International Business Management

Unit 7

Unit 7

Global Trade Institutions

Structure:
7.1 Introduction
Objectives
7.2 Introduction to Global Trade Institutions
Institutions
Objectives
7.3 WTO
Objectives and functions
Structure
Principles
Agreements
Issues
7.4 International Labour Organisation (ILO)
History
International labour code
7.5 Summary
7.6 Glossary
7.7 Terminal Questions
7.8 Answers
7.9 Caselet

7.1 Introduction
In the previous unit, you understood about regional integrations and its role.
You also learned about the various regional integrations across the world
along with important agreements which India has with other countries.
International business is a process of conducting business between several
countries. It creates opportunity as well as challenges. To support the
challenges faced by international business, certain support systems are
established. In this unit, you will learn about support systems for
international business.
This unit covers the institutional support systems It discusses various
international organisations working towards promoting international
business and provide regulatory framework. It also covers the International
Labour Organisation and the international labour code.
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Objectives:
After studying this, unit you should be able to:
describe the various international organisations working to facilitate
international trade.
evaluate the role of WTO.
discuss the major agreements in WTO.
interpret the scope of ILO.
explain the international labour code.

7.2 Introduction to Global Trade Institutions

International business is the process of conducting business in multiple
countries. Multinational corporations (MNCs) and international business
companies (IBCs) conduct business between different countries. After World
War II, the Western leaders did not want to repeat economic isolationism
that played a major part in leading to the war. The leaders decided to
establish an international trade organisation that helped to create new
international political and economic institutions which encouraged and
preserved peaceful international relations.
A countrys trade policy choices are connected to various factors of the
international system. A number of institutions provide support for an open,
multilateral trading system. Trade liberalisation is influenced by institutions
like GATT (General Agreement of Tariffs and Trade) and IMF (International
Monetary Fund). The influence of these international institutions depends on
economic conditions of the debtors or on changing domestic preferences of
trade.
7.2.1 Institutions
The support system institutions for international business include WTO
(World Trade Organisation), World Bank, and International Monetary Fund
(IMF). Regional trade institutions have an ambiguous effect on the
multilateral system whereas some institutions such as NAFTA (North
American Free Trade Agreement) and ASEAN (Association of Southeast
Asian Nations) have a positive effect on lowering trade barriers. These
institutions have different effects on the countries trade policies. The major
support systems for international business are:
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The IMF is an international organisation of 187 countries. It ensures the

stability of the international monetary and financial system.

The World Trade Organization (WTO) is an international organisation

with 153 members which deals with the rules of trade between
countries.

World Bank is an international financial institution that provides

leveraged loans to developing countries for major projects.

United Nations Conference on Trade and Development (UNCTAD), the

permanent body of the United Nations General Assembly was set up in
1964 to deal with trade and development issues.

7.2.2 Objectives
The international institutions provide information about other countries
behaviour, forum for dispute resolution and a common framework for
sustaining trade flows. A strong international financial system is required to
support growing international trade. It helps to reduce the risk of payment
imbalances and financial crisis. The international institutions work together
to provide a strong system for international trade which is open to all
countries. This kind of system is essential for supporting economic growth,
reducing poverty and raising the standard of living around the globe.
The main objective of IMF is to facilitate the expansion and balanced growth
of international trade and provide exchange stability.
The WTO helps in the smooth flow of international trade and provides
countries with a constructive platform for dealing with disputes over trade
issues.
The main objective of UNCTAD is to formulate policies regarding trade,
finance and technology. It is a specialised agency that performs three main
functions:
Provides a forum for intergovernmental discussions.
Undertakes research, data collection and policy analysis for debates of
government representatives and experts.
Provides technical assistance to the specific requirements of developing
countries.

