Overview and Mechanism

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Overview and Mechanism

of Multilateral Trading System

Mr. Sadudee Vongkiattikachorn

International Institute for Trade and Development (ITD)

Outline

A: Trade as an Engine of Growth

B: Protectionism VS Liberalization

- Tools for national trade policies- Tools for national trade policies

- Import Substitution and Export Promotion

C: Snapshots of the WTO

D: Economic integration and interplay with the WTO

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“No single change could make a greater contribution to eliminating poverty than fully opening up the markets of prosperous countries to the goods produced by poor ones.”produced by poor ones.”

Kofi Annan

Secretary General of the United Nations

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Trade as an Engine of Growth

“Economic growth is a sustained increase in real gross domestic product per capita.”

“A positive change in the level of production of goods and services by a country over a certain period of time. Economic growth is usually brought about by technological innovation and positive external forces.”

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According to Amartya Sen’s Development as Freedom, economic growth is not an ultimate goal; it is a mean to enhance people’s economic freedom.

Trade ⇒ Growth ⇒ Economic freedom

- Better living

- Happiness

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How can trade promote growth?Trade helps an economy grow in several ways.

� Encourage specialization ⇒⇒⇒⇒ Employ more resources

It encourages economies to specialize and produce in areas where they have a relative cost advantage over other countries. Over time, this helps economies to employ more of their human, physical and capital resources in sectors where they get the highest returns in open international markets, boosting productivity and the returns to workers and investors.

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� Expand markets ⇒⇒⇒⇒ Economies of scale can be achieved

Trade expands the markets that local producers can access, allowing them to produce at the most efficient scale to keep Trade expands the markets that local producers can access, allowing them to produce at the most efficient scale to keep down costs.

Even in large developing economies, low incomes often make producers’ potential local markets small. This is because of limited purchasing power. So trade is very much essential.

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� Make goods cheaper ⇒⇒⇒⇒ enhance producers’ and consumers’ welfare

Removing tariffs on imports gives consumers access to cheaper products, increasing their purchasing power and living standards, and gives purchasing power and living standards, and gives producers access to cheaper inputs, reducing their production costs and boosting their competitiveness

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Trade and Poverty

� Most experts believe that as a country’s openness to trade increases poverty is reduced

� Countries like China and Malaysia have � Countries like China and Malaysia have experienced rapid growth since establishing more liberal trade policies

� As countries become open to trade, per capita GDP has increased and poverty has been reduced

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� Many potential benefits from trade:

� Increases economic growth and increases incomes

� Speeds spread of technology and innovation

� Allows most efficient country to supply� Allows most efficient country to supply

� Can substitute for aid in development process

� Increases competition

� Greater consumer choice

� Political benefits

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Protectionism VS Liberalization

Protectionism: � Protectionism is based on the belief that exports are good for the

country, but imports are bad for the country.

� Trade between countries is restricted through measures to reduce � Trade between countries is restricted through measures to reduce imports from coming to the country.

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Liberalization:• Liberalization allows imports from other countries to

access domestic market of the home country, by reducing or eliminating barriers to trade.

• It is based on the philosophy of comparative advantages.

• It promotes efficient uses and allocation of resources.

Tools for national trade policies

� Tariffs:

The most important type of trade restrictions is tariff. A tariff is a tax or duty

levied on the traded commodity as it crosses a national boundary.

An import tariff is a duty on the imported commodity. An import tariff is a duty on the imported commodity.

� Non-tariffs:

Non-tariff barriers could be in various forms such as import quota,

product standards, food safety standards, import licensing etc.

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Why does a country impose import tariffs?

� To raise tariff revenue

� To lower the quantity of imports

To protect domestic suppliers� To protect domestic suppliers

� To prevent job loss in some sectors

� To prevent a reduction of workers’ income

� To achieve investment objectives, which in turn, create jobs within the country

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Analyzing the effects of import tariffs

� Domestic price of good ⇑

� Quantity of imports ⇓� Quantity of imports ⇓

� Quantity of domestic products sold ⇑

� Tariff revenue ⇑

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Non-tariff barriers (NTBs)

Rules of Origin

Rules of origin are used to determine the nationality of product.

This is to determine whether a product shall be given preference or whether the MFN tariff should be paid when a product is imported.

The primary objective of Sanitary and Phytosanitary measures (SPS) and Technical Barriers to Trade (TBT) is to protect consumers so as to maximize social welfare. However, the WTO recognizes that both standards may impede trade.

TBT and SPSTBT and SPS

Though the WTO provides freedom for each member to have its own standards, the WTO encourages members to adopt standards developed by international organizations on a non-discriminatory basis.

TBT relates to technical standards covering all products, including food, and product specification issues such as size, shape, weight and packaging material requirements, including labeling and safe handling.

TBT

handling.

SPS includes all measures to ensure the safety of food for human and prevent the spread of animal an plant pests and diseases.

SPS

SPS covers food and agricultural sector and the issues relates to the level of microbial, toxic and physical contaminations.

