greater than their after‐tax profit, with the single exception of ExxonMobil in
2008."[14]:4 Pure coal companies fare even worse: "the economic cost to society exceeds total
revenue (employment, taxes, supply purchases, and indirect employment) in all years, with
this cost varying between nearly $2 and nearly $9 per $1 of revenue."[14]:4–5

Categorising subsidies[edit]
Broad and narrow[edit]

These various subsidies can be divided into broad and narrow. Narrow subsidies are those
monetary transfers that are easily identifiable and have a clear intent. They are commonly
characterised by a monetary transfer between governments and institutions or businesses and
individuals. A classic example is a government payment to a farmer.[13]
Conversely broad subsidies include both monetary and non-monetary subsidies and is often
difficult to identify.[13] A broad subsidy is less attributable and less transparent. Environmental
externalities are the most common type of broad subsidy.

Economic effects[edit]

Competitive equilibrium is a state of balance between buyers and suppliers, in which the
quantity demanded of a good is the quantity supplied at a specified price. When the quantity
demand exceeds the equilibrium quantity, price falls; conversely, a reduction in the supply of
a good beyond equilibrium quantity implies an increase in the price.[16] The effect of a subsidy
is to shift the supply or demand curve to the right (i.e. increases the supply or demand) by the
amount of the subsidy. If a consumer is receiving the subsidy, a lower price of a good
resulting from the marginal subsidy on consumption increases demand, shifting the demand
curve to the right. If a supplier is receiving the subsidy, an increase in the price (revenue)
resulting from the marginal subsidy on production results increases supply, shifting the
supply curve to the right.
Assuming the market is in a perfectly competitive equilibrium, a subsidy increases the supply
of the good beyond the equilibrium competitive quantity. The imbalance creates deadweight
loss. Deadweight loss from a subsidy is the amount by which the cost of the subsidy exceeds
the gains of the subsidy.[17] The magnitude of the deadweight loss is dependent on the size of
the subsidy. This is considered a market failure, or inefficiency.[17]

Subsidies targeted at goods in one country, by lowering the price of those goods, make them
more competitive against foreign goods, thereby reducing foreign competition.[18] As a result,
many developing countries cannot engage in foreign trade, and receive lower prices for their
products in the global market. This is considered protectionism: a government policy to erect
trade barriers in order to protect domestic industries.[19] The problem with protectionism arises
when industries are selected for nationalistic reasons (infant-industry), rather than to gain a
comparative advantage. The market distortion, and reduction in social welfare, is the logic
behind the World Bank policy for the removal of subsidies in developing countries.[16]

Subsidies create spillover effects in other economic sectors and industries. A subsidized
product sold in the world market lowers the price of the good in other countries. Since
subsidies result in lower revenues for producers of foreign countries, they are a source of
tension between the United States, Europe and poorer developing countries.[20] While
subsidies may provide immediate benefits to an industry, in the long-run they may prove to
have unethical, negative effects. Subsidies are intended to support public interest, however,
they can violate ethical or legal principles if they lead to higher consumer prices or
discriminate against some producers to benefit others.[18] For example, domestic subsidies
granted by individual US states may be unconstitutional if they discriminate against out-of-
state producers, violating the Privileges and Immunities Clause or the Dormant Commerce
Clause of the United States Constitution.[18] Depending on their nature, subsidies are
discouraged by international trade agreements such as the World Trade Organization (WTO).
This trend, however, may change in the future, as needs of sustainable development and
environmental protection could suggest different interpretations regarding energy and
renewable energy subsidies.[21] In its July 2019 report, "Going for Growth 2019: The time for
reform is now", the OECD suggests that countries make better use of environmental taxation,
phase out agricultural subsidies and environmentally harmful tax breaks.[22][23]

Perverse subsidies[edit]
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Definitions[edit]

Although subsidies can be important, many are "perverse", in the sense of having adverse
unintended consequences. To be "perverse", subsidies must exert effects that are
demonstrably and significantly adverse both economically and environmentally.[1] A subsidy
rarely, if ever, starts perverse, but over time a legitimate efficacious subsidy can become
perverse or illegitimate if it is not withdrawn after meeting its goal or as political goals
change. Perverse subsidies are now so widespread that as of 2007 they amounted $2 trillion
per year in the six most subsidised sectors alone (agriculture, fossil fuels, road transportation,
water, fisheries and forestry).[24]
Effects[edit]

The detrimental effects of perverse subsidies are diverse in nature and reach. Case-studies
from differing sectors are highlighted below but can be summarised as follows.

Directly, they are expensive to governments by directing resources away from other
legitimate should priorities (such as environmental conservation, education, health, or
infrastructure),[3][13][25][26] ultimately reducing the fiscal health of the government.[27]

Indirectly, they cause environmental degradation (exploitation of resources, pollution, loss of

landscape, misuse and overuse of supplies) which, as well as its fundamental damage, acts as
a further brake on economies; tend to benefit the few at the expense of the many, and the rich
at the expense of the poor; lead to further polarization of development between the Northern
and Southern hemispheres; lower global market prices; and undermine investment decisions
reducing the pressure on businesses to become more efficient.[4][26][28] Over time the latter effect
means support becomes enshrined in human behaviour and business decisions to the point
where people become reliant on, even addicted to, subsidies, 'locking' them into society.[29]

Consumer attitudes do not change and become out-of-date, off-target and inefficient;[4]
furthermore, over time people feel a sense of historical right to them.[28]

Implementation[edit]

Perverse subsidies are not tackled as robustly as they should be. Principally, this is because
they become 'locked' into society, causing bureaucratic roadblocks and institutional inertia.[30]
[31]
When cuts are suggested many argue (most fervently by those 'entitled', special interest
groups and political lobbyists) that it will disrupt and harm the lives of people who receive
them, distort domestic competitiveness curbing trade opportunities, and increase
unemployment.[28][32] Individual governments recognise this as a 'prisoner's dilemma' – insofar
as that even if they wanted to adopt subsidy reform, by acting unilaterally they fear only
negative effects will ensue if others do not follow.[29] Furthermore, cutting subsidies, however
perverse they may be, is considered a vote-losing policy.[30]

Reform of perverse subsidies is at a propitious time. The current economic conditions mean
governments are forced into fiscal constraints and are looking for ways to reduce activist
roles in their economies.[31] There are two main reform paths: unilateral and multilateral.
Unilateral agreements (one country) are less likely to be undertaken for the reasons outlined
above, although New Zealand,[33] Russia, Bangladesh and others represent successful
examples.[4] Multilateral actions by several countries are more likely to succeed as this
reduces competitiveness concerns, but are more complex to implement requiring greater
international collaboration through a body such as the WTO.[26] Irrespective of the path, the
aim of policymakers should be to: create alternative policies that target the same issue as the
original subsidies but better; develop subsidy removal strategies allowing market-discipline
to return; introduce 'sunset' provisions that require remaining subsidies to be re-justified
periodically; and make perverse subsidies more transparent to taxpayers to alleviate the 'vote-
loser' concern.[4]