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Self Assessment Questions 1

1. _____________ is the process of conducting business in multiple
countries.
2. IMF stands for:
a) International Monetary Fund.
b) International Management Foundation.
c) Indian Monetary Fund.
d) Indian Management Foundation.
3. NAFTA is a major support for international business. (True/False)

7.3 WTO
In this section we will discuss about the World Trade Organisation (WTO).
WTO was established on 1st January 1995. In April 1994, the Final Act was
signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of
15th April 1994 was formed to strengthen the world economy that would
lead to better investment, trade, income growth and employment throughout
the world. The WTO is the successor to the General Agreement of Tariffs
and Trade (GATT). India is one of the founders of WTO. WTO represents
the latest attempts to create an organisational focal point for liberal trade
management and to consolidate a global organisational structure to govern
world affairs. WTO has attempted to create various organisational attentions
for regulation of international trade. WTO created a qualitative change in
international trade. It is the only international body that deals with the rules
of trades between nations.
7.3.1 Objectives and functions
The key objective of WTO is to promote and ensure international trade in
developing countries. The other major functions include:
Helping trade flows by encouraging nations to adopt discriminatory trade
policies.
Promoting employment, expanding productions and trade and raising
standard of living and income and utilising the worlds resources.
Ensuring that developing countries secure a better share of growth in
world trade.
Providing forum for trade negotiations.
Resolving trade disputes.
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The important functions of the WTO as stated in the WTO agreement are
the following:

Developing transitional economies Majority of the WTO members

are the developing countries. The developing countries such as India,
China, Mexico, Brazil and others have an important role in the
organisation. The WTO helps in solving the problems of developing
economies. The developing states are provided with trade and tariff
data. This depends on the countrys individual export interest and their
participation in WTO-bodies. The new members benefit hugely from
these services.

Providing help for export promotion The WTO provides specialised

help for export promotion to its members. The export promotion is done
through the International Trade Center established by the GATT in 1964.
It is operated by the WTO and the United Nations. The International
Trade Center accepts requests the member countries, usually
developing countries in assisting to plan and execute programmes for
export promotion. The center provides information on export market and
marketing techniques. The center also provides assistance in
establishing export promotion and marketing services. The WTO proves
its commitment in the upliftment of the world economy through this.

Cooperating in global economic policy-making The main function

of the WTO is to cooperate in global economic policy-making. In the
Marrakesh Ministerial Meeting in April 1994, a separate declaration was
adopted to achieve this objective. The declaration specifies the
responsibility of WTO as, to improve and maintain the cooperation with
international organisations such as the World Bank and International
Monetary Fund (IMF) that are involved in monetary and financial
matters. WTO analyses the impact of liberalisation on the growth and
development of national economies which is the important factor in the
success of the economy.

Monitoring implementation of the agreement The WTO administers

sixty different agreements that have the statue of international legal
documents. The member-governments sign and confirm all WTO
agreements on attainment.

Providing forum for negotiations The WTO provides a permanent

forum for negotiations among members. The negotiations can be on

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matters already stated in the WTO agreements or matters not addressed

in the WTO law.

Administrating dispute settlement The important function of WTO is

the administration of the WTO dispute settlement system. It helps in
settling multilateral trading dispute. A dispute arises when a member
country adopts a trade policy and other fellow members consider it as a
violation of WTO agreements. The Dispute Settlement Body (DSB) is
responsible for the settlement of disputes. The dispute settlement
system is prohibited from adding or deleting the rights and obligations
provided in the WTO agreements. The WTO dispute settlement system
helps to:

Preserve the rights and responsibilities of the members.

Clarify the current provisions of the agreements.

7.3.2 Structure
The structure of the WTO consists of the Ministerial Conference, which is
the highest authority. This body consists of the representatives from all
WTO members. The members meet once in every two years and decisions
on all matters regarding the multilateral trade agreements are taken.
Subsidiary bodies and the General Council composing of WTO members
undertake the daily activities of the WTO. The members report to the
Ministerial Conference. On behalf of the Ministerial Conference the General
Council administers as the Dispute Settlement Body to handle the dispute
settlement procedures. It also acts as the Trade Policy Review Body that
regularly reviews the trade policies of individual WTO members.
The General Council delegates responsibility to other major bodies. They
are:

Council for Trade in Goods It manages the implementation and

functioning of all agreements covering trade in goods

Trade in Services and Trade of Intellectual Property Rights These

two councils are responsible for their respective WTO agreements. They
can also establish their own subsidiary bodies, if required.

Committee on Trade and Development It handles issues related to

the developing countries.

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The Committee on Balance of Payments Consultations between

WTO members and countries that take trade-restrictive measures to
handle balance-of-payments difficulties.

Committee on Budget and Administration Issues concerning

financing and budget of WTO are handled by them.

