World Trade Organisation

The World Trade Organization (WTO) is an international organization designed to supervise

and liberalize international trade. The WTO came into being on January 1, 1995, and is the
successor to the General Agreement on Tariffs and Trade (GATT), which was created in
1947, and continued to operate for almost five decades as a de facto international
organization.

The World Trade Organization deals with the rules of trade between nations at a near-global
level; it is responsible for negotiating and implementing new trade agreements, and is in
charge of policing member countries' adherence to all the WTO agreements, signed by the
bulk of the world's trading nations and ratified in their parliaments. Most of the WTO's
current work comes from the 1986-94 negotiations called the Uruguay Round, and earlier
negotiations under the GATT. The organization is currently the host to new negotiations,
under the Doha Development Agenda (DDA) launched in 2001.

The WTO is governed by a Ministerial Conference, which meets in every two years; a
General Council, which implements the conference's policy decisions and is responsible for
day-to-day administration; and a director-general, who is appointed by the Ministerial
Conference. The WTO's headquarters are in Geneva, Switzerland.

MISSION, FUNCTIONS AND PRINCIPLES :

The WTO's stated goal is to improve the welfare of the peoples of its member countries,
specifically by lowering trade barriers and providing a platform for negotiation of trade. Its
main mission is "to ensure that trade flows as smoothly, predictably and freely as possible".
This main mission is further specified in certain core functions serving and safeguarding five
fundamental principles, which are the foundation of the multilateral trading system.

FUNCTIONS

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.
It provides a forum for negotiations and for settling disputes.
 Additionally, it is the WTO's duty to review the national trade policies, and to ensure
the coherence and transparency of trade policies through surveillance in global
economic policy-making.
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.
The WTO is also a center 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.
Finally, the WTO cooperates closely with the two other components of the Bretton
Woods system, the IMF and the World Bank.

Important Agreements under WTO

General Agreement on trade in Services

General Agreement on Trade in Services, is the first and the only comprehensive
multilateral discipline covering international trade in Services. It was negotiated
during Uruguay Round and came into force along with other WTO agreements in
January 1995. A simple definition of services is that services are the tradables, which
are intangible, invisible, and incapable of storage and, therefore, requiring
simultaneous production and consumption. This description does have its limitations
as technical advancements have made it possible for the services to be visible and
capable of storage (for example, a foreign consultant prepares a documentary film for
a local company and sends it to that company in the form of a video cassette).As per
WTO services are divided into 12 areas and sub divided into 164 areas.

Business Services, Communication Services, Construction and Engineering Services

,Distribution Services, Education Services,Environmental Services, Financial
Services, Health Services, Tourism and travel Services, Recreation, cultural and
sporting Services, Transport Services, Other Services not included elsewhere.
 Trade Related Intellectual Property Rights :
It is the Uruguay Round Agreement on Trade Related Intellectual Property.
It deals with the protection & enforcement of Trade-Related intellectual property
rights". It establishes minimum levels of protection that each government has to give
to the intellectual property of fellow WTO members deals in :
How basic principles of the trading system and other international intellectual
property agreements should be applied:
How to give adequate protection to intellectual property rights
How countries should enforce those rights adequately in their own territories
How to settle disputes on intellectual property between members of the WTO
Special transitional arrangements during the period when the new system is being
introduced.

Trade Related Investment Measures

TRIMs refers to certain conditions or restrictions imposed by a governments in
respect of foreign investment in the country .The agreement on TRIMs provides that
no contracting party shall apply any TRIM which is inconsistent with the WTO
Articles.

PRINCIPLES OF THE TRADING SYSTEM

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. Five principles are of
particular importance in understanding both the pre-1994 GATT and the WTO:

Nondiscrimination. 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 favorable conditions under which it allows trade in a certain product type to all
other WTO members. "Grant someone a special favour and you have to do the same
for all other WTO members." National treatment means that imported and locally-
produced goods should be treated equally (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).
 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 materialize.
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.
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). 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.
Safety valves. In specific circumstances, governments are able to restrict trade. There
are three types of provisions in this direction: articles allowing for the use of trade
measures to attain noneconomical objectives; articles aimed at ensuring "fair
competition"; and provisions permitting intervention in trade for economic reasons.
STRUCTURE OF WTO
FORMAL STRUCTURE

According to WTO rules, all WTO members may participate in all councils, committees, etc.,
except Appellate Body, Dispute Settlement panels, and plurilateral committees.