Examples[edit]

Agricultural subsidies[edit]
Support for agriculture dates back to the 19th century. It was developed extensively in the EU
and USA across the two World Wars and the Great Depression to protect domestic food
production, but remains important across the world today.[26][30] In 2005, US farmers received
$14 billion and EU farmers $47 billion in agricultural subsidies.[18] Today, agricultural
subsidies are defended on the grounds of helping farmers to maintain their livelihoods. The
majority of payments are based on outputs and inputs and thus favour the larger producing
agribusinesses over the small-scale farmers.[1][34] In the USA nearly 30% of payments go to the
top 2% of farmers.[26][35][36]

By subsidising inputs and outputs through such schemes as 'yield based subsidisation',
farmers are encouraged to over-produce using intensive methods, including using more
fertilizers and pesticides; grow high-yielding monocultures; reduce crop rotation; shorten
fallow periods; and promote exploitative land use change from forests, rainforests and
wetlands to agricultural land.[26] These all lead to severe environmental degradation, including
adverse effects on soil quality and productivity including erosion, nutrient supply and salinity
which in turn affects carbon storage and cycling, water retention and drought resistance;
water quality including pollution, nutrient deposition and eutrophication of waterways, and
lowering of water tables; diversity of flora and fauna including indigenous species both
directly and indirectly through the destruction of habitats, resulting in a genetic wipe-out.[1][26]
[37][38]

Cotton growers in the US reportedly receive half their income from the government under the
Farm Bill of 2002. The subsidy payments stimulated overproduction and resulted in a record
cotton harvest in 2002, much of which had to be sold at very reduced prices in the global
market.[18] For foreign producers, the depressed cotton price lowered their prices far below the
break-even price. In fact, African farmers received 35 to 40 cents per pound for cotton, while
US cotton growers, backed by government agricultural payments, received 75 cents per
pound. Developing countries and trade organizations argue that poorer countries should be
able to export their principal commodities to survive, but protectionist laws and payments in
the United States and Europe prevent these countries from engaging in international trade
opportunities.

Fisheries[edit]

Today, much of the world's major fisheries are overexploited; in 2002, the WWF estimate
this at approximately 75%. Fishing subsidies include "direct assistant to fishers; loan support
programs; tax preferences and insurance support; capital and infrastructure programs;
marketing and price support programs; and fisheries management, research, and conservation
programs."[39] They promote the expansion of fishing fleets, the supply of larger and longer
nets, larger yields and indiscriminate catch, as well as mitigating risks which encourages
further investment into large-scale operations to the disfavour of the already struggling small-
scale industry.[26][40] Collectively, these result in the continued overcapitalization and
overfishing of marine fisheries.

There are four categories of fisheries subsidies. First are direct financial transfers, second are
indirect financial transfers and services. Third, certain forms of intervention and fourth, not
intervening. The first category regards direct payments from the government received by the
fisheries industry. These typically affect profits of the industry in the short term and can be
negative or positive. Category two pertains to government intervention, not involving those
under the first category. These subsidies also affect the profits in the short term but typically
are not negative. Category three includes intervention that results in a negative short-term
economic impact, but economic benefits in the long term. These benefits are usually more
general societal benefits such as the environment. The final category pertains to inaction by
the government, allowing producers to impose certain production costs on others. These
subsidies tend to lead to positive benefits in the short term but negative in the long term.[41]

Others[edit]

The US National Football League's (NFL) profits have topped records at $11 billion, the
highest of all sports. The NFL had tax-exempt status until voluntarily relinquishing it in 2015,
and new stadiums have been built with public subsidies.[42][43]

The Commitment to Development Index (CDI), published by the Center for Global
Development, measures the effect that subsidies and trade barriers actually have on the
undeveloped world. It uses trade, along with six other components such as aid or investment,
to rank and evaluate developed countries on policies that affect the undeveloped world. It
finds that the richest countries spend $106 billion per year subsidizing their own farmers –
almost exactly as much as they spend on foreign aid.[44]

Reference:

https://en.wikipedia.org/wiki/Subsidy

How Do Subsidies Work?

Sometimes, a government or other large entity will attempt to provide incentives for certain
behaviors of players within a particular market. For example, a government may choose to
provide a tax credit or other payment to a company that produces alternative energy.
Financial incentives provided by a government that encourage certain behaviors, particularly
the production of goods, are known as subsidies. Subsidies can fulfill an important role, but
they also have various problems.

Subsidies
The definition of a subsidy is relatively broad, as it can encompass any time that the
government pays money to an individual or organization because it has performed a
particular action. However, the term is most often used to refer to payments made to
companies that grow or mine certain products or to parties who are seeking to purchase a
particular product.
Function
When parties who either produce or purchase a product receive subsidies, it provides an
incentive to parties to continue to produce this product or to buy it. This encourages the
product's production and consumption. This may encourage behaviors with positive ancillary
effects. For example, if the government subsidizes the production of green energy, this can
lead to a decrease in pollution.

Advantages
Government subsidies are an excellent way of supporting the production of goods and
services that the free market does not have sufficient motivation to produce, but which fulfills
a vital need. For example, a government that worries that energy is too expensive may wish
to help subsidize its production or purchase, thereby leading to a cheaper price for consumers,
and allowing more people to heat and light their homes.

Disadvantages
Critics complain that subsidies distort the functioning of the free market and lead to
unnecessary expenses. For example, as the time of publication, the U.S. government spends
millions of dollars each year paying farmers who are not using land to grow corn and other
crops, as a means of keeping the price at a level that allows other farmers to survive. Some
say that allowing the free market to dictate the price of corn would save the government and
consumers money.

Reference:

https://www.sapling.com/10004921/subsidies-work

What is a Subsidy?
A subsidy is an incentive given by the government to individuals or
businesses in the form of cash, grants, or tax breaks that improve the
supply of certain Goods and Services. With subsidies, consumers are able to
access cheaper products and commodities. Markets that have positive
externalities, which are extra benefits to society, tend to be favored in policy
to provide a greater supply of that good and service.

Basically, subsidies are provided by the government to specific industries

with the aim of keeping the prices of products and services low for people
to be able to afford them and also to encourage production and
consumption.

Types of Subsidies:

#1. Production subsidy

This type of subsidy is provided in order to encourage the production of a

product. In order for manufacturers to increase their production output, the
government compensates for some of its parts in order to lessen their
expenses while increasing their output. As a result, production and
consumption grow, but the price remains the same. The drawback of such
an incentive is that it may promote overproduction.

