IB Docs (2) Team
World trade organisation (WTO)
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Introduction
This page focuses on the World Trade Organisation and also contains a paper two type question. You can download both the question and mark scheme as a PDF files, at the bottom of this page.
Enquiry question
What are the objectives and functions of the WTO?
Lesson time: 2 hours
Lesson objectives:
Describe the objectives and functions of the WTO.
Teacher notes:
1. Beginning activity - begin with the opening questions in activity 1 and then discuss this as a class. (Allow 5 minutes in total)
2. Processes - technical vocabulary - the students can learn the background information from the videos, activity 1 and the list of key terms. (10 minutes)
3. Developing the theory - activity 2 involves a discussion of the strengths and weaknesses of trading. This activity includes 2 videos, each taking opposing views (20 minutes)
5. Activity 3 contains a case study written under the new syllabus. (85 minutes)
Available as a PDF file at: 
WTO
Activity 1: World trade organisation WTO
Research the organisation and answer the following questions:
(a) What year was the organisation established?
1 January 1995 and this replaced the former organisation, the General Agreement on Tariffs and Trade (GATT).
(b) How many nations signed the original agreement?
23
(c) What is meant by 'most favoured nation status'
Most favoured nation status nations are able to trade under more favourable conditions that other members. A full list of participating and observer nations is provided at 
WTO map
(d) Describe the four roles of the WTO.
1. It acts as forum so that participating nations can meet and agree ways that trade barriers can be reduced, thus increasing the volume of trade.
2. It ensures that the complex trade rules developed by the WTO's members are respected.
3. The organisation reviews the trade policies of its members to assess whether WTO members are abiding by WTO rules. The purpose of these reviews is not so much to solve problems as to prevent them from occurring in the first place.
4. it acts as a judge and jury in cases where countries are perceived to have broken free trade rules. In the case of a dispute the WTO will rule on the disagreement and decide if appropriate sanctions should be placed on the offending nation.
Activity 2: Strengths and weaknesses of the WTO
Take a look at the following video and then discuss the strengths and weaknesses of the organisation.
Student discussion point on world trade
Describe the strengths and weaknesses of the WTO based on the arguments that you heard in the video.
As the first video outlines the WTO has been responsible for regulating trade agreements between nations, as well as promoting increased trading opportunities. This is borne out by significant increases in the volume of world trade since the WTO's inception. As an example between 1980 and 2002, world trade more than tripled in size while world output merely doubled in the same period. The WTO must take some of the credit for this development. Increased trade has also contributed to significant falls in poverty levels throughout the world and rising living standards in many LEDCs.
However, there are losers and winners from the growth in international trade and some believe that one of these are the blue collar workers, living in the Developed world, as many manufacturing jobs have been outsourced overseas, where labour costs were lower. The finished product is often then exported back to the West. Critics have also noted that many LEDCs, producing the consumer goods enjoyed by consumers, have poor records on environmental protection as well as low wages and poor working conditions.
Activity 3: Case study on WTO
China and the WTO: An uneasy relationship
Having joined the WTO, many Western countries expected China to soon liberalise and become an open market economy. This second in a series of three columns describes how China has been able to shrug off pressures to change its economic structure and trading strategy, particularly regarding how its state-owned enterprises operate within the multilateral system.
On 11 December 2001, China officially joined the WTO. Its achievements since then have been truly remarkable. In 2001, China was the sixth largest exporter of goods in the world (fourth, if the European Union is counted as one unit). Since 2009, it has been the world’s largest goods exporter, surpassing even the EU bloc from 2014 onwards.
Fast export (and import) growth has boosted GDP growth and income levels. According to the IMF’s April 2021 WEO database, China’s GDP amounted to barely 13% of the US GDP in 2001. Twenty years later, this ratio is likely to reach 73%. During the same period, China’s per capita income (measured at purchasing power parity) rose from the level of Sudan in 2001 to nearly the level of Mexico today.
But China’s integration in the world economy has created frictions, especially with the US, which has long had massive trade deficits with China. In 2019, US goods and services trade with China totalled an estimated $635 billion. Exports were $163 billion; imports were $472 billion. The US goods and services trade deficit with China was $309 – a far cry from the forecast when China joined the WTO and the value of trade between the two nations was valued at $54,355 million.