� Disciplines imposed on measures used to protect human, animal and plant life from foreign pests, diseases and contaminants

� Such measures can significantly impede trade

SPS

� Such measures can significantly impede trade

� Must be non-discriminatory

� Measures must now be based on scientific assessment of risks

Potential impacts of standards

Developing countries are standard takers, not standard setters.

� High cost to ensure the compliance with importing countries’ health or safety regulations

⇒ New investment is required.

� Difficulties in gaining access to relevant and useful information on rules and regulations

� Limited ability to maintain records at the field level as required by some standards

These standards are likely to be complied by large multinational companies (MNCs), not labor-intensive SMEs.

Protectionism in ASEAN

Indonesia

� Jakarta port closure for fruit imports

� Import licensing on textiles and clothing; electronic appliances; toys

� SPS imposed on red onion: root must be cut before export → increase trade cost

� Require imported pharmaceutical products to be registered with local pharmaceutical company

� Limit exports of rattan which is used to product furniture → cost of producing furniture in other countries increase

� Campaign to lower rice consumption: “No rice day” program on Tuesday → effects Thailand’s export of rice and Thai restaurants in Indonesia

� Label requirements for rice

� Safeguard investigation on imports of mackerel, finished casing and tubing, conveyor belts, non-alloy steel

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Import Substitution and Export Orientation

Import substitution industrialization strategyImport substitution industrialization strategy: :

The industrialization policy that many developing countries followed The industrialization policy that many developing countries followed curing the curing the 19501950s, s, 19601960s, and s, and 19701970s involving replacement of s involving replacement of

imports of industrial goods with domestically produced goods.imports of industrial goods with domestically produced goods.

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imports of industrial goods with domestically produced goods.imports of industrial goods with domestically produced goods.

ExportExport--oriented industrialization strategyoriented industrialization strategy: :

The industrialization policy that pursued by some developing The industrialization policy that pursued by some developing countries that involves increasing the output of manufactured goods countries that involves increasing the output of manufactured goods for export. for export.

An import substitution strategy has four main advantages:

� Low risks in setting up an industry

The market for the industrial product already exists, as evidenced by imports of the commodity, so that risks are reduced n setting up an industry to replace imports.

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� Easier to implement than export promotion strategy

Compared to export promotion strategy, an import substitution strategy is easier for developing countries to protect their domestic market against foreign competition than to force developed countries to lower trade barriers against their manufactured exports.

� Induce foreign investment

Foreign firms are induced to establish so-called tariff factories to overcome the tariff wall of developing countries.

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� Possibly lead to exports

After some time, domestic firms can develop their technology and know-how, and thereby improve the quality of their products. The firms can export the products, which once used to be produced only for domestic market.

The disadvantages of import substitution policy are as follows:

� Protection ⇒ No incentive for domestic firms to become more efficient

� Small domestic market ⇒ Can’t achieve economies of scale� Small domestic market ⇒ Can’t achieve economies of scale

� Relatively inefficient domestic production ⇒ More expensive goods

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� Overcome smallness of domestic market

Export orientation strategy allows a developing country to take advantage of economies of scale and overcome the smallness of domestic market.

ExportExport--oriented industrialization strategy has oriented industrialization strategy has three main advantages:three main advantages:

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�� Promote efficiency throughout the economyPromote efficiency throughout the economy

Production of manufactured goods for export requires and stimulates efficiency Production of manufactured goods for export requires and stimulates efficiency throughout the economy. This is especially important when the output of one industry is throughout the economy. This is especially important when the output of one industry is used as an input of another domestic industry.used as an input of another domestic industry.

� Gain bigger market

Unlike import substitution, the expansion of manufactured exports is not limit by the growth of domestic market.

WTOWTO

Snapshots of the WTO

Regional

Bilateral

Background and functions of WTO

� Created on January 1, 1995

� Successor of the General Agreements on Tariffs and � Successor of the General Agreements on Tariffs and Trade (GATT)

The International Organization that Governs the Rules of Trade Between Nations

Functions:

- administer WTO trade agreements

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- administer WTO trade agreements- forum for trade negotiations- handle trade disputes- monitor national trade policies- technical assistance and training- cooperate with international organizations

After WW II

World Bank IMF International Trade Organization

Not successful

GATTWorld Trade Organization

(WTO) From 1948 to 1995

WTO organization chart

WTO’s Fundamental Principles

Based on five core principles:

� Trade without discrimination

� Freer trade, gradually, through negotiation� Freer trade, gradually, through negotiation

� Predictability, through binding and transparency

� Promoting fair competition – “reciprocity”

� Encouraging development and economic reform

Major issues negotiated under WTO

� Agriculture--GATT

� Non-Agricultural Market Access (NAMA)--GATT

� Services---GATS

� Intellectual Property--TRIPS

Agricultural Negotiations

Three pillars of the negotiations

� Export subsidies

� Domestic support

� Tariff cuts

Export subsidies and domestic support lead to price distortions in global market.

