Lecture 6 - The Economics of the World Trade Organisation (WTO)

It's based of a market system, the WTO provides a central point for a country to sign a trade deal instead of having to do it to many different countries.
Specialisation (cf. comparative advantage), resources used efficiently.
Economies of scale: spreading overheads in R&D in the bigger market
Wider market enables competition-induced efficiency.

National markets are too small for efficiency in many industries
But governments face many pressures to restrict imports, especially from weak industry.

Governments likely to take short-term view, protect
I.e workers and producers may lobby for protectionism. To protect their business in rational self interest, however may have adverse effects due to retaliatory policies.
Therefore open trade requires a set of agreed rules and sanctions.

Cf. World Trade Organization (n.d.) Understanding the WTO: The Organization. Available at: https://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm (Accessed: 22 October 2025).

During negotiations, WTO members will "bind" import tariffs. This is a commitment not to raise the rates of tariffs for each specific product.
Raising a "fixed" tariff would result in other members inducing retaliatory policies.

The general consensus is that the WTO is a success. Where trade growth has exceeded GDP (volume +6%/year since 1980s > World GDP growth=below 4%)

Respected institution until recently see:
Wikipedia contributors (2025) Tariffs in the second Trump administration. Wikipedia, The Free Encyclopedia. Last modified 21 October 2025, 01:10 UTC. Available at: https://en.wikipedia.org/w/index.php?title=Tariffs_in_the_second_Trump_administration&oldid=1317953139 (Accessed: 22 October 2025).

Due to the rules and dispute settlement system to resolve trade quarrles works quicker during tough times. But losers may substitute other measures for those that are found to break WTO rules cf. Hofmann & Kim 2012

The WTO enabled protection in economic crisis such as 2008. Despite trade falling 12% in 2012. WTO renegotiations allow trade to recover to the pre-crisis level. The WTO lobbied for lower tarrifs across other countries.

Some rules can be abused. For example, anti-dumping
Some WTO trade rules can be abused. For example, anti-dumping rules are designed to stop exporters from selling goods abroad below their average cost () in order to drive out local competitors.
However, countries can manipulate these rules to protect their own industries rather than ensure fair trade. This becomes a form of hidden protectionism, where a government imposes an anti-dumping tax on foreign goods that are simply cheaper, not unfairly priced.
For instance, the UK once imposed extra duties on Chinese-made football merchandise, claiming it was being dumped — even though it may have just been genuinely low-cost production.
The caveat here: importers can manipulate an exporters AC values to overvalue the average cost. In large markets it becomes harder to get an accurate, reliable value.
Bilateral agreements
Rapid increase in bilateral (direct) agreements undermines the WTO as countries are taking deals independent of the WTO. That can leave external countries behind.
Massive trade imbalances
The US-China, by influencing the value of your currency, such as the USD which is what is global reserve currency, influencing the money supply could have adverse impacts on central banks outside the US due to imbalances in the exchange rate.
Slowdown in trade growth.

Despite this being legal (with respect to WTO policies), forming FTAs and CUs independently under certain conditions
Article 24 (GATT) stipulates: