Principles of the Trading System

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy games.
Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO:

Non-Discrimination.

It has two major components: the most favoured nation (MFN) rule, and the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members.

"Grant someone a special favour and you have to do the same for all other WTO members."

National treatment means that imported and locally-produced goods should be treated equally (at least after the foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating against imported goods).

Reciprocity.

It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to ensure that such gains will materialise.

Binding and enforceable commitments.

The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.

Transparency.

The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM). The WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures used to set limits on quantities of imports.

Safety valves.

In specific circumstances, governments are able to restrict trade. There are three types of provisions in this direction: articles allowing for the use of trade measures to attain noneconomic objectives; articles aimed at ensuring "fair competition"; and provisions permitting intervention in trade for economic reasons.

There are 11 committees under the jurisdiction of the Goods Council each with a specific task. All members of the WTO participate in the committees. The Textiles Monitoring Body is separate from the other committees but still under the jurisdiction of Goods Council. The body has its own chairman and only ten members. The body also has several groups relating to textiles.

Fundamental Analysis

A currency is used as the basis of trade for general goods and services within an economy. Usually, each country has its own currency, and exchange with the legal tender is only valid in the respective country. However, there are groups of nations that band together and use a single currency between the members (e.g. the Euro-zone).

Currency value is most broadly based on supply and demand, although some developing countries peg the value to a more stable country's currency or to a basket of currencies/investment vehicles

For a currency trader, fundamental analysis focuses on key underlying economic and political factors to determine the direction of a currency's value. There are a number of fundamental indicators traders may follow that reflect how an economy is changing and gleam insight into Forex market prices to come.

Example of a Trade

In an example of a trade, an investor wanting to buy 200 shares—also known as two round lots, of 100 shares each—of IBM stock will telephone or e-mail the order to a brokerage firm. This communication is normally made to an individual called a stockbroker.


The investor might desire to buy the shares at the market, or current, price. On the other hand, the investor may choose to pay no more than a set amount per share. The brokerage firm then contacts one of its floor brokers at the NYSE, the exchange on which IBM stock is traded.


The floor broker then goes to IBM’s stock post—that is, the particular spot on the trading floor where IBM stock is traded. Here other floor brokers will be buying and selling the same stock. The activity around the post constitutes an auction market with transactions typically communicated through hand signals.


The most important person at the post is a broker-dealer called a specialist. The job of the specialist is to manage the auction process. The specialist will actually execute the trade and inform the floor broker of the final price at which the trade has been executed.


For this service, the investor will pay the original broker a commission, either as a flat fee or as a percentage of the purchase price.

Stock Trading

Stocks are shares of ownership in companies. People who buy a company’s stock may receive dividends (a portion of any profits). Stockholders are entitled to any capital gains that arise through their trading activity—that is, to any gain obtained when the price at which the stock is sold is greater than the purchase price.


But stockholders also face risks. One risk is that the firm may experience losses and not be able to continue the payment of dividends. Another risk involves capital losses when the stockholder sells shares at a price below the purchase price.

A company can list its stock on only one major stock exchange. However, options on its stock may be traded on another exchange. Where a stock is traded depends on both the requirements of the exchange and the decision of the corporation. Each exchange establishes requirements that a company must meet to have its stock listed.

For example, to be listed on the New York Stock Exchange, a company, among other things, must have a minimum of 1.1 million shares outstanding with a market value of at least $100 million. But not all companies that satisfy NYSE requirements apply to have their stock traded on this exchange.

Intel and Dell Computer, two very large and well-known corporations, satisfy NYSE requirements but choose instead to have their shares traded on the over-the-counter Nasdaq.
The different exchanges tend to attract different kinds of companies. Smaller exchanges, such as the Nasdaq, typically trade the stock of small, emerging businesses, such as high-tech companies.

In the United States, the AMEX lists small to medium-sized businesses, including many oil and gas companies. The NYSE primarily lists large, established companies

Transaction on the Stock Exchange

Most security trading is accomplished through brokerage firms. Persons and organizations that wish to purchase securities will call upon the brokerage firm to execute their transaction. To actually conduct the transaction on the stock exchange, the brokerage firm must have a membership, called a seat, on the exchange.

Stock exchanges limit the number of available seats, and the cost of a seat on an exchange is high. During 2002 the price of a seat on the NYSE ranged from $2 million to $2.6 million. Brokerage firms that have seats not only can complete trades on the floor of the exchange but also have the right to vote on exchange policy.

Brokerage firms are willing to pay high prices for exchange seats because of the profit opportunities available from membership in an exchange. Profits can be generated from the fees charged for the execution of trades as well as from trading on the firm’s own account. There are, however, risks associated with brokerage firm activity.

For example, brokerage firms can lose money if their clients default on margin loans (loans obtained to purchase securities).