Subsidy/support ⇒ Supply rises ⇒ Price Subsidy/support ⇒ Supply rises ⇒ Price falls

Points for negotiations under NAMA

� Reducing average tariffs by adopting Swiss formula

NAMA

� Reducing the number of tariff peaks

� Reducing tariff escalation

Automotive & partsAutomotive & parts

Bicycles &partsBicycles &partsElectronicsElectronics

forest productsforest products

fish and fish productsfish and fish products

gems and jewellerygems and jewellery

ChemicalsChemicalsSectorSector

gems and jewellerygems and jewellery

hand toolshand tools

raw materialsraw materials

textiles, clothingtextiles, clothingand footwearand footwear

toystoyssports equipmentsports equipment

mmachineryachinery

SectorSector

Non-Agricultural Market Access (NAMA)

Doha Mandate

Reduce/Eliminate Takes into Account

High Tariffs

Tariff Peaks

Tariff Escalation

Non-Tariff Barriers

Special Needs& Interest ofDevelopingCountries

In particular to Product of

Export Interest to Developing

countries

� Three most liberalized services sectors:

� Tourism

� Financial services

� Telecommunication services

Services Negotiations

� In general, developed countries have made commitments in all major sectors except courier and postal services

� All developing countries have made commitments on tourism services

Other Key Negotiations under WTO

� SBS / TBT

� Agreement on Agriculture (AOA)

� Anti-Dumping Agreement (ADA)� Anti-Dumping Agreement (ADA)

� Subsidies and Countervailing Measures (SCM)

� Safeguards (SG)

� Dispute Settlement Understanding (DSU)

� Agreement on Import Licencing Procedures

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Doha Negotiations

� Started in Doha in 2001

� Many deadlines have been missed.Many deadlines have been missed.

� 2004

� July 2007

� and…..a few more after that..

Economic Integration and Interplay with the WTO

Economic Integration refers to the commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together.

The degrees of economic integration are as follows:The degrees of economic integration are as follows:

� Preferential trade arrangements� Free trade area� Customs union� Common market� Economic union

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Economic Integration and Development

� LCDs in the region will be able to link their production to the supply chain in the region for eventual export to the destinations outside the region.

� Higher investment from countries in the region will create more employment of semi-skilled and unskilled workers in LCDs in the region. As a result, income of the poor will increase and their quality of life will improve.

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GATT Art. XXIV

� GATT sets out rules with which WTO members must comply in establishing a RTA covering trade in goods. It applies to customs unions (CUs) and free trade areas (FTAs).

WTO Rule on Economic Integration

Article XXIV imposes 3 obligations on WTO members wishing to enter into a RTA covering trade in goods;

• An obligation to notify a RTA to the WTO

• An obligation not to raise the overall level of protection and make access to products of third parties not participating in the RTA more difficult

• An obligation to liberalize substantially all the trade among constituents of the RTA

WTO & Economic Integration

AEC

NAFTA EU

• Article 24 (GATT 1994)BTA (Interim) / FTA / Customs Union

WTO

JTEPA

TAFTA

TPP

Others(e.g. AANZFTA)

Forms of Economic Integration

• Common Market

• Economic Union

� Preferential Tariff Arrangement

• Free Trade Arrangement

• Customs Union

• Common Market

Preferential Trade Arrangements

PTAs provide lower barriers on trade among

participating nations than on trade with nonmember nations. This is the loosest form of economic integration.

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Free Trade Area

An FTA is the form of economic integration wherein all barriers are removed on trade among members, but each nation retains its own barriers to trade with nonmembers.

� Within AFTA framework, Laos reduced customs duties to 0-5% by the end of 2008.

� The government of Thailand has concluded bilateral trade agreements with Australia, New Zealand, Japan and AFTA.

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Customs Union

A customs union allows no tariffs or other barriers on trade among members (as in an FTA), and in addition it harmonized trade policies such as setting common tariff rates toward the rest of the world. rates toward the rest of the world.

� European Common Market 1957

� Mercosur—South Common Market

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Common Market

A common market goes beyond a customs union by also allowing the free movement of labor and by also allowing the free movement of labor and capita among member nations.

� The EU achieved the status of a common market at the beginning of 1993.

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Economic Union

An economic union goes still further by harmonizing or even unifying the monetary and fiscal policies of member states. This is the most advanced type of economic integration.

� The Euro-zone, which consists of 15 member countries within the EU.

Use of single currency = Economic & Monetary Union

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Summary

FTAFTA Customs

Union

Common

Market

Economic

Union

Free trade among Free trade among membersmembers

YesYes YesYes YesYes YesYesmembersmembers

Common external Common external tarifftariff

NoNo YesYes YesYes YesYes

Free resource Free resource mobilitymobility

NoNo NoNo YesYes YesYes

Common macroCommon macro--economic policieseconomic policies

NoNo NoNo NoNo YesYes

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THANK YOU

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THANK YOU

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