Critics of China’s trade policy, not only in the US but also in the EU, often argue that China has failed to respect its WTO obligations. When the nation joined the organisation China agreed to become a full market economy, reduce its dependence on subsidies for state owned businesses which critics then argued were dumped on overseas markets. In turn, this has led to retaliation with China facing almost arbitrary import tariffs under anti-dumping rules from other WTO members. The United States, for example, is considering a 256 per cent tax on one Chinese steel good to protect domestic producers.
Key economic indicators China (yearly average)
GDP growth % | Unemployment % | Exports $b | Imports $b | |
2001 - 2005 | 10.08 | 3.8% | 607.36 | 412.14 |
2006 - 2010 | 12.65 | 4.2% | 1,497.57 | 1,149.09 |
2011 - 2015 | 7.77 | 4.5% | 2,175.08 | 2,119.38 |
2015 - 2020 | 6.25 | 5.6% | 2,655.98 | 2,208.11 |
Questions:
(a) Define the following terms:
i. Purchasing power parity (line 13) [2 marks]
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below | 0 |
1 | The idea that it is some form of attempt to compare prices between different nations | 1 |
2 | An accurate definition that it is the measurement of prices in different countries using specific goods to compare the absolute purchasing power of the countries' currencies. | 2 |
ii. Dumping (line 24) [2 marks]
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below | 0 |
1 | The idea that it is some form of subsidy or help for exporters | 1 |
2 | An accurate definition that it is the process where by the producers of one country are able to benefit from government subsidies and so ‘dump’ their products on a foreign market, at below market price. | 2 |
(b) i. Calculate the average GDP growth rate and trade balance during the period 2001-2020. [3 marks]
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below | 0 |
1 | For a correct calculation of either GDP growth rate or trade balance: Growth - (10.08+12.65+7.77+6.25) / 4 = 9.19% Trade deficit - (607.36-412.14) + (1,497.57-1,149.09) + (2,175.08-2,119.38) + (2,655.98-2,208.11) = 1,047.27 / 4 = $261.82 bn | 1-2 |
2 | For a correct calculation of either GDP growth rate and trade balance: Growth - (10.08+12.65+7.77+6.25) / 4 = 9.19% Trade deficit - (607.36-412.14) + (1,497.57-1,149.09) + (2,175.08-2,119.38) + (2,655.98-2,208.11) = 1,047.27 / 4 = $261.82 bn | 3 |
ii. Tariff (line 25) [2 marks]
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below | 0 |
1 | The idea that it is some form of tax. | 1 |
2 | An accurate definition that it is an indirect tax on imported goods into a country. | 2 |
(c) Describe the four roles of the WTO. [4 marks]
1. It acts as forum so that participating nations can meet and agree ways that trade barriers can be reduced, thus increasing the volume of trade.
2. It ensures that the complex trade rules developed by the WTO's members are respected.
3. The organisation reviews the trade policies of its members to assess whether WTO members are abiding by WTO rules. The purpose of these reviews is not so much to solve problems as to prevent them from occurring in the first place.
4. it acts as a judge and jury in cases where countries are perceived to have broken free trade rules. In the case of a dispute the WTO will rule on the disagreement and decide if appropriate sanctions should be placed on the offending nation.
Level | Descriptor | Mark |
1 | The work includes one of the above functions of the WTO | 1 |
2 | The work includes two of the above functions of the WTO | 2 |
| 3 | The work includes three of the above functions of the WTO | 3 |
| 4 | The work includes four of the above functions of the WTO | 4 |
(d) Illustrate using a diagram why the alleged subsidising of Chinese industries provides their producers with an advantage on world markets? [4 marks]
The diagram illustrates the benefits to Chinese producers of receiving a government subsidy, which reduces their costs of production and raises supply from Supply to Supply + subsidy. As a result of the subsidy the steel produced in China falls from Pc to Pw, becoming the world's cheapest, giving Chinese producers a clear advantage on world markets.
Two marks should be awarded for an accurately drawn diagram and a maximum of two marks can be awarded for a suitable explanation.