Source: WTO Sectariat; Geneva; Switzerland

7.3.3 Principles
The WTO principles of the trading system are:

Trading without discrimination One aspect of indiscrimination is that

foreigners and natives must be treated equally. This implies that

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imported goods that are in the market must not face discrimination.
There is also a Most Favoured Nation (MFN) principle which requires the
nations to treat all WTO members equally. If one nation grants a special
trade deal to another nation, the deal must be extended to all WTO
members.

Trade barriers negotiated downwards Trade barriers such as import

tariffs, red tape should be lowered and trade growth must be
encouraged.

Predictable trading The predictability in business helps to know the

real costs. The WTO operates with tariff bindings and agreements that
restricts raising a specific tariff over a given time. This provides the
business with realistic data. The business can also anticipate a stable
future if the trade rules are made clear and accessible.

Competitive trading The WTO works towards trade liberalisation and

understands that trade relationships between nations can be very
complex. The WTO agreements support healthy competition in services
and intellectual property and discourage subsidies and dumping of
products at prices below the cost of their manufacturer.

Encourage development and economic reforms The majority of the

WTO members are developing economies that are changing to market
economies. The developed nations must give market access to goods
from the under developed countries and provide technical assistance.
Developed countries are allowing duty-free and quota-free imports for all
the products from the under developed countries.

7.3.4 Agreements
The WTO agreements are a set of rules that are followed by the member
governments while formulating policies and practices in the area of
international trade. The agreements mainly cover goods, services and
intellectual property. The agreements comprise of the rights and obligations
of the government that are enforceable in multilateral framework. The
agreement supports individual countries commitments to lower customs
tariffs and other trade barriers, and to open services markets. The
agreements also recommend governments to make their trade policies
transparent. According to the agreement, the government must notify the
WTO about the measures adopted to make their trade policies transparent.
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The major agreements are:

General Agreement on Trade in Services (GATS) GATS is a

framework agreement defining the rules under which trade in services
must occur. GATS aims at extending the rules covering trade in goods
to trade in services. A detailed rule has been included to take into
account the differences between goods and services and the way in
which trade in services is conducted. Trade in services cover a wide
range of activities in the area of telecommunication, information,
banking, insurance and education. WTO has recognised over 150
service sub-sectors.
The main objective of GATS is to establish a framework for liberalising
trade in services. It encourages countries to modify their domestic
regulations. This modification results in elimination of restrictions applied
to service products entering the country and is applicable to international
service suppliers who are carrying out business in various modes.
According to the GATS, MFN status and transparency is applicable to all
services. Other commitments such as national treatment and market
access are only applicable to services that are opened according to the
specified negotiated commitments. GATS covers services known as
consumption abroad where services such as e-commerce are used by
the consumers in a host country and citizens of a country travel
overseas to consume products such as tourism or education.

Trade-Related Aspects of Intellectual Property Rights (TRIPS) The

Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) is one of the WTO agreements that is compiled by all WTO
members. According to TRIPS, developed and developing members of
WTO must adopt the same minimum levels of intellectual property
protection. The TRIPS Agreement includes rules on domestic
enforcement procedures. TRIPS Agreement focuses on issues such as
innovation and the dissemination of technology, development of
biotechnology, health care and the operation of multilateral environment
agreements.
The TRIPS agreement states that members can take actions to protect
the public health and nutrition. It encourages protection of new plant
varieties. The members are encouraged to develop national systems

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that promote local breeding, rights of farmers and protect human

fundamental human rights which include the right to food and health. It
promotes the use and protection of knowledge that is relevant to the
conservation and use of biological diversity. This includes knowledge in
technology and genetic material. The 1995 WTO TRIPS Agreements
covers copyright and related rights, geographic indications, trademarks,
and patents of integrated circuits, protection of information and control of
anticompetitive practices in contractual licenses.