#2. Consumption subsidy

This happens when the government offsets the costs of food, education,
healthcare, and water.

#3. Export subsidy

An obvious fact is that a country or state earns from its exports and exports
help to balance its economy. That is why, to encourage exports, the
government subsidizes the cost. However, this can be easily abused,
especially by exporters who exaggerate the prices of their goods so that
they receive a larger incentive, eventually raising their profits at the expense
of taxpayers.

#4. Employment subsidy

This incentive is given by the government to companies and organizations

in order to enable them to provide more job opportunities.

Advantages of Subsidies:

#1. Lowering prices and controlling inflation

They are especially applicable in the area of fuel prices, particularly when
global crude oil prices are rising. Many countries subsidize fuel costs in
order to keep prices from ballooning.

#2. Preventing the long-term decline of industries

There are many industries that should be kept alive and functional, such as
fishing and farming. Many new and fast-growing industries may also
benefit from being subsidized.

#3. A greater supply of goods

Governments want to increase the access of their population to Goods &

Services such as Water, Food, and Education. They, therefore, provide an
incentive that could be in the form of a tax credit or even straight up cash.
Markets that have positive externalities are usually the ones that receive
such benefits.

 
Disadvantages of Subsidies

#1. Shortage of supply

Though one of the advantages of subsidies is the greater supply of goods,

a shortage of supply can also occur. This is because lowered prices can lead
to a sudden rise in demand that many producers may find very hard to
meet. Ultimately, it can lead to very high demand that causes an increase in
prices.

#2. Difficulty in measuring success

Subsidies are usually effective and helpful. However, if the government

were to make a report of its success in using subsidies, it would be a
different story. This is because it is hard to quantify the success of subsidies.

#3. Higher taxes

How will the government raise funds to use for subsidizing industries? Of
course, by imposing higher taxes. So, it is the people who provide the
means to enable the government to subsidize industries.
Reference:

https://corporatefinanceinstitute.com/resources/knowledge/economics/subsidy/

World Trade Organization

The World Trade Organization (WTO) is an intergovernmental organization that is
concerned with the regulation of international trade between nations. The WTO
officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by
123 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade
(GATT), which commenced in 1948. It is the largest international economic
organization in the world.[5][6]
The WTO deals with regulation of trade in goods, services and intellectual property
between participating countries by providing a framework for negotiating trade
agreements and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements, which are signed by representatives of member
governments[7]:fol.9–10 and ratified by their parliaments.[8] The WTO prohibits
discrimination between trading partners, but provides exceptions for environmental
protection, national security, and other important goals. [9] Trade-related disputes are
resolved by independent judges at the WTO through a dispute resolution process.[9]
The WTO's current Director-General is Roberto Azevêdo,[10][11] who leads a staff of
over 600 people in Geneva, Switzerland.[12] A trade facilitation agreement, part of the
Bali Package of decisions, was agreed by all members on 7 December 2013, the
first comprehensive agreement in the organization's history. [13][14] On 23 January 2017,
the amendment to the WTO Trade Related Aspects of Intellectual Property Rights
(TRIPS) Agreement marks the first time since the organization opened in 1995 that
WTO accords have been amended, and this change should secure for developing
countries a legal pathway to access affordable remedies under WTO rules. [15]
Studies show that the WTO boosted trade, [16][17][9] and that barriers to trade would be
higher in the absence of the WTO.[18] The WTO has highly influenced the text of trade
agreements, as "nearly all recent [preferential trade agreements (PTAs)] reference
the WTO explicitly, often dozens of times across multiple chapters... in many of
these same PTAs we find that substantial portions of treaty language—sometime the
majority of a chapter—is copied verbatim from a WTO agreement." [19]

History[edit]
Main article: History of the World Trade Organization

The economists Harry White (left) and John Maynard Keynes at the Bretton Woods
Conference.[20]

The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was
established by a multilateral treaty of 23 countries in 1947 after World War II in the wake of
other new multilateral institutions dedicated to international economic cooperation—such as
the World Bank (founded 1944) and the International Monetary Fund (founded 1944 or
1945). A comparable international institution for trade, named the International Trade
Organization never started as the U.S. and other signatories did not ratify the establishment
treaty,[21][22][23] and so GATT slowly became a de facto international organization.[24]

GATT negotiations before Uruguay[edit]

See also: General Agreement on Tariffs and Trade

Seven rounds of negotiations occurred under GATT (1949 to 1979). The first real[citation needed]
GATT trade rounds (1947 to 1960) concentrated on further reducing tariffs. Then the
Kennedy Round in the mid-sixties brought about a GATT anti-dumping agreement and a
section on development. The Tokyo Round during the seventies represented the first major
attempt to tackle trade barriers that do not take the form of tariffs, and to improve the system,
adopting a series of agreements on non-tariff barriers, which in some cases interpreted
existing GATT rules, and in others broke entirely new ground. Because not all GATT
members accepted these plurilateral agreements, they were often informally called "codes".
(The Uruguay Round amended several of these codes and turned them into multilateral
commitments accepted by all WTO members. Only four remained plurilateral (those on
government procurement, bovine meat, civil aircraft and dairy products), but in 1997 WTO
members agreed to terminate the bovine meat and dairy agreements, leaving only two.[25])
Despite attempts in the mid-1950s and 1960s to establish some form of institutional
mechanism for international trade, the GATT continued to operate for almost half a century
as a semi-institutionalized multilateral treaty régime on a provisional basis.[26]

Uruguay Round: 1986–1994[edit]

Main article: Uruguay Round

During the Doha Round, the US government blamed Brazil and India for being inflexible and
the EU for impeding agricultural imports.[27][28]

Well before GATT's 40th anniversary, its members concluded that the GATT system was
straining to adapt to a new globalizing world economy.[29][30] In response to the problems
identified in the 1982 Ministerial Declaration (structural deficiencies, spill-over impacts of
certain countries' policies on world trade GATT could not manage, etc.), the eighth GATT
round—known as the Uruguay Round—was launched in September 1986, in Punta del Este,
Uruguay.[29]

It was the biggest negotiating mandate on trade ever agreed: the talks aimed to extend the
trading system into several new areas, notably trade in services and intellectual property, and
to reform trade in the sensitive sectors of agriculture and textiles; all the original GATT
articles were up for review.[30] The Final Act concluding the Uruguay Round and officially
establishing the WTO regime was signed 15 April 1994, during the ministerial meeting at
Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.[31]

The GATT still exists as the WTO's umbrella treaty for trade in goods, updated as a result of
the Uruguay Round negotiations (a distinction is made between GATT 1994, the updated
parts of GATT, and GATT 1947, the original agreement which is still the heart of GATT
1994).[29] GATT 1994 is not, however, the only legally binding agreement included via the
Final Act at Marrakesh; a long list of about 60 agreements, annexes, decisions and
understandings was adopted. The agreements fall into six main parts:

 the Agreement Establishing the WTO

 the Multilateral Agreements on Trade in Goods[32]
 the General Agreement on Trade in Services
 the Agreement on Trade-Related Aspects of Intellectual Property Rights
 dispute settlement[33]
 reviews of governments' trade policies[34]

In terms of the WTO's principle relating to tariff "ceiling-binding" (No. 3), the Uruguay
Round has been successful in increasing binding commitments by both developed and
developing countries, as may be seen in the percentages of tariffs bound before and after the
1986–1994 talks.[35]

Ministerial conferences[edit]

The World Trade Organization Ministerial Conference of 1998, in the Palace of Nations
(Geneva, Switzerland).