Other diagrams or labelling may be suitable.
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below. | 0 |
1 | For an accurately drawn diagram or a suitable explanation. | 1-2 |
2 | For an accurately drawn diagram and a suitable explanation. | 3-4 |
(e) Illustrate using a diagram of the impact on the market for steel in the USA of the government's proposed decision to impose a 256 per cent tax on one Chinese steel good to protect domestic producers. [4 marks]
Two marks should be awarded for an accurately drawn diagram and a maximum of two marks can be awarded for a suitable explanation. More than one diagram might be appropriate but it should include a rise in production costs for Chinese steel and a fall in quantity demanded for Chinese steel imports from (Q1,Q2) to (Q3,Q4).
Responses should describe how the 256% tariff on Chinese steel products would protect employment and domestic steel producers, through reduced import levels – (Q2 – Q4). The tariff would be supported by the US steel industry as well as though employed in it. The stakeholder to lose out as a consequence of the tariff would be the American consumer. They would be forced to pay higher prices for their steel products, represented on the diagram by the rise from Pc to Pc+t. This would include American businesses dependent on steel in their production process.
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below. | 0 |
1 | For an accurately drawn diagram or a suitable explanation. | 1-2 |
2 | For an accurately drawn diagram and a suitable explanation. | 3-4 |
(f) Explain why unemployment may have continued to rise in China, since 2001, despite very high growth during the same period? [4 marks]
Level | Descriptor | Mark |
0 | The work does not reach any of the standard described below. | 0 |
1 | For an explanation that recognises that economic growth will only reduce cyclical / demand deficient unemployment. Therefore, the rise in unemployment during this period is likely to be either frictional or structural. | 1-2 |
2 | For an explanation that recognises that economic growth will only reduce cyclical / demand deficient unemployment. Therefore, the rise in unemployment during this period is likely to be either frictional or structural. That as the economy of a developing nation grows we would expect to see a rise in structural unemployment as the economy industrialises and workers are forced away from the primary sector but the growth in secondary sector jobs does not rise at the same rate. | 3-4 |
(g) Using information from the passage and your knowledge of economics evaluate the view that the WTO members should impose ‘anti-dumping tariffs’ against China. [15 marks]
Command term: Evaluate
The command term in this question is evaluate, which means make a judgement as to whether free trade or protectionism in the steel market is the most beneficial for the EU.
Responses would be expected to use extracts from the passage in order to reach the higher-grade bands.
Key term to define - anti-dumping tariff.
Responses may include:
• a definition of trade protection
Arguments for trade protection
- it will make things “fairer” between local and imported markets, presuming that China is guilty of dumping which is yet to be proved.
- it will protect employment in the local industry
- it will protect employment in other, connected industries
- increased tariff revenue for the government
- the steel industry is important to the economy for both jobs and revenue and an over dependence on steel imports may leave nations without adequate supplies, if circumstances change.
Arguments against trade protection
- it is likely to raise the price to consumers
- it is likely raise the price to producers who buy the imported steel which would then feed into higher inflation throughout the economy as the price of construction, cars, kitchen appliances e.t.c. rise
- competition may diminish and local producers may become inefficient
- it may lead to retaliation from China
- welfare loss
- misallocation of world’s scarce resources.
Responses for question (g) should be graded according to the following mark bands:
Marks | Level descriptor |
0 | The response is below the standards described below. |
1-3 | The response indicates little understanding of the demands of the question The response uses little relevant theory Little attempt is made to make use of the text/data. |
4-6 | The response indicates some understanding of the demands of the question The response makes limited use of demand side / supply side policies. There is limited evaluation contained in the response The response makes limited use of the text/data to support their arguments. |
7-9 | The response indicates an understanding of the demands of the question Some relevant theory is used in the response The response contains some evaluation The response makes some use of the text/data. |
10-12 | The response indicates an understanding of the demands of the question The response uses relevant theory appropriately Evaluation is used appropriately There is appropriate use of the text/data. |
13-15 | The response indicates an understanding of the demands of the question The response makes effective use of relevant theory Evaluation is used effectively The response makes effective use of the text/data. |
The above question and mark scheme are available as a PDF file at: 
WTO mark scheme
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