The World Trade Organisation

Overview

World Trade Organisation and what is its basic purpose, most-favoured-nation principle and national treatment principle and why it matters.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is the World Trade Organisation and what is its basic purpose?

   Model answer

   The World Trade Organisation is the international body that administers the rules governing trade between its member countries. Its purpose is to reduce barriers to trade through negotiated agreements, to provide a stable and predictable framework of rules that members commit to follow, and to settle disputes between members according to those rules rather than by unilateral retaliation.

2. 2

   Explain the most-favoured-nation principle.

   Model answer

   The most-favoured-nation principle requires a member to extend to all other members any favourable trading terms it grants to one of them, so that a tariff concession offered to a single partner automatically applies to everyone. Its effect is to prevent discrimination between trading partners and to multiply the reach of every bilateral concession. The principle has an important exception for members of a customs union or free trade area, which are permitted to give each other terms they do not extend to outsiders.

3. 3

   Explain the national treatment principle and why it matters.

   Model answer

   National treatment requires that once an imported good has cleared customs it must be treated no less favourably than an equivalent domestically produced good in respect of internal taxes and regulations. It matters because without it a country could comply with its tariff commitments and then reimpose the barrier through discriminatory sales taxes, labelling rules or distribution restrictions. The principle therefore closes the gap between the letter of a tariff concession and its economic effect.

4. 4

   What is a bound tariff rate and why does binding matter more than the level itself?

   Model answer

   A bound rate is the maximum tariff a member has committed not to exceed on a given product; it may charge less, but raising the duty above the bound rate breaches its commitment. Binding matters because it converts trade policy from something that can change at any moment into a predictable framework, and it is predictability that allows firms to invest in export capacity and cross-border supply chains. A high but bound tariff can therefore be less damaging to investment than a low but unpredictable one.

5. 5

   Explain the role of the World Trade Organisation in settling trade disputes.

   Model answer

   A member that believes another has breached the agreed rules can bring a formal complaint, which is examined by a panel that rules on whether a breach has occurred. If a breach is found, the offending member is expected to bring its measure into conformity, and if it does not, the complainant may be authorised to impose retaliatory measures of a value proportionate to the damage suffered. The purpose is to channel conflict into a rules-based process, which protects smaller members who would lose any contest of unilateral retaliation with a larger partner.

6. 6

   How does the World Trade Organisation promote trade liberalisation?

   Model answer

   It hosts multilateral negotiating rounds in which members exchange concessions, using the most-favoured-nation principle to spread each concession to all. It converts the results into binding legal commitments, so liberalisation is locked in rather than reversible at will. It monitors members' trade policies through regular review and publication, which exposes hidden barriers. And by providing dispute settlement it makes the commitments credible, since a promise that cannot be enforced would not change firms' behaviour.

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.