Trade is the buying and selling of goods and services. The products that are exchanged are things that people grow or make, like food to eat, machines to work with or clothes to wear. Services are things that people do for others, like working in bank, caring for old people or teaching pupils.
Why do we trade?
Trade happens because people need or want things that they don't have. We also trade for work that we cannot do ourselves. Trade between countries happens for the same reason. Some countries, for example, have natural resources, like coal, oil or wood which other countries might want to buy. They try to sell the goods, products or services that they have too much of to other countries. They earn money from these sales and then can buy the things that they themselves need and cannot produce on their own.
Both producers and consumers profit from international trade. If countries can produce goods more cheaply than others because they specialize on them why not let them. They make more money on one side and consumers in other countries can buy goods that are cheaper.
Even though many nations have a lot of different goods to export there are countries that depend only on one or two products to get money. Saudi Arabia, Kuwait and other countries of the Middle East depend on oil exports, because it is pretty much the only thing that they can sell. Poor countries in Africa depend largely on the export of tropical farm products to get money.
Each year goods and services worth about 11 trillion dollars ($ 11 000 000 000 000) are traded all over the world. The biggest exporting nations are The United States, France, Germany, the United Kingdom, Canada and Japan.
The difference between what a country exports and what it imports is called the balance of trade. If a country exports more than it imports we call this a trade surplus. And if a country pays more for its imports than it gets for its exports it has a trade deficit.
How trade is limited
In some countries the government controls all trade and in others it allows companies and firms to trade freely. However, all governments control trade in some way.
Sometimes a government forbids companies to buy or sell dangerous or illegal products, or military technology. When companies expand and get bigger they often take over others and form a monopoly. Governments pass laws to prevent companies from becoming too strong and powerful and from controlling the market.
Many governments try to help their own industries by making it more difficult to import foreign products. They put import taxes on foreign goods to make products more expensive and their own products cheaper. A government may also limit the number of products that it will buy from another nation. European countries, for example, may limit the number of cars that are imported from Japan or the USA. They want their people to buy European cars. We call this strategy protectionism because governments want to protect their companies and industries.
History of trade
Trading is as old as mankind. The early civilizations of Mesopotamia or Egypt traded among themselves and with other people. Gradually, trade routes developed over land and sea. These were used to transport spices, salt, minerals and jewels over great distances.
In the 15th century Europeans started exploring the seas to find new trade routes to Asia. The Portuguese explored the coast of Africa, the Spanish, English and French set across the Atlantic and founded colonies in the New World.
In the 1700s the Industrial Revolution began in Great Britain. During the following two centuries it became the most powerful trading nation in the world. The British sold goods to its colonies and received raw materials from them.
During this era governments did not interfere much with free trade. As a result many owners became very rich. They kept all the money themselves and paid workers badly. In the first half of the 20th century World War I and the Great Depression led to the decline of world trade. Many governments introduced new plans to help their own companies' workers.
After the Second World War the big countries of the free world tried to improve free trade. Some have formed trading blocs that trade freely. The biggest of them are the European Union, NAFTA and South America's Mercosur. About 150 countries are members of the World Trade Organization, an institution that sets up rules for world trade.
What Is The World Trade Organization?
You may remember seeing news footage of the protests at the doors of the World Trade Organization's (WTO) Third Ministerial Conference held in Seattle, Washington, in 1999. Similar demonstrations against the WTO have also occurred in Italy, Spain, Canada and Switzerland. What is the WTO, and why do so many people oppose it? The following article addresses these questions and concerns regarding the world's only international organization that deals with the global rules of trade.
What Is the WTO? The WTO was born out of the General Agreement on Tariffs and Trade (GATT), which was established in 1947. A series of trade negotiations, GATT rounds began at the end of World War II and were aimed at reducing tariffs for the facilitation of global trade on goods. The rationale for GATT was based on the Most Favored Nation (MFN) clause, which, when assigned to one country by another, gives the selected country privileged trading rights. As such, GATT aimed to help all countries obtain MFN-like status so that no single country would be at a trading advantage over others.
