The WTO and the World Trade System — Week 2 Assignment

A S S I G N M E N T

The WTO and the World Trade System

Week 2 — Comprehensive Study Notes

Topics Covered: Global Value Chains • WTO Principles • Hegemonic Stability • RTAs

Introduction
International trade is the buying and selling of goods and services between countries. Over the last
70 years, global trade has grown enormously — from $84 billion in 1953 to over $24 trillion in 2023.
This did not happen by accident. It happened because of political institutions, trade rules, and
powerful countries that pushed for open markets.

This assignment covers all four major topics from Week 2:

• How global production and trade have changed (Global Value Chains)
• What the WTO is and how it works
• How powerful countries (hegemons) shape global trade
• The rise of Regional Trade Arrangements (RTAs) and their impact on the WTO

Part 1: How Global Economic Production Has Changed

1.1 From Finished Goods to Intermediate Goods
Twenty years ago, a company would make a complete product in one country and ship it to
another. For example, Japan would make a car from start to finish and export it.

Today, that is completely different. Instead of one country making the whole product, different parts
are made in different countries. These parts are called intermediate goods — meaning they are not
the final product yet. They need to be assembled somewhere.

Example Toyota no longer makes all its cars in Japan. Instead, it buys parts from over 20

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different countries — steel from one country, electronics from another, tyres from
somewhere else — and then assembles the car in multiple locations around the
world.

Nutella, made by the Ferrero Group (Italy), uses ingredients from all over the world
— hazelnuts from Turkey, cocoa from Africa, sugar from Europe, palm oil from
Example
Malaysia — and has factories on four continents. The headquarters manages
everything from Italy.

This shows that production is now spread across many countries. The item you buy in a shop is the
result of work done by workers in many different nations.

1.2 What Are Global Value Chains (GVCs)?

A Global Value Chain (GVC) is the entire journey of a product — from the raw material stage,
through manufacturing and assembly, all the way to the consumer.

In a GVC, different stages of production happen in different countries. Each country adds some
'value' (skill, work, material) to the product before it moves to the next stage.

What makes GVCs What do GVCs enable? Who benefits?

possible?
Trade liberalisation (lower Specialisation (each country Multinational companies and
tariffs) and technology does what it is best at) and the countries they operate in
advances (internet, shipping) efficiency (faster, cheaper (jobs, skills, income)
production)

1.3 How Fast Has World Trade Grown?

World trade has grown at an average of 6% per year over the last 70 years. The value of
merchandise (goods) traded globally rose from just $84 billion in 1953 to over $24 trillion in 2023.

Importantly, trade has grown faster than the overall global economy. This means that a larger and
larger share of what the world produces gets sold across borders. More production 'crosses
borders' than ever before — making the world deeply interconnected.

Imagine the world's economy as a pizza. Decades ago, most of the pizza was eaten
Simple at home (domestic consumption). Today, more and more slices are traded across
Analogy the table (exported to other countries). The pizza is bigger AND more of it crosses
borders.

1.4 Why Does Trade Need Political Structures?

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Trade growth is not automatic. Countries need rules to trust each other, to resolve arguments, and
to keep markets open. Without these rules, countries might raise tariffs (taxes on imports), ban
certain products, or favour their own companies unfairly — all of which would reduce trade.

This is why political institutions like the WTO (and before it, GATT) were created. They provide the
framework that makes global trade possible and trustworthy.

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Part 2: What is the World Trade Organization (WTO)?

2.1 Historical Background — From GATT to WTO
The WTO did not always exist. It was born out of a previous agreement called GATT — the General
Agreement on Tariffs and Trade.

Year Event
1947 GATT was created after World War II to help countries reduce tariffs and trade
more freely.
1947–1994 GATT operated as the main trade agreement for 47 years. During this time, 8
rounds of negotiations were completed to lower tariffs and trade barriers.
1995 GATT was formally integrated into the WTO. The WTO became the official
international body governing global trade.

2.2 What Does the WTO Actually Do?

The WTO serves three main functions:

• Forum for Trade Negotiations — Member countries meet to negotiate new trade rules and
reduce barriers.
• A Set of Rules — The WTO provides a legal rulebook that all members must follow in their
trade policies.
• Dispute Resolution — When one country believes another is breaking the rules (e.g.,
unfairly blocking imports), they can bring the case to the WTO, which acts like a court.

The WTO is relatively small in terms of staff and budget compared to the scale of trade it governs.
Its power comes from the rules and agreements that member governments themselves create and
agree to follow.