The highest decision-making body of the WTO, the Ministerial Conference, usually meets
every two years.[36] It brings together all members of the WTO, all of which are countries or
customs unions. The Ministerial Conference can take decisions on all matters under any of
the multilateral trade agreements. Some meetings, such as the inaugural ministerial
conference in Singapore and the Cancun conference in 2003[37] involved arguments between
developed and developing economies referred to as the "Singapore issues" such as
agricultural subsidies; while others such as the Seattle conference in 1999 provoked large
demonstrations. The fourth ministerial conference in Doha in 2001 approved China's entry to
the WTO and launched the Doha Development Round which was supplemented by the sixth
WTO ministerial conference (in Hong Kong) which agreed to phase out agricultural export
subsidies and to adopt the European Union's Everything but Arms initiative to phase out
tariffs for goods from the Least Developed Countries.

The Twelfth Ministerial Conference (MC12) is set to be held in Nur-Sultan, Kazakhstan, in

June 2020.
Doha Round (Doha Agenda): 2001–present[edit]

Main article: Doha Development Round

The WTO launched the current round of negotiations, the Doha Development Round, at the
fourth ministerial conference in Doha, Qatar in November 2001. This was to be an ambitious
effort to make globalization more inclusive and help the world's poor, particularly by slashing
barriers and subsidies in farming.[38] The initial agenda comprised both further trade
liberalization and new rule-making, underpinned by commitments to strengthen substantial
assistance to developing countries.[39]

Progress stalled over differences between developed nations and the major developing
countries on issues such as industrial tariffs and non-tariff barriers to trade[40] particularly
against and between the EU and the US over their maintenance of agricultural subsidies—
seen to operate effectively as trade barriers. Repeated attempts to revive the talks proved
unsuccessful,[41] though the adoption of the Bali Ministerial Declaration in 2013[42] addressed
bureaucratic barriers to commerce.[43]

As of June 2012, the future of the Doha Round remained uncertain: the work programme lists
21 subjects in which the original deadline of 1 January 2005 was missed, and the round
remains incomplete.[44] The conflict between free trade on industrial goods and services but
retention of protectionism on farm subsidies to domestic agricultural sectors (requested by
developed countries) and the substantiation[jargon] of fair trade on agricultural products
(requested by developing countries) remain the major obstacles. This impasse has made it
impossible to launch new WTO negotiations beyond the Doha Development Round. As a
result, there have been an increasing number of bilateral free trade agreements between
governments.[45] As of July 2012 there were various negotiation groups in the WTO system
for the current stalemated agricultural trade negotiation.[46]

Functions[edit]
Among the various functions of the WTO, these are regarded by analysts as the most
important:

 It oversees the implementation, administration and operation of the covered

agreements (with the exception is that it does not enforce any agreements when China
came into the WTO in Dec 2001)[47][48]
 It provides a forum for negotiations and for settling disputes.[49][50]

Additionally, it is WTO's duty to review and propagate the national trade policies, and to
ensure the coherence and transparency of trade policies through surveillance in global
economic policy-making.[48][50] Another priority of the WTO is the assistance of developing,
least-developed and low-income countries in transition to adjust to WTO rules and disciplines
through technical cooperation and training.[51]

1. The WTO shall facilitate the implementation, administration and operation and
further the objectives of this Agreement and of the Multilateral Trade Agreements,
and shall also provide the framework for the implementation, administration and
operation of the multilateral Trade Agreements.
 2. The WTO shall provide the forum for negotiations among its members concerning
their multilateral trade relations in matters dealt with under the Agreement in the
Annexes to this Agreement.
3. The WTO shall administer the Understanding on Rules and Procedures Governing the
Settlement of Disputes.
4. The WTO shall administer Trade Policy Review Mechanism.
5. With a view to achieving greater coherence in global economic policy making, the
WTO shall cooperate, as appropriate, with the international Monetary Fund (IMF) and
with the International Bank for Reconstruction and Development (IBRD) and its
affiliated agencies.[52]

The above five listings are the additional functions of the World Trade Organization. As
globalization proceeds in today's society, the necessity of an International Organization to
manage the trading systems has been of vital importance. As the trade volume increases,
issues such as protectionism, trade barriers, subsidies, violation of intellectual property arise
due to the differences in the trading rules of every nation. The World Trade Organization
serves as the mediator between the nations when such problems arise. WTO could be referred
to as the product of globalization and also as one of the most important organizations in
today's globalized society.

The WTO is also a centre of economic research and analysis: regular assessments of the
global trade picture in its annual publications and research reports on specific topics are
produced by the organization.[53] Finally, the WTO cooperates closely with the two other
components of the Bretton Woods system, the IMF and the World Bank.[49]

Principles of the trading system[edit]

The WTO establishes a framework for trade policies; it does not define or specify outcomes.
That is, it is concerned with setting the rules of the trade policy games.[54] Five principles are
of particular importance in understanding both the pre-1994 GATT and the WTO:

1. Non-discrimination. It has two major components: the most favoured nation (MFN)
rule, and the national treatment policy. Both are embedded in the main WTO rules on
goods, services, and intellectual property, but their precise scope and nature differ
across these areas. The MFN rule requires that a WTO member must apply the same
conditions on all trade with other WTO members, i.e. a WTO member has to grant the
most favourable conditions under which it allows trade in a certain product type to all
other WTO members.[54] "Grant someone a special favour and you have to do the same
for all other WTO members."[35] National treatment means that imported goods should
be treated no less favourably than domestically produced goods (at least after the
foreign goods have entered the market) and was introduced to tackle non-tariff
barriers to trade (e.g. technical standards, security standards et al. discriminating
against imported goods).[54]
2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise
because of the MFN rule, and a desire to obtain better access to foreign markets. A
related point is that for a nation to negotiate, it is necessary that the gain from doing
so be greater than the gain available from unilateral liberalization; reciprocal
concessions intend to ensure that such gains will materialise.[55]
 3. Binding and enforceable commitments. The tariff commitments made by WTO
members in a multilateral trade negotiation and on accession are enumerated in a
schedule (list) of concessions. These schedules establish "ceiling bindings": a country
can change its bindings, but only after negotiating with its trading partners, which
could mean compensating them for loss of trade. If satisfaction is not obtained, the
complaining country may invoke the WTO dispute settlement procedures.[35][55]
4. Transparency. The WTO members are required to publish their trade regulations, to
maintain institutions allowing for the review of administrative decisions affecting
trade, to respond to requests for information by other members, and to notify changes
in trade policies to the WTO. These internal transparency requirements are
supplemented and facilitated by periodic country-specific reports (trade policy
reviews) through the Trade Policy Review Mechanism (TPRM).[56] The WTO system
tries also to improve predictability and stability, discouraging the use of quotas and
other measures used to set limits on quantities of imports.[35]
5. Safety values. In specific circumstances, governments are able to restrict trade. The
WTO's agreements permit members to take measures to protect not only the
environment but also public health, animal health and plant health.[57]