The WTO replaced GATT as the world's global trading body in 1995, and the current set of governing rules stems from the Uruguay Round of GATT negotiations, which took place throughout 1986-1994. GATT trading regulations established between 1947 and 1994 (and in particular those negotiated during the Uruguay Round) remain the primary rule book for multilateral trade in goods. Specific sectors such as agriculture have been addressed, as well as issues dealing with anti-dumping.
The Uruguay Round also laid the foundations for regulating trade in services. The General Agreement on Trade in Services (GATS) is the guideline directing multilateral trade in services. Intellectual property rights were also addressed in the establishment of regulations protecting the trade and investment of ideas, concepts, designs, patents, and so forth.
The purpose of the WTO is to ensure that global trade commences smoothly, freely and predictably. The WTO creates and embodies the legal ground rules for global trade among member nations and thus offers a system for international commerce. The WTO aims to create economic peace and stability in the world through a multilateral system based on consenting member states (currently there are slightly more than 140 members) that have ratified the rules of the WTO in their individual countries as well. This means that WTO rules become a part of a country's domestic legal system. The rules, therefore, apply to local companies and nationals in the conduct of business in the international arena. If a company decides to invest in a foreign country, by, for example, setting up an office in that country, the rules of the WTO (and hence, a country's local laws) will govern how that can be done. Theoretically, if a country is a member to the WTO, its local laws cannot contradict WTO rules and regulations, which currently govern approximately 97% of all world trade.
How It Functions Decisions are made by consensus, though a majority vote may also rule (this is very rare). Based in Geneva, Switzerland, the Ministerial Committee, which holds meetings at least every two years, makes the top decisions. There is also a General Council, a Goods Council, Services Council, and an Intellectual Property Rights Council, which all report to the General Council. Finally, there are a number of working groups and committees.
If a trade dispute occurs, the WTO works to resolve it. If, for example, a country erects a trade barrier in the form of a customs duty against a particular country or a particular good, the WTO may issue trade sanctions against the violating country. The WTO will also work to resolve the conflict through negotiations.
Free Trade at What Cost? The anti-WTO protests we have seen around the world are a response to the consequences of establishing a multilateral trading system. Critics say that the after-effects of WTO policies are undemocratic because of the lack of transparency during negotiations. Opponents also argue that since the WTO functions as a global authority on trade and reserves the right to review a country's domestic trade policies, national sovereignty is compromised. For example, regulations that a country may wish to establish to protect its industry, workers or environment could be considered barriers to the WTO's aim to facilitate free trade. A country may have to sacrifice its own interests to avoid violating WTO agreements. Thus, a country becomes limited in its choices. Moreover, brutal regimes that are pernicious to their own countries may inadvertently be receiving concealed support from foreign governments who continue, in the name of free trade, to do business with these regimes. Unfavorable governments in favor of big business therefore remain in power at the cost of a representative government.
One high profile WTO controversy has to do with intellectual property rights and a government's duty to its citizens versus a global authority. One well known example is HIV/AIDS treatments and the cost of patented medicines. Poor, very needy countries, such as those in South America and sub-Saharan Africa, simply cannot afford to buy these patented drugs. If they were to buy or manufacture these same drugs under an affordable generic label, which would save thousands of lives, these countries would, as members of the WTO, be in violation of intellectual property rights (TRIPS) agreements and subject to possible trade sanctions.
Conclusion Free trade fosters investment into other countries, which can help boost the economy and eventually the standard of living of all countries involved. As most investment comes from the developed and economically powerful into the developing and less influential economies, there is, however, a tendency for the system to give the investor an advantage. Regulations that facilitate the investment process are in the investor's interest because these regulations help foreign investors maintain an edge over local competition. Controversy over what is the best course of action in the creation of a global economic system - one that fosters free trade and free choice - will persist.