2.3 Core Principles of the WTO

Principle 1: Market Liberalism

The WTO is built on the idea that open trade — where goods and services flow freely between
countries — is good for everyone. When trade barriers are low, countries can specialise in what
they produce best and buy the rest cheaply from others. This raises living standards.

Think of it like a shop that sells to everyone instead of just people from one
Analogy
neighbourhood. Everyone benefits when the market is open.

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Principle 2: Non-Discrimination
This is perhaps the most important principle. The WTO says that all member countries must be
treated equally in trade. Non-discrimination works in two ways:

(A) Most-Favoured Nation (MFN) Rule

If you give a trade benefit (like a lower tariff) to one WTO member, you must give the same benefit
to ALL WTO members. You cannot play favourites.

If Country A reduces its import tax on cars from Country B from 10% to 5%, it must
also reduce that tax to 5% for cars from all other WTO members — Country C, D, E,
Example and so on. Exception: Countries can have lower tariffs with Regional Trade
Agreement (RTA) partners or under the Generalised System of Preferences (GSP)
for developing countries.

(B) National Treatment Rule

Once a foreign product has entered a country and paid any applicable import duty, the government
cannot treat it worse than domestic (local) products. The rules for domestic and foreign products
must be the same.

If a country's environmental rules say domestic cars must meet Fuel Standard X,
Example foreign cars must follow the exact same Fuel Standard X. The country cannot set
stricter standards only for foreign cars to secretly block imports.

2.4 Decision-Making Through Bargaining Rounds

The WTO does not make its rules by a small committee. Instead, all member countries sit together
and negotiate. These negotiations happen in formal rounds called Bargaining Rounds.

Feature Detail
How many rounds? 8 rounds have been successfully concluded. The 9th — the Doha Round
— began in 2001 and is still ongoing (one of the longest negotiations in
history).
How does a round It starts at a WTO Ministerial Conference, where representatives of all
begin? member governments set the agenda (topics to be negotiated).
How does a round When all member governments agree on a final deal, they sign it, ratify it
end? in their home parliaments, and implement it into their national laws.
Why do rounds Because every member country has different interests. A rich country
take so long? wants access to poor countries' markets. A poor country wants special
treatment and protections. Getting everyone to agree takes years.
What enforces the The WTO's Dispute Settlement Mechanism. If a country breaks the rules,
rules? other countries can file a complaint and the WTO can authorise trade
penalties.

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In summary: The WTO is an international political system that creates and enforces the rules that
govern how countries conduct trade with each other.

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Part 3: Hegemons, Public Goods, and the World Trade

System
3.1 What is Hegemonic Stability Theory?
Hegemonic Stability Theory is an idea in international relations that says: a stable, open global
trade system requires a dominant country — called a hegemon — to lead and maintain it.

Without a powerful leader willing to create and enforce trade rules, the system becomes unstable
and countries become more protectionist (blocking trade to protect their own industries).

Think of a school playground. When there is a strong teacher (the hegemon) who
enforces the rules, kids play fairly. When the teacher leaves, stronger kids start
Analogy
bullying, and the playground becomes chaotic. The teacher's presence is a 'public
good' — everyone benefits.

3.2 What Are Public Goods?

A public good has two special characteristics:

• Non-excludability — Once a public good is provided, you cannot stop others from using it.
Everyone gets access.
• Non-rivalry — One person using it does not reduce how much others can use it. It does not
get 'used up.'

Real- Street lights are a public good. Once the government puts up a street light, every
World person walking past benefits — you cannot charge individuals for using the light, and
Example one person walking under it doesn't reduce the light for others.

Global trade rules are a public good. Once the WTO creates a rule (e.g., 'all countries must apply
equal tariffs'), every country benefits from the predictability and stability that comes from everyone
following that rule.

3.3 The Free-Riding Problem

A free-rider is someone who enjoys the benefits of a public good without contributing to the cost of
providing it. This is a major problem in international trade.

All countries want stable global trade rules — they benefit from them. But no country wants to pay
the cost (diplomatic effort, financial resources, compromises) of creating and maintaining those
rules. Every country prefers to let others do the hard work — and then enjoy the benefits for free.

Example Imagine 10 students share a flat. Everyone wants a clean kitchen. But no one wants

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to be the one to clean it. Everyone 'free-rides' on the hope that someone else will
clean. Result: the kitchen stays dirty (public good is under-provided).

