GATT AND WTO The World Trade Organization:

international business  GATT AND WTO The World Trade Organization:

The World Trade Organization (WTO) was founded in 1995, and is comprised of 146 member countries and 30 observer countries. The WTO has three primary goals: to promote trade flows by encouraging nations to adopt non-discriminatory and predictable trade policies, to reduce remaining trade barriers through multilateral negotiations, and to establish impartial procedures for resolving trade disputes among members.

Problem Sectors: One challenge facing the WTO is dealing with sectors of the economy such as agriculture and textiles that most nations protect. Groups including the Cairns Group (a group of major agricultural exporters) have pressured the WTO to ensure that the Uruguay Round policies dealing with agricultural trade are implemented according to schedule. Similarly, developing countries are monitoring the dismantling of the Multifibre Agreement (MFA), which created a complex array of quotas and tariffs on trade in textiles and apparel.

The General Agreement on Trade in Services (GATS): The WTO is also focusing on reducing barriers to trade in services. One approach currently in use is the principle of national treatment, in which a country treats foreign firms the same as it treats domestic firms. The WTO began negotiating a new GATS agreement in 2000, but progress has been slow.

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS): The third challenge for the WTO is intellectual property rights (patents, copyrights, trademarks, and brand names). Efforts to improve intellectual property right protection, agreed upon at the Uruguay round, will be phased in over the space of a decade. In 2001, the WTO launched the Doha round of negotiations. Several contentious issues are slated to be discussed, including agriculture trade, intellectual property rights, and trade in services.

Trade-Related Investment Measures Agreement (TRIMS): The TRIMS agreement is a start toward eliminating national regulations on FDI, which may distort or restrict trade. It affects trade balancing rules, foreign exchange access, and domestic sales requirements. Enforcement of WTO Decisions: The WTO, unlike its predecessor GATT, has more power to punish violators of the WTO rules. Most experts feel that the WTO has been successful in implementing its policies during its first years of existence.

Unit 8


  1. Describe the importance of foreign direct investment (FDI) in the world economy, and the changing patterns of FDI over time.
  2. Present a number of different theories that explain why a company would undertake an acquisition rather than a Greenfield investment.
  3. Present a number of different theories that attempt to explain horizontal FDI, and suggest the conditions under which each may be most applicable.
  4. Present a number of different theories that attempt to explain vertical FDI, and suggest the conditions under which each may be most applicable.
  5. Explain carefully the importance of market imperfections in understanding FDI, specifically as it pertains to the transfer of know-how and technological information.
  6. Suggest the implications of these theories of FDI for the process of international expansion for business firms, particularly comparing licensing to FDI. A more detailed discussion of modes of entry is contained in Chapter 14.


The focus of this chapter is foreign direct investment (FDI). FDI can take the form of a foreign firm buying a firm in a different country, or deciding to invest in a different country by building operations there.

  1. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect managerial decisions of the operation.
  2. The goal of our coverage of FDI is to understand the pattern of FDI that occurs between countries, and why firms undertake FDI and become multinational in their operations.
  3. The opening case describes Starbuck’s investments outside the US. Although concentrating originally on the franchising method of expansion and licensing of its products, Starbucks later pursued other options such as joint ventures, wholly owned subsidiaries, and acquisitions to retain tighter control over operations. This chapter will describe some of the basic theories of FDI, and why firms undertake FDI rather than simply exporting products or licensing their know-how.
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