Policy framework for trade

The WTO Agreements mark recognition in global economic policies - and in developing country policies in particular – of the trends toward globalization of markets and liberalization of trade and investment regulations.

But the improvements in market access that will result from the Agreements and from the new commitments of WTO members also challenge many developing countries to realize the benefits of trade by

• taking advantage of the market opportunities offered
• improving their participation in world trade institutions whose membership they now dominate
  


It is now widely accepted, however, that an economy's capacity to strengthen its participation in the trading system depends mostly on its own policies and endowments.

Four goals

A joint WTO/UNCTAD report "Strengthening the Participation of Developing Countries in World Trade and in the Trading System" (TD/375), identifies four "primary objectives" for strengthening developing countries' participation in the trading system:

• Seize the trading opportunities arising from the rules, concessions and commitments made by trading partners
• Effectively exercise trade rights in export markets
• Fully conform to trade obligations – using WTO obligations to enhance the credibility, stability and transparency of trade regimes
• Define and effectively pursue trade and development interests in trade negotiations
  
  

Factors that play an important role in developing countries' response to these challenges are:

The macroeconomic environment: an environment of stable prices is a prerequisite for sustainable growth. It ensures that the 'incentive structure' is right for growth based on the enterprise and initiative of firms.

Natural and human capital resource endowments and technological, physical and financial infrastructure: these factors determine the ability of an economy to react to incentives, to attract investment, to increase productivity and to reach markets where comparative advantage can come into play.

Public institutions including the legal and regulatory framework have a strong bearing on the efficiency of markets.

Interaction between trade and macroeconomic policy

The key to low-inflation growth over the long term is raising productivity by, among other things, improving the technology of production and getting prices - that is, production incentives - right.

An open trade and investment regime, where any barriers to the movement of goods, services or assets are price-related and transparent, contributes to both of these goals.

An unstable macroeconomic environment jeopardizes a country's balance of payments and trade. Domestic imbalances caused by weak fiscal or monetary controls, for example, quickly show up in the external accounts as trade imbalances and foreign financial obligations including debt. When this happens, in developed or developing countries, local producers often accuse foreigners - whose share of the domestic market rises rapidly - of unfair trade practices. Lenders may be criticized for the terms of credit or foreign investors for aggressive acquisition behaviour.

If weak monetary controls accompany spending (fiscal) imbalances, there will be a sharp rise in domestic inflation. At this point, the real exchange rate should be allowed to weaken, to compensate for the difference in inflation between domestic and foreign markets. But governments are often under pressure to maintain the nominal exchange rate - that is, allow an appreciation in the real exchange rate - in order to maintain consumers' 'buying power' in the face of domestic inflation. External balances deteriorate further when this happens and the 'crisis' begins to feed on itself.

WTO's contribution to stronger participation in trade

The WTO assists developing countries to achieve these objectives in three ways

• By providing a framework of rules which supports appropriate domestic policies
• By offering direct technical assistance to the export and import efforts of developing countries, through the UNCTAD/WTO International Trade Centre and through its own technical assistance program.
• By providing stable access abroad for the country ‘s exports and a process for resolving trade disputes.