In international trade, this free-rider problem means that without a powerful leader (hegemon)
willing to absorb the costs, trade rules are under-provided and the global system becomes less
open and stable.

The problem is made worse by group size — the more countries there are, the stronger the
temptation to free-ride, because each individual country's contribution seems small and optional.

3.4 How Hegemons Solve the Free-Rider Problem

A hegemon is a country that:

• Produces a disproportionately large share of global economic output

• Leads in technology development
• Gains enormous benefits from trade
• Is therefore willing to bear the full costs of creating and maintaining international trade rules
— even if others free-ride

Hegemons act like 'privileged groups' — they benefit so much from the public good (open trade)
that they are willing to provide it even without everyone contributing.

However, as a hegemon's power weakens (relative to other countries), its willingness and ability to
maintain the open trade system also weakens. This leads to instability and less open trade.

3.5 Historical Evidence of Hegemonic Stability

Period Hegemon Impact on Trade

19th Century Britain (British Rapid expansion of global trade. Britain
Hegemony) promoted free trade globally.
Early–Mid 20th C Britain → USA Instability, protectionism, and trade wars during
(transition) the transition period (e.g., Great Depression
era).
Post-WWII USA (American Massive growth in world trade. USA built and
Hegemony) led the GATT/WTO system.
Present (emerging) USA + China + India? Questions about whether US hegemony is
declining and what this means for the WTO
system.

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Part 4: The Evolving WTO — New Directions, New

Challenges
4.1 Why Is the WTO Changing?
For 70 years, the core rules of the trade system have remained relatively stable. But in recent
decades, major changes have taken place that are pushing the WTO in new directions and creating
new challenges.

4.2 Rise of Developing Countries as a Powerful Bloc

In the early years of GATT and the WTO, rich countries (especially the USA and EU) dominated.
They set the agenda, and poorer countries mostly went along.

This changed dramatically. The WTO has grown rapidly — over 70 countries joined since 1985,
bringing total membership to 166 countries (with further growth expected beyond 190). Developing
countries are no longer silent. They now demand that trade rules benefit them too.

• Brazil, China, and India emerged as leaders of a powerful coalition of developing countries.
• During the Seattle Round (1999), developing countries successfully resisted a trade agenda
that primarily served US and EU interests.
• Today, successful negotiations can only proceed after addressing the priorities of
developing countries — especially agricultural liberalisation (making it easier for poor
countries to sell their farm products globally).

More members = more diverse interests = harder to reach consensus. It is much

Impact harder to get 166 countries to agree than it was to get 23 (the original GATT
signatories) to agree.

4.3 Rise of NGOs as a Force Outside the WTO

Since the late 1990s, Non-Governmental Organisations (NGOs) — civil society groups representing
consumers, environmental groups, labour unions, etc. — have become increasingly vocal and
active around WTO negotiations.

Their main concerns:

• Consumer protections — Are WTO rules protecting the rights of consumers or just the
interests of producers and big corporations?
• Environmental protections — Are WTO rules allowing governments to ban imports that are
environmentally harmful, or are such bans treated as unfair trade barriers?

Real Case The EU banned the import of hormone-treated beef from the USA on health
grounds. The USA argued this was just disguised protectionism (a secret way to

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block American beef). The WTO had to decide: was the EU's ban a legitimate health
regulation or unfair trade discrimination? Cases like this show how hard it is to
separate genuine safety concerns from protectionist motives.

WTO rules try to balance these concerns through SPS Measures (Sanitary and Phytosanitary
measures) — rules about food safety and animal/plant health standards. But critics argue the WTO
is biased towards producer interests rather than consumer welfare.

4.4 The Challenges of Effectiveness and Legitimacy

◦ Effectiveness Challenge — Can such a large and diverse group of governments

actually negotiate meaningful trade liberalisation? With 166 members, reaching
agreement is extremely difficult.
◦ Legitimacy Challenge — Should international trade rules — which can limit what
national governments can do — be negotiated without involving civil society (ordinary
people, NGOs, consumers)? Many feel this is undemocratic.
◦ Reform Proposals — Some suggest creating a steering committee of key countries to
speed up negotiations — but this would sacrifice inclusivity and make the organisation
less democratic.
◦ NGO Involvement — Including NGOs might make the WTO more legitimate in the
eyes of the public, but it would also complicate consensus-building further.

The current impasse (deadlock) over decision-making reforms has pushed governments to seek
alternative forums for trade agreements — especially Regional Trade Arrangements (RTAs).

