The World Trade Organisation (WTO)

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The World Trade Organisation (WTO)

In recent months markets have been rattled by key global players, China and the US, battling over trade and protectionism. Overseeing all trade disputes, the World Trade Organisation (WTO) has a key role to play. However, it is clearly facing an uphill struggle when two major nations are intent on putting up barriers.

The WTO is made up of 164 nations accounting for 95% of all global trade. It is an intergovernmental organisation whose aims are to ensure trade is fair and transparent. In a competitive landscape, and under their rules-based framework, they strive to ensure trade does not favour one party over another.

The WTO came into being in 1995, the successor to the General Agreement on Tariffs and Trade (GATT) which was established in the wake of the Second World War. Despite many criticisms about the organisation’s effectiveness against nations ‘going rogue’ the WTO, and before that GATT, have helped prevent sudden, harmful policy shocks.

The main functions of the WTO are to:

• Host negotiations

• Remove obstacles to trade

• Resolve conflict

The key advantage conferred by membership of the WTO lies in the requirement for negotiation. Membership helps all countries, regardless of size, overcome trade barriers and resolve disputes. It is also a rule making body setting tariffs to ensure a level playing field.

The policy term for equalising terms of trade is ‘Most Favoured Nation’ (MFN) status. This term cropped up during the Brexit negotiations. MFN occurs when no member state is provided with more favourable terms than their fellow members, thus avoiding competitive advantages being offered outside of free trade agreements (the European Union operates a free trade area for its members).

If the UK leaves the EU with an agreement on trade, EU rules will transition into UK law. However, if the UK leaves without a deal, under MFN the EU will charge the same tariffs to the UK as it does to all other countries with which it does not have a trade deal. This means some goods tariffs will be lower, but others will be higher and one key difference will be that customs checks at the borders will increase. However, they should not be arbitrary nor significantly more onerous.

The critical aspect is the extent to which the UK could pursue a liberal trade agenda when free of the EU. ‘Project fear’, as it is termed, warns that new trade deals are a fantasy. Brexiteers say the opportunity is so great outside the bloc that the EU is determined to shackle the UK. Growth in trade outside of the EU is growing much faster than trade between the EU members and there are other trade blocks such as the Pacific trade bloc and our Commonwealth partners to which the UK can turn.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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