Highest level: Ministerial Conference

The topmost decision-making body of the WTO is the Ministerial Conference, which has to
meet at least every two years. It brings together all members of the WTO, all of which are
countries or separate customs territories. The Ministerial Conference can make decisions on
all matters under any of the multilateral trade agreements.

Second level: General Council

The daily work of the ministerial conference is handled by three groups: the General Council,
the Dispute Settlement Body, and the Trade Policy Review Body. All three consist of the
same membership - representatives of all WTO members - but each meets under different
rules.

1. The General Council, the WTOs highest-level decision-making body in Geneva, meets
regularly to carry out the functions of the WTO. It has representatives (usually ambassadors
or equivalent) from all member governments and has the authority to act on behalf of the
ministerial conference which only meets about every two years. The council acts on behalf on
the Ministerial Council on the entire WTO affairs. The current chairman is Amb. Xavier
carim (south africa)

2. The Dispute Settlement Body is made up of all member governments, usually represented
by ambassadors or equivalent. The current chairperson is H.E. Mr. Mr. Bruce Gosper
(Australia).
3. The WTO General Council meets as the Trade Policy Review Body (TPRB) to undertake
trade policy reviews of Members under the TRPM. The TPRB is thus open to all WTO
Members. The current chairperson is H.E. Ms. Claudia Uribe (Colombia).

Third level: Councils for Trade

The Councils for Trade work under the General Council. There are three councils - Council
for Trade in Goods, Council for Trade-Related Aspects of Intellectual Property Rights, and
Council for Trade in Services - each council works in different fields. Apart from these three
councils, six other bodies report to the General Council reporting on issues such as trade and
development, the environment, regional trading arrangements and administrative issues.

1. Council for Trade in Goods- The workings of the General Agreement on Tariffs and Trade
(GATT) which covers international trade in goods, are the responsibility of the Council for
Trade in Goods. It is made up of representatives from all WTO member countries. The
current chairperson is Amb. Yonov Frederick Agah (Nigeria).

2. 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 WTOs work with other international organizations in the field.

3. 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). Its open to all WTO members, and can
create subsidiary bodies as required.
Absolute advantage refers to the ability of a country to produce a good more efficiently
than other countries. In other words, a country that has an absolute advantage can produce
a good with lower marginal cost (fewer materials, cheaper materials, in less time, with fewer
workers, with cheaper workers, etc.). Absolute advantage differs from comparative
advantage, which refers to the ability of a country to produce specific goods at a lower
opportunity cost.

A country with an absolute advantage can sell the good for less than a country that does not
have the absolute advantage. For example, the Canadian economy, which is rich in low cost
land, has an absolute advantage in agricultural production relative to some other countries.
China and other Asian economies export low-cost manufactured goods, which take
advantage of their much lower unit labor costs. Imagine that Economy A can produce 5
widgets per hour with 3 workers. Economy B can produce 10 widgets per hour with 3
workers. Assuming that the workers of both economies are paid equally, Economy B has an
absolute advantage over Economy A in producing widgets per hour. This is because
Economy B can produce twice as many widgets as Economy B with the same number of
workers.

Comparative Advantage :In economics, comparative advantage refers to the ability of a

party to produce a particular good or service at a lower marginal and opportunity cost over
another. Even if one country is more efficient in the production of all goods (has an absolute
advantage in all goods) than another, both countries will still gain by trading with each
other. More specifically, countries should import goods if the opportunity cost of importing
is lower than the cost of producing them locally. Imagine that there are two nations,
Chiplandia and Entertainia, that currently produce their own computer chips and CD players.
Chiplandia uses less time to produce both products, while Entertainia uses more time to
produce both products. Chiplandia enjoys and absolute advantage, an ability to produce an
item with fewer resources. However, the accompanying table shows that Chiplandia has a
comparative advantage in computer chip production, while Entertainia has a comparative
advantage in the production of CD players.