General Agreement on Tariffs and Trade (GATT) GATT is a

multilateral agreement among countries providing a framework for
conducting international trade. GATT is regarded as an international
institution governing international trade relations. It consists of
disciplines on governments and matters related to import and export of
goods. It was established to promote international trade by reducing
tariff and non-tariff restrictions on imports imposed by member nations.
Tariff barrier refers to imposing import duty and non-tariff barriers means
restricting imports through import licensing and by banning the imports.
GATT provides a framework for negotiations on the level of tariff. It
promotes multilateral trade among member nations. It provides
protection against unfair trade and obstructions to trade.
Sanitary-phyto-sanitary barriers in trade: A caselet of Indian red
chillies
Sudan Red is a synthetic colorant which is used in red chilly powder to
make the powder look red. There are three grades of Sudan Red
colorant used in red chilly powder in India. Other grades have been
found in Chinese duck eggs in the recent times. Sudan Red is a
carcinogenic material. Indian red chilly powders containing Sudan Red
has been banned in European Union countries. In October 2003, the
European Union has specified the requirements of Sudanfree
certificates for all spices imported into Europe. Accordingly; inspection
agencies in India namely Spice Board & Export Inspection Agency has
been communicated and notified for the same by European Union.
Now, the inspection of red chilli has been made compulsory by Spice
Board and each consignment exported must comply to the EU
guidleines. The Spice Board inpects all consignments on sample basis

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of red chillies. For exporters, it has become an additional transactioncal

cost to exports as it is estimated that Sudan tests cost as much as Rs.
2,000 per sample and several samples are drawn from a container
load. Total cost of such Sudan test is estimated to be around 3% of
CIF value.
Source: www.indianspices.com

7.3.5 Issues
The issues related to WTO are:

Trend towards unilateral action by some developed countries in

disregard of the provisions laid down in the Uruguay Round. Developing
countries and least-developed countries have to overcome issues like
constraints of resources, skills shortage and expertise in these areas.
The unilateral action can disgrace the entire multilateral trading system.
This slows down the motivation for reform in all developing countries.

Another issue is the favour of regionalism. Third world countries can

face discrimination as regional economic groupings have resulted in
more trade between countries in the region.

The Agreement on Agriculture has number of inequities in the

implementation of the Agreement. Most developing countries cannot
provide export subsidies. However, developed countries can resort to
such subsidies. Thus, countries that have been previously distorting the
market can continue to maintain subsidy regimes. Other countries are
banned from utilising these measures.

The WTOs current position on trade, environment and sustainable

development faces criticism. Liberalisation of trade leads to larger
growth, higher incomes and increased consumption. However, it affects
production which in turn has an adverse effect on the environment.
Though the WTO trading system creates growth, it also causes pollution.
The WTO trade and growth policies are responsible for environment
degradation.

The other issues are green room negotiations. Green room negotiations
are the informal negotiation meetings at the WTO in which 35 countries
are chosen by the Director General.

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Activity 1
Refer to any website and create a report on the principles laid down by
GATT to the member countries on anti-dumping measures.
Refer to the following link for guidance
http://commerce.nic.in/wto-feb.pdf
Self Assessment Questions 2
4. The WTO is the successor to the _____________ .
5. Majority of the WTO members belong to developed countries.
(True/False)
6. The main objective of _____________ agreement is to establish
framework for liberalising trade in services.
a) GATT.
b) NAFTA.
c) TRIPS.
d) GATS.
7. The WTO agreements are a set of rules that are followed by the
governments while formulating policies and practices in the area of
international trade. (True/False)
8. The highest authority of WTO is the _____________.

7.4 International Labour Organisation (ILO)

International Labour Organisation (ILO) is a specialised agency of the
United Nations which deals with labour issues. The headquarters is situated
in Geneva, Switzerland. The secretariat comprises of the people employed
by the organisation throughout the world. The secretariat is known as the
International Labour Office. The ILO manages work through three main
bodies. They are:

International Labour Conference The members of the ILO meet at

the International Labour Conference every year in June, in Geneva. Two
government delegates along with an employer delegate and a worker
delegate represents their respective member state. The technical
advisors also accompany the delegates. The Cabinet Ministers are
usually responsible for labour affairs, head the delegations and present

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the viewpoint of their government. The Conference creates and

implements standards for international labour. Social and labour issues
are discussed in the Conference. It also assigns the budget of the
organisation and elects the Governing Body.

Governing Body The executive council of the ILO is known as the

Governing Body. It meets thrice a year in Geneva and takes decisions
on the ILO policies. It forms programmes and budgets which are
submitted to the Conference for adoption. The Governing Body has 28
government members, 14 employer members and 14 worker members.
Ten government seats are permanently held by states of chief industrial
importance. Taking into consideration the geographical distribution,
representatives of other member countries are elected at the
Conference once in every three years. The representatives are elected
by the employers and workers.