There are three types of provision in this direction:

1. articles allowing for the use of trade measures to attain non-economic objectives;
2. articles aimed at ensuring "fair competition"; members must not use environmental
protection measures as a means of disguising protectionist policies.[57][58]
3. provisions permitting intervention in trade for economic reasons.[56]

Exceptions to the MFN principle also allow for preferential treatment of developing
countries, regional free trade areas and customs unions.[7]:fol.93

Organizational structure[edit]
The highest authority of the WTO is the Ministerial Conference, which must meet at least
every two years.[59]

In between of each Ministerial Conference, the daily work is handled by three bodies whose
membership is one and the same; they only differ by the terms of reference under which each
body is constituted.[59]

 The General Council

 The Dispute Settlement Body
 The Trade Policy Review Body

The General Council, whose Chair as of 2020 is David Walker of New Zealand,[60] has the
following subsidiary bodies which oversee committees in different areas:

Council for Trade in Goods

There are 11 committees under the jurisdiction of the Goods Council each with a
specific task. All members of the WTO participate in the committees. The Textiles
Monitoring Body is separate from the other committees but still under the jurisdiction
 of Goods Council. The body has its own chairman and only 10 members. The body
also has several groups relating to textiles.[61]
Council for Trade-Related Aspects of Intellectual Property Rights
Information on intellectual property in the WTO, news and official records of the
activities of the TRIPS Council, and details of the WTO's work with other
international organizations in the field.[62]
Council for Trade in Services
The Council for Trade in Services operates under the guidance of the General Council
and is responsible for overseeing the functioning of the General Agreement on Trade
in Services (GATS). It is open to all WTO members, and can create subsidiary bodies
as required.[63]
Trade Negotiations Committee
The Trade Negotiations Committee (TNC) is the committee that deals with the current
trade talks round. The chair is WTO's director-general. As of June 2012 the
committee was tasked with the Doha Development Round.[64]

The Service Council has three subsidiary bodies: financial services, domestic regulations,
GATS rules and specific commitments.[61] The council has several different committees,
working groups, and working parties.[65] There are committees on the following: Trade and
Environment; Trade and Development (Subcommittee on Least-Developed Countries);
Regional Trade Agreements; Balance of Payments Restrictions; and Budget, Finance and
Administration. There are working parties on the following: Accession. There are working
groups on the following: Trade, debt and finance; and Trade and technology transfer.

Decision-making[edit]
The WTO describes itself as "a rules-based, member-driven organization—all decisions are
made by the member governments, and the rules are the outcome of negotiations among
members".[66] The WTO Agreement foresees votes where consensus cannot be reached, but
the practice of consensus dominates the process of decision-making.[67]

Richard Harold Steinberg (2002) argues that although the WTO's consensus governance
model provides law-based initial bargaining, trading rounds close through power-based
bargaining favouring Europe and the U.S., and may not lead to Pareto improvement.[68]

Dispute settlement[edit]
Main article: Dispute settlement in the WTO

The WTO's dispute-settlement system "is the result of the evolution of rules, procedures and
practices developed over almost half a century under the GATT 1947".[69] In 1994, the WTO
members agreed on the Understanding on Rules and Procedures Governing the Settlement of
Disputes (DSU) annexed to the "Final Act" signed in Marrakesh in 1994.[70] Dispute
settlement is regarded by the WTO as the central pillar of the multilateral trading system, and
as a "unique contribution to the stability of the global economy".[71] WTO members have
agreed that, if they believe fellow-members are violating trade rules, they will use the
multilateral system of settling disputes instead of taking action unilaterally.[72]
The operation of the WTO dispute settlement process involves case-specific panels[73]
appointed by the Dispute Settlement Body (DSB),[74] the Appellate Body,[75] The Director-
General and the WTO Secretariat,[76] arbitrators,[77] and advisory experts.[78]

The priority is to settle disputes, preferably through a mutually agreed solution, and provision
has been made for the process to be conducted in an efficient and timely manner so that "If a
case is adjudicated, it should normally take no more than one year for a panel ruling and no
more than 16 months if the case is appealed... If the complainant deems the case urgent,
consideration of the case should take even less time.[79] WTO member nations are obliged to
accept the process as exclusive and compulsory.[80]

According to a 2018 study in the Journal of Politics, states are less likely and slower to
enforce WTO violations when the violations affect states in a diffuse manner.[81] This is
because states face collective action problems with pursuing litigation: they all expect other
states to carry the costs of litigation.[81] A 2016 study in International Studies Quarterly
challenges that the WTO dispute settlement system leads to greater increases in trade.[82]

However, the dispute settlement system cannot be used to resolve trade disputes that arise
from political disagreements. When Qatar requested the establishment of a dispute panel
concerning measures imposed by the UAE, other GCC countries and the US were quick to
dismiss its request as a political matter, stating that national security issues were political and
not appropriate for the WTO dispute system.[83]

Accession and membership[edit]

Main article: World Trade Organization accession and membership

The process of becoming a WTO member is unique to each applicant country, and the terms
of accession are dependent upon the country's stage of economic development and current
trade regime.[84] The process takes about five years, on average, but it can last longer if the
country is less than fully committed to the process or if political issues interfere. The shortest
accession negotiation was that of the Kyrgyz Republic, while the longest was that of Russia,
which, having first applied to join GATT in 1993, was approved for membership in
December 2011 and became a WTO member on 22 August 2012.[85] Kazakhstan also had a
long accession negotiation process. The Working Party on the Accession of Kazakhstan was
established in 1996 and was approved for membership in 2015.[86] The second longest was
that of Vanuatu, whose Working Party on the Accession of Vanuatu was established on 11
July 1995. After a final meeting of the Working Party in October 2001, Vanuatu requested
more time to consider its accession terms. In 2008, it indicated its interest to resume and
conclude its WTO accession. The Working Party on the Accession of Vanuatu was
reconvened informally on 4 April 2011 to discuss Vanuatu's future WTO membership. The
re-convened Working Party completed its mandate on 2 May 2011. The General Council
formally approved the Accession Package of Vanuatu on 26 October 2011. On 24 August
2012, the WTO welcomed Vanuatu as its 157th member.[87] An offer of accession is only
given once consensus is reached among interested parties.[88]

A 2017 study argues that "political ties rather than issue-area functional gains determine who
joins" and shows "how geopolitical alignment shapes the demand and supply sides of
membership".[89] The "findings challenge the view that states first liberalize trade to join the
GATT/WTO. Instead, democracy and foreign policy similarity encourage states to join."[89]

Accession process[edit]

WTO accession progress:[90]

  Draft Working Party Report or Factual Summary adopted
  Goods or Services offers submitted
  Working party meetings
  Memorandum on Foreign Trade Regime submitted
  Working party established

A country wishing to accede to the WTO submits an application to the General Council, and
has to describe all aspects of its trade and economic policies that have a bearing on WTO
agreements.[91] The application is submitted to the WTO in a memorandum which is examined
by a working party open to all interested WTO Members.[92]

After all necessary background information has been acquired, the working party focuses on
issues of discrepancy between the WTO rules and the applicant's international and domestic
trade policies and laws. The working party determines the terms and conditions of entry into
the WTO for the applicant nation, and may consider transitional periods to allow countries
some leeway in complying with the WTO rules.[84]

The final phase of accession involves bilateral negotiations between the applicant nation and
other working party members regarding the concessions and commitments on tariff levels and
market access for goods and services. The new member's commitments are to apply equally
to all WTO members under normal non-discrimination rules, even though they are negotiated
bilaterally.[91] For instance, as a result of joining the WTO, Armenia offered a 15 per cent
ceiling bound tariff rate on accessing its market for goods. Together with the tariff bindings
being ad valorem there are no specific or compound rates. Moreover, there are no tariff-rate
quotas on both industrial and agricultural products.[93] Armenia's economic and trade
performance growth was noted since its first review in 2010, especially its revival from the
2008 global financial crisis, with an average annual 4% GDP growth rate, despite of some
fluctuations. Armenia's economy was marked by low inflation, diminishing poverty and
essential progress in enhancing its macroeconomic steadiness in which trade in goods and
services, which is the equivalent of 87% of GDP, played a growing role.[94]
When the bilateral talks conclude, the working party sends to the general council or
ministerial conference an accession package, which includes a summary of all the working
party meetings, the Protocol of Accession (a draft membership treaty), and lists ("schedules")
of the member-to-be's commitments. Once the general council or ministerial conference
approves of the terms of accession, the applicant's parliament must ratify the Protocol of
Accession before it can become a member.[95] Some countries may have faced tougher and a
much longer accession process due to challenges during negotiations with other WTO
members, such as Vietnam, whose negotiations took more than 11 years before it became
official member in January 2007.[96]

Members and observers[edit]

The WTO has 164 members and 24 observer governments.[97] Liberia became the 163rd
member on 14 July 2016, and Afghanistan became the 164th member on 29 July 2016.[98][99] In
addition to states, the European Union, and each EU country in its own right,[100] is a member.
WTO members do not have to be fully independent states; they need only be a customs
territory with full autonomy in the conduct of their external commercial relations. Thus Hong
Kong has been a member since 1995 (as "Hong Kong, China" since 1997) predating the
People's Republic of China, which joined in 2001 after 15 years of negotiations. The
Republic of China (Taiwan) acceded to the WTO in 2002 as "Separate Customs Territory of
Taiwan, Penghu, Kinmen and Matsu" (Chinese Taipei) despite its disputed status.[101] The
WTO Secretariat omits the official titles (such as Counsellor, First Secretary, Second
Secretary and Third Secretary) of the members of Chinese Taipei's Permanent Mission to the
WTO, except for the titles of the Permanent Representative and the Deputy Permanent
Representative.[102]

As of 2007, WTO member states represented 96.4% of global trade and 96.7% of global
GDP.[103] Iran, followed by Algeria, are the economies with the largest GDP and trade outside
the WTO, using 2005 data.[104][105] With the exception of the Holy See, observers must start
accession negotiations within five years of becoming observers. A number of international
intergovernmental organizations have also been granted observer status to WTO bodies.[106] 12
UN member states have no official affiliation with the WTO.[citation needed]

Agreements[edit]
The WTO oversees about 60 different agreements which have the status of international legal
texts. Member countries must sign and ratify all WTO agreements on accession.[107] A
discussion of some of the most important agreements follows.

The Agreement on Agriculture came into effect with the establishment of the WTO at the
beginning of 1995. The AoA has three central concepts, or "pillars": domestic support,
market access and export subsidies.

The General Agreement on Trade in Services was created to extend the multilateral trading
system to service sector, in the same way as the General Agreement on Tariffs and Trade
(GATT) provided such a system for merchandise trade. The agreement entered into force in
January 1995.
The Agreement on Trade-Related Aspects of Intellectual Property Rights sets down
minimum standards for many forms of intellectual property (IP) regulation. It was negotiated
at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in
1994.[108]

The Agreement on the Application of Sanitary and Phytosanitary Measures—also known as

the SPS Agreement—was negotiated during the Uruguay Round of GATT, and entered into
force with the establishment of the WTO at the beginning of 1995. Under the SPS agreement,
the WTO sets constraints on members' policies relating to food safety (bacterial
contaminants, pesticides, inspection and labelling) as well as animal and plant health
(imported pests and diseases).

The Agreement on Technical Barriers to Trade is an international treaty of the World Trade
Organization. It was negotiated during the Uruguay Round of the General Agreement on
Tariffs and Trade, and entered into force with the establishment of the WTO at the end of
1994. The object ensures that technical negotiations and standards, as well as testing and
certification procedures, do not create unnecessary obstacles to trade".[109]

The Agreement on Customs Valuation, formally known as the Agreement on Implementation

of Article VII of GATT, prescribes methods of customs valuation that Members are to
follow. Chiefly, it adopts the "transaction value" approach.

In December 2013, the biggest agreement within the WTO was signed and known as the Bali
Package.[110]

Office of director-general[edit]

The headquarters of the World Trade Organization in Geneva, Switzerland.