Competitive advantages are conditions that allow a company or country to produce a good
or service at a lower price or in a more desirable fashion for customers. These conditions
allow the productive entity to generate more sales or superior margins than its competition.
Competitive advantages are attributed to a variety of factors, including cost structure,
brand, quality of product offerings, distribution network, intellectual property and customer
support.
Factor Mobility and Trade - Overview
Factor mobility refers to the ability to move factors of production - labor, capital or land - out of one
production process into another. Factor mobility may involve the movement of factors between firms
within an industry, as when one steel plant closes but sells its production equipment to another steel
firm. Mobility may involve the movement of factors across industries within a country, as when a worker
leaves employment at a textile firm and begins work at a automobile factory. Finally mobility may
involve the movement of factors between countries either within industries or across industries, as when
a farm worker migrates to another country or when a factory is moved abroad.
The standard assumptions in the literature are that factors of production are freely (i.e., without
obstruction) and costlessly mobile between firms within an industry and between industries within a
country, but are immobile between countries.
Product life cycle theory divides the marketing of a product into four stages: introduction,
growth, maturity and decline. When product life cycle is based on sales volume, introduction and
growth often become one stage. For internationally available products, these three remaining
stages include the effects of outsourcing and foreign production.
General Theory

When a product is first introduced in a particular country, it sees rapid growth in sales volume
because market demand is unsatisfied. As more people who want the product buy it, demand
and sales level off. When demand has been satisfied, product sales decline to the level required
for product replacement. In international markets, the product life cycle accelerates due to the
presence of "follower" economies that rarely introduce new innovations but quickly imitate the
successes of others. They introduce low-cost versions of the new product and precipitate a faster
market saturation and decline.

Growth

An effectively marketed product meets a need in its target market. The supplier of the product
has conducted market surveys and has established estimates for market size and composition.
He introduces the product, and the identified need creates immediate demand that the supplier is
ready to satisfy. Competition is low. Sales volume grows rapidly. This initial stage of the product
life cycle is characterized by high prices, high profits and wide promotion of the product.
International followers have not had time to develop imitations. The supplier of the product may
export it, even into follower economies.

Maturity
In the maturity phase of the product life cycle, demand levels off and sales volume increases at a slower
rate. Imitations appear in foreign markets and export sales decline. The original supplier may reduce prices
to maintain market share and support sales. Profit margins decrease, but the business remains attractive
because volume is high and costs, such as those related to development and promotion, are also lower.

Decline
In the final phase of the product life cycle, sales volume decreases and many such products are eventually
phased out and discontinued. The follower economies have developed imitations as good as the original
product and are able to export them to the original supplier's home market, further depressing sales and
prices. The original supplier can no longer produce the product competitively but can generate some return
by cleaning out inventory and selling the remaining products at discontinued-items prices.
PESTEL analysis is a more elaborate version of the PEST analysis that includes two
additional environmental factors. If you want a comprehensive understanding of the macro
environment in which your business is currently operating, this is the best monitoring tool
you can use to get a complete picture .
Political Factors :This takes into account the level of government intervention in the
economy. Political factors are important as businesses need political stability to operate or
they will fail to achieve the desired level of profitability. Apart from the stability, the political
factors also taken into account include government policies, tax laws, labour regulations and
trade policies
Economic Factors : Economical factors facing businesses have a direct impact on their
profitability and therefore, are important when you analyse PESTEL. These factors include
inflation rate, exchange rate, interest rate and disposable income available to end
consumers. The economic factors can be further categorized into micro-economic and
macro-economic factors. The micro-economic factors are related to how the consumers in
the society spend their disposable income while the macro-economic factors are more
concerned with the overall demand-and-supply conditions in the economy.
Social Factors : The social environment in which a business operates also has a profound
impact on its operation. The social factors include the cultural influences and beliefs of the
target audience. For example, a product or an advertisement may be deemed offensive in a
particular culture while it would be perfectly normal in another culture. This will also include
age demographics, education, likes, interests and opinions of the society.
Technological factors are one of the most important PESTEL factors. Today, companies
allocate considerable resources towards Research and Development to stay ahead in the
game and not lose ground to their competitors. Technological factors are not only of
significance in the production of goods and services but also in their distribution. These
factors help businesses explore new ways of communicating, engaging and interacting with
their target audience.

Environmental factors are essential to analyse PESTEL and may be deemed a relatively new
addition to the macro-economic analytical tools. However, they have gained significance
owing to the rising concern regarding the environment among the masses. Consumers today
prefer to buy products from businesses whose products and services are environment-
friendly and who are socially responsible.

Legal factors are also deemed an important part of the whole macro-economic scenario and
focus on issues like product safety, consumer rights and laws, equal opportunities, and
health and safety. For companies to operate successfully, they should not only know but
also abide by the rules and regulations of the country they are operating in.These factors
should be understood by every organisation in order to analyse PESTEL. This analytical tool
can help the business plan and achieve its strategic objectives in a more informed and
realistic manner.
Foreign Exchange Market'
The foreign exchange market is the market in which participants are able to buy, sell,
exchange and speculate on currencies. Foreign exchange markets are made up of
banks, commercial companies, central banks, investment management firms, hedge
funds, and retail forex brokers and investors. The forex market is considered the
largest financial market in the world.