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Part 5: Regional Trade Arrangements (RTAs) — The

Greatest Challenge?
5.1 What Are Regional Trade Arrangements (RTAs)?
An RTA is a trade agreement between two or more countries that gives each other preferential
(better-than-normal) access to their markets. In an RTA, member countries treat each other more
favourably than they treat non-member countries.

Main Types of RTAs

Type What It Means Example

Free-Trade Area No tariffs between members, but NAFTA (USA, Canada, Mexico)
each country keeps its own tariffs
with outside countries.
Customs Union No tariffs between members AND European Union (EU)
a common (shared) tariff for all
outside countries.
Common Market All of the above + free movement EU Single Market (deeper
of workers and capital (investment integration)
money) between member
countries.

5.2 Are RTAs Allowed Under WTO Rules?

RTAs seem to contradict the WTO's non-discrimination principle — they give preferential treatment
to member countries. However, they are allowed under GATT Article XXIV, which permits RTAs
provided that the agreement does not increase barriers against countries that are not members of
the RTA.

5.3 Growth and Proliferation of RTAs

RTAs have grown explosively. There are currently 380 operational RTAs worldwide. These can be
bilateral (between 2 countries) or plurilateral (between 3 or more countries).

Three Waves of RTA Expansion

Wave / Period Motivation Examples

1st Wave: 1950s– Economic cooperation, post-war ECSC (European Coal & Steel
1970s reconstruction and development. Community), Latin American

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Free Trade Area

2nd Wave: Trade reforms in Eastern Europe and NAFTA, Moldova and Russia
1990s–early Central Asia after Soviet Union RTAs post-Soviet Union
2000s collapse; developing countries seeking
partners.
3rd Wave: 2008– Mega-regionals: deeper integration TPP (Trans-Pacific Partnership),
Present going beyond tariffs into investment, TTIP (USA–EU), RCEP (Asia-
intellectual property, regulations. Also Pacific)
driven by deadlock in Doha Round.

5.4 Why Do Countries Form RTAs?

◦ Secure Market Access — Small countries want guaranteed access to the markets of
their biggest trading partners. Example: In the 1980s, Canada sought an RTA with the
USA to protect Canadian exports from potential US trade barriers.
◦ Signal to Investors — Joining an RTA shows foreign investors that a country is
committed to open, liberal economic policies — which makes the country more
attractive for foreign investment. Example: Mexico joined NAFTA partly to attract
foreign direct investment.
◦ Bargaining Power at WTO — By combining their markets in an RTA, a group of
smaller countries gains more negotiating power at the WTO. Example: EU countries
negotiate as a single bloc, giving them enormous leverage.
◦ Policy Issues Beyond Doha — Some trade issues (like investment rules, labour
standards, digital trade) cannot currently be negotiated at the WTO due to the Doha
deadlock, so countries use RTAs to address them bilaterally.

5.5 Trade Creation vs. Trade Diversion

RTAs have two economic effects — one positive, one potentially negative:

Effect What It Means Impact

Trade Creation The RTA removes tariffs Positive — increases overall trade
between members, so and economic efficiency.
countries trade more with
each other.
Trade Diversion Trade shifts from cheaper Negative — reduces efficiency
non-member countries to and potentially harms non-
more expensive RTA member countries.
members (because of the
tariff advantage).

The net impact of an RTA depends on whether trade creation outweighs trade diversion. If it does,
the RTA is beneficial. If trade diversion dominates, it could actually hurt global trade efficiency.

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5.6 The 'Gravitational Pull' of RTAs

RTAs tend to expand. Once a large RTA exists, countries outside it face disadvantages — their
exports face tariffs while member countries' exports do not. This creates pressure on non-members
to join.

The EU has expanded from 6 original members (1957) to 27 members today.

Example Countries neighbouring the EU found it increasingly costly to stay outside and
eventually sought membership or partnership agreements.

There are two very different views on where this leads:

◦ Optimistic View — RTAs keep expanding and eventually merge into a global free
trade agreement, achieving what the WTO has been trying to do through rounds.
◦ Pessimistic View — RTAs create competing blocs (e.g., an American bloc, a
European bloc, an Asian bloc) that are internally free but protectionist against each
other — making global trade fragmented and more restricted.