The procedures for the appointment of the WTO director-general were updated in January
2003,[111] and include quadrennial terms.[60] Additionally, there are four deputy directors-
general. As of 13 June 2018 under director-general Roberto Azevêdo, the four deputy
directors-general are:

 Yi Xiaozhun of China (since 1 October 2017),

 Karl Brauner of Germany (since 1 October 2013),
 Yonov Frederick Agah of Nigeria (since 1 October 2013) and
 Alan W. Wolff of the United States (since 1 October 2017).[112]

List of directors-general[edit]
Source: Official website[113]

Name Country Term

Peter Sutherland Ireland 1995
Renato Ruggiero Italy 1995–1999
Mike Moore New Zealand 1999–2002
Supachai Panitchpakdi Thailand 2002–2005
Pascal Lamy France 2005-2009, 2009–2013
Roberto Azevêdo Brazil 2013–2017, 2017-present

(Heads of the precursor organization, GATT):

 Eric Wyndham White, 1948–1968

 Olivier Long, 1968–1980
 Arthur Dunkel, 1980–1993
 Peter Sutherland, 1993–1995

2020 director-general selection[edit]

In May 2020, Director-General Roberto Azevêdo announced he will step down on 31 August
2020, a year before it expires.[114] The candidates to succeed the current Director-General
listed in the order the nominations were received are as follows:[115]

 Jesús Seade Kuri, Undersecretary for North America for the Mexican Ministry of
Foreign Affairs
 Ngozi Okonjo-Iweala, former Managing Director of the World Bank, Finance
Minister and Minister of Foreign Affairs
 Abdel-Hamid Mamdouh
 Tudor Ulianovschi, former Foreign Minister of Moldova
 Yoo Myung-hee, Minister for Trade of South Korea
 Amina C. Mohamed, Cabinet Secretary for Sports, Heritage and Culture in Kenya
 Mohammad Maziad Al-Tuwaijri
 Liam Fox, former Secretary of State for International Trade and Secretary of State
for Defence

Budget[edit]
The WTO derives most of the income for its annual budget from contributions by its
Members. These are established according to a formula based on their share of international
trade.

2019 Top 10 Members’ contributions to the consolidated budget of the WTO[116]

Rank Country CHF Percentage
1  United States 22,660,405 11.59%
2  China 19,737,680 10.10%
3  Germany 13,882,455 7.10%
4  Japan 7,896,245 4.04%
 5  United Kingdom 7,446,595 3.81%
6  France 7,440,730 3.81%
7  South Korea 5,777,025 2.96%
8  Netherlands 5,745,745 2.94%
9  Hong Kong 5,427,080 2.78%
10  Italy 5,096,685 2.61%
Others 94,389,355 48.28%
TOTAL 195,500,000 100.00%

Criticism[edit]
Main article: Criticism of the World Trade Organization

Women at farmers rally against WTO, Bhopal, M.P., India, Nov 2005

Although tariffs and other trade barriers have been significantly reduced thanks to GATT and
WTO, the promise that free trade will accelerate economic growth, reduce poverty, and
increase people's incomes has been questioned by many critics.[117] Some prominent
skeptics[who?] cite the example of El Salvador. In the early 1990s, they removed all quantitative
barriers to imports and also cut tariffs. However, the country's economic growth remained
weak. On the other hand, Vietnam which only began reforming its economy in the late 1980s,
saw a great deal of success by deciding to follow the China's economic model and
liberalizing slowly along with implementing safeguards for domestic commerce. Vietnam has
largely succeeded in accelerating economic growth and reducing poverty without
immediately removing substantial trade barriers.[118][117] Although there were other factors that
affected the economic performance of these two countries and some[who?] might say that it is
essentially because of the ultimate opening up of the markets that contributed to the growth
story that is attributed with Vietnam's economy.

Economist Ha-Joon Chang himself argues that there is a "paradox" in neo-liberal beliefs
regarding free trade, because the economic growth of developing countries was higher in the
1960-1980 period compared to the 1980-2000 period even though its trade policies are now
far more liberal than before. In addition, there are also results of research that show that new
countries actively reduce trade barriers only after becoming significantly rich. From the
results of the study, WTO critics argue that trade liberalization does not guarantee economic
growth and certainly not poverty alleviation.[117]

WTO critics[who?] also put forward the view that the benefits derived from free trade are not
shared equally. This criticism is usually supported by data showing that the gap between the
rich and the poor continues to widen, especially in China and India, where economic
inequality is growing even though economic growth is very high.[117] In addition, WTO
approaches aiming to reduce trade barriers can harm developing countries. Trade
liberalization that is too early without any prominent domestic barriers is feared to trap the
developing economies in the primary sector, which often does not require skilled labor. And
when these developing countries decide to advance their economy by means of
industrialization, the premature domestic industry cannot immediately skyrocket as expected,
making it difficult to compete with other countries whose industries are more advanced.[119]

WTO protesters on 7th Avenue, Seattle, US, 1999

It is said[who?] that leading economist Adam Smith once[when?] gave advice to the newly
independent United States government at that time to focus on the domestic agricultural
sector rather than trying to compete with Europe whose industry was more advanced. The
United States eventually set high tariffs to protect American producers. Only then the United
States became one of the countries with a strongest domestic industry, in the world. The same
is said[who?] about East Asian economies. Some[who?] even predict that if South Korea had
abolished its tariffs earlier, it would have been more likely that the country would still be a
semi-industrialized, rice-producing country.[119]

WTO law has also been severely criticized because of the Agreement on Agriculture, which
essentially allows developed countries to maintain agricultural subsidies (an example being
the Common Agricultural Policy in the European Union) while not favoring the developing
countries as much. As a result of these subsidies, these countries often sell excess produce to
world markets at much lower prices, and dumping them in poorer countries. Even though
WTO members have agreed to eliminate agricultural export subsidies, some say that the
developed countries still maintain subsidies and protect their agricultural sector with trade
barriers, and this practice impedes the development of the agricultural industry in developing
countries.[120]

On the other hand, if all agricultural subsidies were to be immediately abolished, food prices
could potentially skyrocket, and this could also harm the people and threaten food security in
some of the countries. Therefore, legal experts who criticize the WTO from a human rights
perspective suggest that this subsidy should be phased out gradually, so that the market can
adjust to the changes that occur.[121]

Impact[edit]
Studies show that the WTO boosted trade.[16][17] Research shows that in the absence of the
WTO, the average country would face an increase in tariffs on their exports by 32 percentage
points.[18][122] The dispute settlement mechanism in the WTO is one way in which trade is
increased.[123][124][125][126]

According to a 2017 study in the Journal of International Economic Law, "nearly all recent
[preferential trade agreements (PTAs) reference the WTO explicitly, often dozens of times
across multiple chapters. Likewise, in many of these same PTAs we find that substantial
portions of treaty language—sometime the majority of a chapter—is copied verbatim from a
WTO agreement... the presence of the WTO in PTAs has increased over time."[19]
Reference:

https://en.wikipedia.org/wiki/World_Trade_Organization

Trade agreement
A trade agreement (also known as trade pact) is a wide-ranging taxes, tariff and trade
treaty that often includes investment guarantees. It exists when two or more countries agree
on terms that help them trade with each other. The most common trade agreements are of the
preferential and free trade types, which are concluded in order to reduce (or eliminate) tariffs,
quotas and other trade restrictions on items traded between the signatories.