The forex market has unique characteristics and properties that make it an attractive
market for investors who want to optimize their profits.

Highly Liquid :The forex market has enticed retail currency traders from all over
the world because of its benefits. One of the benefits of trading currencies is its
massive trading volume, which covers the largest asset class globally. This means that
currency traders are provided with high liquidity.
Open 24 Hours a Day, 5 Days a Week : In the forex market, as one major
forex market closes, one in another part of the world opens. Unlike stocks, the forex
market operates 24 hours daily except on weekends. Traders find this as one of the
most compelling reasons to choose forex, since it provides convenient opportunities
for those who are in school or work during regular work days and hours.
Leverage :The leverage given in the forex market is one of the highest forms of
leverage that traders and investors can use. Simply put, leverage is a loan given to an
investor by his broker. With this loan, investors are able to enhance profits and gains
by increasing traders and investors control over the currencies they are trading.For
example, investors who have a $1,000 forex market account can trade $100,000
worth of currency with a margin of 1%, with a 100:1 leverage.
The Biggest in the World of Finance

In 2013, the Triennial Central Bank Survey of Foreign exchange and OTC Derivatives
Market Activity provided statistics on the amount of currencies traded daily, and has
stated an average of $4 trillion traded daily. The break-down of this amount shows
that $1.490 trillion were traded in spot transactions, $475 billion in outright
forwards, $1.765 trillion in foreign exchange swaps, $43 billion in currency swaps,
and $207 billion in options and other forex products.
The Foreign Exchange Trading Process
Traders trade foreign currencies in hopes that they can profit from the changes in the exchange rate
between the two currencies. In order to gain access to the Foreign Exchange market, commonly
called FOREX, you have to open an account with a broker and begin trading. You also need a basic
understanding of currency pairs and how to trade them.

Currency Pairs

One of the most basic terms in the FOREX market is "currency pair." In order to trade the market,
you have to understand what a currency pair is and how it works. Currencies are paired with other
currencies in standard pairs. For example, if you wish to trade the Euro against the United States
Dollar, you would trade the EUR/USD pair. When you buy the EUR/USD pair, you are really buying
the Euro and selling the dollar.

Traders

The majority of traders in the market are institutional traders. Institutional traders are exchange
banks who exchange with other banks every day. This market is the single largest financial market in
the world because of the size of the institutional traders involved. Individuals can also get involved
by working with a FOREX broker. People trade this market from all over the world at all times.
Traders can access the market 24 hours a day five days per week.

Brokers

In order to trade the market, you have to have an account with a FOREX broker. FOREX brokers are
situated all over the world and there is not a central agency that governs all of them. You can open
an account by filling out a basic form and proving your identity. Then you can fund the account with
a payment through check, credit or debit card or wire transfer. At that point, you can trade
currencies in the market.

Platform

Once you have an account with a broker, you can download the brokers trading platform to your
computer. This trading platform will allow you to look at price charts with real-time pricing
information on all of the major currency pairs. You can use indicators and other tools on the trading
platform to aid in your trading decisions. Once you are ready to place an order, you can do so from
your platform without contacting the broker.

Orders

When you decide that you want to get into the market, you can place one of a few different types of
orders. If you want to get into the market as quickly as possible, you can simply place a market order.
This fills your order at the price that is available in the market. You could also place a limit order that
fills your order once the market gets to a certain point.
EXCHANGE RATE ARRANGEMENT :

An exchange rate regime is how a nation manages its currency in the foreign exchange
market. An exchange rate regime is closely related to that countrys monetary policy. There
are three basic types of exchange regimes: floating exchange, fixed exchange, and pegged
float exchange.

A floating exchange rate, or fluctuating exchange rate, is a type of exchange rate regime
wherein a currencys value is allowed to fluctuate according to the foreign exchange market.
A currency that uses a floating exchange rate is known as a floating currency. The dollar is an
example of a floating currency. Many economists believe floating exchange rates are the
best possible exchange rate regime because these regimes automatically adjust to economic
circumstances. These regimes enable a country to dampen the impact of shocks and foreign
business cycles .