International Labour Office The permanent secretariat of the

International Labour Organisation is the International Labour Office. It is
the central point for all activities that are administered by the governing
body. The Office is a center for administration, research and
documentation. It employs more than 1,700 officials from 110
nationalities. The Office also organises certain programmes to extend
technical help to all member nations. Under this programme of technical
cooperation, around 600 experts undertake missions in all regions of the
world.

7.4.1 History
Following the Treaty of Versailles, the ILO was established as an agency of
the League of Nations. The ILO was created in 1919, after the First World
War. The ideas of the International Association for Labour Legislation were
incorporated in the Constitution of the International Labour Organisation.
The initial motivation of the ILO was humanitarian because the workers
were exploited without any improvement in their health and family. The
preamble of the constitution of the ILO states the conditions of labour and
the injustice and privation to large number of people. The economic factor
was the second motivation as it has a certain effect on the cost of
production. The failure of a nation to adopt humane conditions of labour
affects the economic situation of the country adversely.
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The ILO constitution was written in April 1919 by the Labour Commission
that was set up by the Peace Conference. The first annual International
Labour Conference had two representatives from the government. It
included one representative from the employers organisations and another
representative from the workers organisations of each member state. The
first six International Labour Conventions that dealt with working hours in
industry, minimum age, unemployment, maternity protection and night work
for women and night work for young persons in was implemented in the first
annual International Labour Conference. Albert Thomas was chosen as the
first Director of the International Labour Office by the Governing Body. From
the beginning, he drove organisation with a strong motivation. 16
International Labour Conventions and 18 Recommendations were adopted
in 2 years. In 1920, the ILO headquarters was set up in Geneva.
7.4.2 International Labour Code
The International Labour Code is composed of Conventions and
Recommendations adopted by the International Labour Conference. In
1997, the Code contained 181 conventions and 188 recommendations that
covered important subjects in labour and social fields. The main function of
the ILO is to set international labour standards by adopting conventions and
recommendations covering the major labour-related issues which are
referred to as the International Labour Code. The Conference adopts
conventions and recommendations which is prepared by the International
Labour Office and the governing body. The representatives of the member
nations bring the conventions and recommendations to the notice of the
authorities.

Conventions These treaties are not bound to a country unless they

are approved by that country. ILO conventions that have secured a twothird majority should be presented by the member country in the
Conference. The ILO conventions are approved as written and without
reservations. Flexibility clauses are included in the conventions to
accommodate different climatic conditions or states of development of
particular countries.

Recommendations When state practices vary largely, non-binding

guidelines known as recommendations are issued. Recommendations
are issued when the subject is:

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Very technical and cannot be handled by a convention.

Already covered by a convention but needs to be addressed in more

detail.

Member states are required to bring recommendations to the attention of

their governments.
Activity 2
On February 2010, India signed the Decent Work Country Programme
(DWCP) document. Refer to any business magazine or website and
discuss the main objectives of DWCP.
Refer to the following link for guidance
http://www.ilo.org/public/english/bureau/program/dwcp/

Self Assessment Questions 3

9. The _____________ establishes and implements international labour
standards.
10. The Governing Body meets once a year in Geneva and takes decisions
on the ILO policies. (True/False)
11. The ILO was created in:
a) 1920.
b) 1919.
c) 1929.
d) 1991.
12. The body of ILO Conventions and Recommendations is commonly
known as the International Labour Conference. (True/False)
13. The executive council of the ILO is known as the _____________.

7.5 Summary
Let us now summarise the salient points you learnt about support systems
for international business:
International business is the process of conducting business in multiple
countries. Multinational corporations (MNCs) and international business
companies (IBCs) conduct business between different countries.

The major support systems for international business are WTO (World
Trade Organisation), World Bank, and International Monetary Fund
(IMF).

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WTO (World Trade Organisation) was established on 1st January 1995.

In April 1994, the Final Act was signed at a meeting in Marrakesh,
Morocco.

The major agreements of WTO are GATS, TRIPS, and GATT.

International Labour Organisation (ILO) is a specialised agency of the

United Nations which deals with labour issues.