The logic of formal trade agreements is that they outline what is agreed upon and the
punishments for deviation from the rules set in the agreement.[1] Trade agreements therefore
make misunderstandings less likely, and create confidence on both sides that cheating will be
punished; this increases the likelihood of long-term cooperation.[1] An international
organization, such as the IMF, can further incentivize cooperation by monitoring compliance
with agreements and reporting third countries of the violations.[1] Monitoring by international
agencies may be needed to detect non-tariff barriers, which are disguised attempts at creating
trade barriers.[1]

Trade pacts are frequently politically contentious since they may change economic customs
and deepen interdependence with trade partners. Increasing efficiency through "free trade" is
a common goal. For the most part, governments are supportive of further trade agreements.

There have been however some concerns expressed by the WTO. According to Pascal Lamy,
Director-General of the WTO, the proliferation of regional trade agreements (RTAs) "...is
breeding concern — concern about incoherence, confusion, exponential increase of costs for
business, unpredictability and even unfairness in trade relations."[2] The position of the WTO
is that while the typical trade agreements (called preferential or regional by the WTO) are
useful to a degree, it is much more beneficial to focus on global agreements in the WTO
framework such as the negotiations of the current Doha round.

The anti-globalization movement opposes such agreements almost by definition, but some
groups normally allied within that movement, e.g. green parties, seek fair trade or safe trade
provisions that moderate real and perceived ill effects of globalization.

Classification of trade pacts[edit]

By number and type of signatories[edit]

There are three different types of trade agreements. The first is unilateral trade agreement,[3]
this is what happens when a country wants certain restrictions to be enforced but no other
countries want them to be imposed. This also allows countries to decrease the amount of
trade restrictions. That is also something that does not happen often and could impair a
country.

The second is classified as bilateral (BTA) when signed between two sides, where each side
could be a country (or other customs territory), a trade bloc or an informal group of countries
(or other customs territories). Both countries loosen their trade restrictions to help businesses,
so that they can prosper better between the different countries. This definitely helps lower
taxes and it helps them converse about their trade status. Usually this revolves around
subsided domestic industries. Mainly the industries fall under automotive, oil, or food
industries.[4]

A trade agreement signed between more than two sides (typically neighboring or in the same
region) is classified as multilateral. These face the most obstacles- when negotiating
substance, and for implementation. The more countries that are involved, the harder it is to
reach mutual satisfaction. Once this type of trade agreement is settled on, it becomes a very
powerful agreement. The larger the GDP of the signatories, the greater the impact on other
global trade relationships. The largest multilateral trade agreement is the North American
Free Trade Agreement[5] between the United States, Canada, and Mexico.[6]

U.S. regional trade agreements[edit]

These are between countries in a certain area. The most powerful ones include a few
countries that are near each other in a geographical area.[7] These countries usually have
similar histories, demographics and even economic goals.

North American Free Trade Agreement (NAFTA) January 1, 1989 was when it was put into
effect, this is between United States, Canada, and Mexico this agreement was designed to get
rid of tariff barriers between the separate countries.

Regional trade agreements are very hard to establish and commit to when the countries are
more diverse.
Association of Southeast Asian Nations(ASEAN) this was formed in 1967 between the
countries of Indonesia, Malaysia, the Philippines, Singapore, and Thailand the reasoning was
so that they could engage political and economic encouragement and it helps them all keep
regional stability.[7]

By level of integration[edit]

There are a variety of trade agreements; with some being quite complex (European Union),
while others are less intensive (North American Free Trade Agreement).[8] The resulting level
of economic integration depends on the specific type of trade pacts and policies adopted by
the trade bloc:

1. Separate
o Trade and Investment Framework Agreement (TIFA)
o Bilateral Investment Treaty (BIT)
o Preferential Trade Arrangement (PTA)–limited scope and depth of tariffs
reduction between the customs territories.
 Free Trade Agreement establishing a Free Trade Area (FTA)–
extensive reduction or elimination of tariffs on substantially all trade
allowing for the free movement of goods and in more advanced
agreements also reduction of restrictions on investment and
establishment allowing for the free movement of capital and free
movement of services
 Common market–FTA with significantly reduced or eliminated
restrictions on the freedom of movement of all factors of
production, including free movement of labour and of
enterprise; and coordination in economic policy
o Currency union–sharing the same currency
2. Composite
o Customs union–FTA with common external tariffs of all signatories in respect
to non-signatory countries
 Customs and monetary union–Customs union with Currency union
 Economic union–Customs union with Common market
 Economic and monetary union (EMU)–Economic union with
Currency Union
 Fiscal Union–common coordination of substantial parts
of the fiscal policies (proposed step between EMU and
Complete economic integration)

Special agreements[edit]

 World Trade Organization treaty

o agreements in the WTO framework (Textile Agreement and others)
 the now defunct Multilateral Agreement on Investment (in the OECD framework)

By the World Trade Organization[edit]

Typically the benefits and obligations of the trade agreements apply only to their signatories.
In the framework of the World Trade Organization, different agreement types are concluded
(mostly during new member accessions), whose terms apply to all WTO members on the so-
called most-favored basis (MFN), which means that beneficial terms agreed bilaterally with
one trading partner will apply also to the rest of the WTO members.

All agreements concluded outside of the WTO framework (and granting additional benefits
beyond the WTO MFN level, but applicable only between the signatories and not to the rest
of the WTO members) are called preferential by the WTO. According to WTO rules these
agreements are subject to certain requirements such as notification to the WTO and general
reciprocity (the preferences should apply equally to each of the signatories of the agreement)
where unilateral preferences (some of the signatories gain preferential access to the market of
the other signatories, without lowering their own tariffs) are allowed only under exceptional
circumstances and as temporary measure.[9]

The trade agreements called preferential by the WTO are also known as regional (RTA),
despite not necessarily concluded by countries within a certain region. There are currently
205 agreements in force as of July 2007. Over 300 have been reported to the WTO.[10] The
number of FTA has increased significantly over the last decade. Between 1948 and 1994, the
General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, received 124
notifications. Since 1995 over 300 trade agreements have been enacted.[11]

The WTO is further classifying these agreements in the following types:

 Goods covering:
o basic preferential trade agreement (a.k.a. partial scope agreement)
o free trade agreement
o customs union
 Services covering:
o Economic Integration Agreement–any agreement, including a basic PTA, that
covers also services

Reference:

https://en.wikipedia.org/wiki/Trade_agreement#:~:text=A%20trade%20agreement%20%28also
%20known%20as%20trade%20pact%29,terms%20that%20helps%20them%20trade%20with
%20each%20other.