A fixed exchange rate system, or pegged exchange rate system, is a currency system in
which governments try to maintain a currency value that is constant against a specific
currency or good. In a fixed exchange-rate system, a countrys government decides the
worth of its currency in terms of either a fixed weight of an asset, another currency, or a
basket of other currencies. The central bank of a country remains committed at all times to
buy and sell its currency at a fixed price.To ensure that a currency will maintain its pegged
value, the countrys central bank maintain reserves of foreign currencies and gold. They can
sell these reserves in order to intervene in the foreign exchange market to make up excess
demand or take up excess supply of the countrys currency.The most famous fixed rate
system is the gold standard, where a unit of currency is pegged to a specific measure of gold.

Pegged floating currencies are pegged to some band or value, which is either fixed or
periodically adjusted. These are a hybrid of fixed and floating regimes. There are three types
of pegged float regimes:

Crawling bands: The market value of a national currency is permitted to fluctuate within a
range specified by a band of fluctuation. This band is determined by international
agreements or by unilateral decision by a central bank. The bands are adjusted periodically
by the countrys central bank. Generally the bands are adjusted in response to economic
circumstances and indicators.
Crawling pegs: A crawling peg is an exchange rate regime, usually seen as a part of fixed
exchange rate regimes, that allows gradual depreciation or appreciation in an exchange rate.
The system is a method to fully utilize the peg under the fixed exchange regimes, as well as
the flexibility under the floating exchange rate regime. The system is designed to peg at a
certain value but, at the same time, to glide in response to external market uncertainties.
Pegged with horizontal bands:This system is similar to crawling bands, but the currency is
allowed to fluctuate within a larger band of greater than one percent of the currencys
value.
Major Types of Trading Blocs:- 1.Preferential Trade Area (PTAs) 2.Free Trade Area
3.Customs Union 4.Common Market

MAJOR TRADE BLOCS

A. EU (European Union)

B. NAFTA (North American Free Trade Agreement)

C. OPEC (Organisation of Petroleum Exporting Countries)

D. ASEAN (Association of South East Asian Nations)

E. SAARC ( South Asian Association for Regional Cooperation)

F. MERCOSUR (Mercado Comun del Cono Sur, also known as Southern Common Markets (SCCM)
Commodity agreements are arrangements between producing and consuming
countries to stabilise markets and raise average prices. Such agreements are
common in many markets, including the market for coffee, tea, and sugar.
International Commodity Agreements which are inter- governmental arrangements
concerning the production of & trade in, certain primary products with a view to
stabilizing their prices.

The basic objective is to stimulating a dynamic & steady growth & ensuring
reasonable predictability in the real export earnings of the developing countries so
as to provide:

Expanding the resources for economic & social development.

Consider the interest of the consumers in importing countries

Considering the remunerative & equitable & stable prices for primary
commodities.

Considering the import purchasing power

Increased imports & consumption & also coordination of production & marketing
policies
 Quota agreements: In international trade, a government imposed limit on the
quantity of goods and services that may be exported or imported over a specified
period of time. Limits on the amount of a goods produced, imported, exported or
offered for sale. International quota agreements seek to prevent a fall in commodity
prices by regulating prices. This agreement undertake to restrict the export or
production by a certain percentage of the basic quota decided by the Central
Committee or Council. This type of agreement mostly in the case of the
commodities like coffee, tea & sugar This agreement avoids accumulation of
stocks require no financing & do not call for continuous operating decisions.

Buffer Stock Agreements: A practice in which a large investor, especially a

government, buys large quantities of commodities during periods of high supply
and stores them so they do not trade or circulate. The investor then sells them when
supply is low. This is done to stabilize the price. It is to stabilizing the prices by
maintaining the demand & supply balance. It is more useful for the commodities
like tea, sugar rubber, copper. This arrangements only for those products which
can be stored at relatively low cost without the danger of deterioration & this is one
of the limitation of this agreement.

Bilateral or Multilateral Contracts: Bilateral agreements may be formed as

business or personal agreements between individuals or companies. They may also
be formed between sovereign countries in the form of trade agreements or
agreements in other areas. In either case, a bilateral agreement is a binding contract
between the two parties that have agreed to mutually acceptable terms.
International sale & purchase contracts may also be entered into by two or more
major exporters & importers. Bilateral contract to purchase & sell certain quantities
of a commodity at agreed prices. In this agreement, an upper price & a lower price
are specified. If the market price, throughout the period of the agreement, remains
within these specified limits the agreement becomes inoperative. If the market
price rises above the upper limit specified, the exporter country is obliged to sell to
the importing country a certain specified quantity of the upper price fixed by the
agreement. On the other hand, if the market price falls below the lower limit
specified, the importer is obliged to purchase the contracted quantity at the
specified lower price.