The ILO manages work through three main bodies, namely International
Labour Conference, Governing Body and International Labour Office.

The International Labour Code is composed of conventions and

recommendations adopted by the International Labour Conference.

7.6 Glossary
League of Nations: An intergovernmental organisation founded as a result
if the Treaty of Versailles in 1919-1920.
Red tape: A sequence of forms and procedures required to gain
bureaucratic approval for something. It is an obstructive and time consuming
official routine.
Tariff bindings: A ceiling level above which a member cannot apply a tariff.
It is the maximum tariff that can be applied by a Member.
Treaty of Versailles: One of the peace treaties at the end of World War I.

7.7 Terminal Questions

1. Describe the international organisations working to facilitate international
trade.
2. Evaluate the role of WTO.
3. Discuss the major agreements in WTO.
4. Interpret the scope of ILO.
5. Explain the international labour code.

7.8 Answers
Self
1.
2.
3.

Assessment Questions 1
International business.
a) International Monetary Fund.
False.

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Self Assessment Questions 2

4. GATT.
5. False.
6. d) GATS.
7. True.
8. Ministerial Conference.
Self Assessment Questions 3
9. International Labour Conference.
10. False.
11. b) 1919.
12. False.
13. Governing body.
Terminal questions
1. The major support systems for international business are WTO (World
Trade Organisation), World Bank, and International Monetary Fund
(IMF). Refer to section 7.2 of this unit for details.
2. WTO represents the latest attempts to create an organisational focal
point for liberal trade management and to consolidate a global
organisational structure to govern world affairs. Refer to section 7.3 of
this unit for details.
3. The WTO agreements are a set of rules that are followed by the member
governments while formulating policies and practices in the area of
international trade. Refer to section 7.3.4 of this unit for details.
4. International Labour Organisation (ILO) is a specialised agency of the
United Nations which deals with labour issues. Refer to section 7.4 of
this unit for details.
5. The International Labour Code is composed of conventions and
recommendations adopted by the International Labour Conference.
Refer to section 7.4.2 of this unit for details.

7.9 Caselet
WTO and the Challenges Faced by Indian Pharmaceutical
Companies
India is favourable location for big pharmaceutical companies because of
its cheap and educated labor force. The major concern of the WTO is to
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take care of the poor, especially in the area of health care. The TRIPS
Agreement of the WTO in pharmaceuticals brought the health care issue
to the forefront. According to the agreement, developing countries had to
revise their patent laws to conform to WTO requirements by 2006. The
success or failure of the TRIPS Agreement depends on countries like
India. Indias pharmaceutical industry is highly efficient and India needs
to implement the IPR (Intellectual Property Rights) laws to simultaneously
maintain its position in the pharmaceutical sector. The challenge for India
is to maintain its international obligations and to satisfy domestic interest
that includes consequent access to cheap medicine.
Indian pharmaceutical companies are using adaptive strategies to cope
up with the WTO product patent law. In order to adapt and benefit from
the opportunities created by the new patent system, firms are adapting a
combination of cooperative and competitive strategies. Indian pharma
companies face international competition. Companies that get huge
profits from exports spend huge amount on R&D (Research &
Development). Large companies such as Ranbaxy and Cipla were
preparing for the new patent regime since 1995. A company can lose
market share on a patent expired product. However, the cost of
developing the product can be recovered even after the expiration date of
the patent if the marketing strategies are well planned. Visionary
strategies such as drug discovery, focus on production of high quantum
and moderately priced generics, outsourcing to MNC's upgrading
manufacturing facilities, etc., are also being adopted by Indian pharma
companies. India can be the top global pharma Industry with the help of
these facilities and pharma support services such as clinical research
operations, diagnostic services and data management services.
Discussion question
1. Discuss the adaptive strategies of Indian pharmaceutical companies to
cope up with the WTO product patent law.
(Hint: Cooperative and competitive strategies)
Source: http://www.eurojournals.com/ejefas_13_04.pdf retrieved on 10th
November 2010

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Reference:

Walter Carlsnaes, Thomas Rissee and Beth A Simmons. (2006):

Handbook of International Relations. Sage Publications Ltd.

E-References:

www.indianspices.com, retrieved on 20 April 2012

www.wto.org, retrieved on 21 April 2012

http://www.indianembassy.org, retrieved on 2 Feb 2009

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