5.7 Are RTAs a Complement or Challenge to the WTO?

◦ Complementary Argument — RTAs liberalise trade between their members and can
serve as stepping stones towards global free trade. They also address issues that the
WTO cannot currently handle due to its deadlock.
◦ Challenge Argument — RTAs fundamentally institutionalise discrimination — they
give better treatment to some countries than others, directly contradicting the WTO's
core non-discrimination principle. Each RTA creates a new web of different rules,
making the global trading system more complex and fragmented.

The future is genuinely uncertain: Will RTAs evolve into a supportive network that complements the
WTO, or will they create competitive protectionist blocs that undermine global free trade?

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Key Terms Glossary

All important terms from this week's slides, explained in plain language:

Term Simple Explanation

Intermediate Good A product that is not yet finished — it is a part or material that will be
used to make a final product. E.g., a car engine is an intermediate
good.
Global Value Chain The complete process of making a product, spread across many
(GVC) different countries. Each country adds some value.
Tariff A tax that a country charges on imported goods. High tariffs make
foreign goods more expensive and less competitive.
Trade Liberalisation The process of reducing tariffs and other trade barriers so that goods
and services can flow more freely between countries.
WTO World Trade Organisation. The international body that sets rules for
global trade, provides a forum for negotiations, and resolves trade
disputes.
GATT General Agreement on Tariffs and Trade. The predecessor to the
WTO, operational from 1947 to 1994.
Nondiscrimination The WTO principle that all member countries must be treated equally
in trade — no favourites.
Most-Favoured Nation If you give a trade benefit to one WTO member, you must give the
(MFN) same benefit to ALL WTO members.
National Treatment Foreign products must be treated the same as domestic products
once they have entered the country.
Public Good Something that, once provided, is available to everyone and cannot
be denied to anyone, and whose use by one person does not reduce
availability for others.
Free Rider Someone who benefits from a public good without contributing to its
provision.
Hegemon A dominant country that leads and maintains the international
system — including the trade system.
Hegemonic Stability The idea that a stable, open global trade system requires a dominant
Theory country (hegemon) to lead and maintain it.
RTA Regional Trade Arrangement. A trade agreement between two or
more countries giving each other preferential market access.
Free-Trade Area An RTA where members remove tariffs between themselves but
keep independent tariffs with outside countries. E.g., NAFTA.
Customs Union An RTA where members have no tariffs between themselves AND

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share a common external tariff. E.g., EU.

Trade Creation The positive effect of an RTA: increased trade between members
due to removed tariffs.
Trade Diversion The negative effect of an RTA: trade shifts from efficient non-
members to less efficient members due to tariff advantages.
SPS Measures Sanitary and Phytosanitary measures — WTO rules on food safety
and animal/plant health standards used to regulate imports.
NGO Non-Governmental Organisation. A civil society group (e.g.,
environmental or consumer rights groups) that operates outside of
government.
Mega-Regionals Very large RTAs involving multiple major economies that go beyond
tariff reductions to cover investment, regulations, and more. E.g.,
TPP, TTIP.
Doha Round The current (and stalled) round of WTO trade negotiations, launched
in 2001 in Doha, Qatar. Still ongoing.
Dispute Settlement The WTO's 'court system.' If a country believes another country is
Mechanism breaking WTO rules, it can bring a case and get a binding ruling.

Summary — Big Ideas at a Glance

Topic Key Takeaway

Global Production Production is no longer done in one country. It is spread across the
world through Global Value Chains. The Toyota and Nutella
examples show this clearly.
Trade Growth World trade grew from $84B (1953) to $24T (2023) — averaging 6%
per year. It grew faster than the overall economy.
The WTO Created in 1995 from GATT. It provides trade rules, a negotiation
forum, and a dispute resolution system. Built on non-discrimination
(MFN + National Treatment).
Hegemonic Stability Open trade requires a dominant power (hegemon) to maintain it.
Britain did this in the 19th century; the USA did it after WWII. As
hegemonic power declines, trade systems become less stable.
Public Goods Problem Global trade rules are a public good — everyone wants them but no
one wants to pay for them (free rider problem). The hegemon solves
this by being willing to absorb the costs.
Developing Countries & Developing countries are now a powerful force in the WTO. NGOs
NGOs are demanding more transparency and accountability. Both are
making consensus harder to reach.

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RTAs 380 RTAs now exist. They give preferential trade access within
blocs. They can both complement (trade creation) and challenge
(trade diversion, discrimination) the WTO system.
The Big Debate Will RTAs lead to global free trade (optimistic) or competitive trade
blocs (pessimistic)? This is unresolved and the WTO's greatest
challenge.

End of Assignment — The WTO and the World Trade System, Week 2

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