Reinert/Windows on the World Economy, 2004 The World Trade Organization CHAPTER 7

Reinert/Windows on the World Economy, 2004

The World Trade Organization

CHAPTER 7


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Introduction

Chapter covers key aspects of the World Trade Organization (WTO

Introduces International Monetary Fund (IMF) and World Bank

Discusses General Agreement on Tariffs and Trade (GATT)


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The General Agreement on Tariffs and Trade

In July 1944 United States and Britain held a conference (Bretton Woods) for a set of post-war, economic institutions including setting up International Bank for Reconstruction and Development (World Bank) International Monetary Fund

In December 1945 United States attempted to launch idea of an International Trade Organization (ITO) Met for a first set of negotiations in London—twenty-three founding members

were present and signed General Agreement on Tariffs and Trade (GATT) In 1948 ITO charter was agreed to at a United Nations Conference In 1950 US announced it would not seek US Congressional ratification of

Havana Charter, effectively terminating ITO plan• Was in response to pressures from isolationist members of the US Congress

Consequently, vehicle for post-war trade negotiations became GATT


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The General Agreement on Tariffs and Trade

Between 1946 and 1994, the GATT provided a framework multilateral trade negotiations

Rounds reduced tariffs among member countries in many (but not all) sectors Average tariff on manufactured products imposed by

industrial countries fell from 35% to 4% However GATT Secretariat could not always effectively

enforce negotiated agreements without legal standing of ITO

• Resolved in 1994 with Marrakesh Agreement Provided for creation of World Trade Organization (WTO)


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What Does GATT Entail?

Most important principle—nondiscrimination Important sub-principles

• Most-favored-nation Each member must grant treatment to each other member as

favorable as it extends to any other member country For instance if Japan lowers a tariff on Indonesia's exports of a

certain product, it must also lower its tariff on the exports of that product from all other member countries

Exceptions are allowed and preferences are granted

• National treatment Addresses internal, domestic policies such as taxes

Foreign goods within a country should be treated no less favorably than domestic goods with regard to tax policies


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What Does GATT Entail?

A second important GATT principle General prohibition of quotas or quantitative

restrictions on trade• Reflects a longstanding view that price distortions

(tariffs) are preferred to quantity distortions in international markets

• Quantitative restrictions were one of the most significant impediments to trade prior to GATT

• Exceptions are allowed


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GATT Exceptions—Agricultural Products

Applied when certain domestic programs were in place Granted to address US agricultural programs

• Used for decades to reduce US imports of sugar, dairy products and peanuts

In addition, United States insisted export subsidies be allowed for agriculture Generally prohibited by GATT

European Union became the most vociferous supporter of these exemptions in 1980s and 1990s


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GATT Exceptions—Textiles and Clothing

In 1961, a US-initiated conference of major textile traders was convened Developed the Short Term Arrangement Regarding International

Trade in Cotton Textiles• Withdrew cotton textile trade from the MFN system for a period of one

year In October 1962, Long Term Arrangement Regarding

International Trade in Cotton Textiles replaced STA Allowed importers to curb imports in cases of “market disruption” via

bilateral or unilateral action In December 1972, a GATT fact-finding study on world

textile trade was completed Resulted in Arrangement Regarding International Trade in Textiles

or the Multi-fiber Arrangement• General, multilateral framework for managing textile and clothing trade


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Reaction to GATT Exceptions

Exceptions generated negative feelings on the part of developing countries Agriculture, textiles, and clothing are products

countries first turn to in their trade and development process

Developing countries wondered how they could have a fair chance to participate in the trade and development process


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GATT—Tariff Bindings Tariffs are bound at an agreed-upon level often above applied levels

Levels may not be increased in the future Applied rates below bound rates may be increased General purpose of the binding principle

• To introduce a degree of predictability into the world trading system GATT introduced stipulations with regard to subsidies, countervailing

duties, and antidumping duties Use of subsidies is not supposed to harm trading interests of other members

• If subsidies cause “material injury” or “threat thereof” to a domestic industry of another country

That country can apply countervailing duties or tariffs on its imports of product from subsidizing country

Leaves room for different interpretations/controversy• “Dumped” goods are defined as exports sold at a price below those charged by

the exporter in its domestic market Allowed for antidumping duties or tariffs to be imposed under certain circumstances


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The World Trade Organization

The initial Bretton Woods vision of an International Trade Organization ended in 1950

In 1990 Canada proposed a Multilateral Trade Organization to address weaknesses of the GATT Secretariat

In 1991, the Director General of GATT, Authur Dunkel released a draft agreement for the Uruguay Round that became known as “the Dunkel text” Included a draft charter for MTO

By the end of 1993, text of the Uruguay Round contained a final charter for a World Trade Organization (WTO) Marrakesh Agreement is actually “Marrakesh Agreement

Establishing the World Trade Organization”


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Marrakesh Agreement

Marrakesh Agreement and WTO is sometimes referred to as a “tripod” in that it primarily addressed the following areas Trade in Goods—an Agreement on Agriculture and an Agreement

on Textiles and Clothing Trade in Services as specified in General Agreement on Trade in

Services Intellectual Property as specified in Agreement on Trade-Related

Aspects of Intellectual Property Rights Included a WTO charter

Established WTO as a legal international organization Stipulated that “WTO shall provide the common institutional

framework for the conduct of trade relations among its members” Defined the functions of WTO


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Table 7.2 Administrative Structure of the WTO


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Table 7.2 Administrative Structure of the WTO


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Trade in Goods

Agreement on Agriculture addresses three outstanding issues concerning international trade in agricultural goods Market access

• Replaced a quota-based system with a system of bound tariffs and tariff-reduction commitments

Known as tariffication—represents a significant change of regime• Non-tariff measures (quotas) are now prohibited

Domestic support• Distinction is made between

“Green box” measures—are exempt from any reduction commitments

“Amber box” measures—are not exempt Export subsidies

• Use has not been eliminated but limited to specified situations


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Agreement on Agriculture

Best viewed as a change in rules Not as a significant program for the liberalization

of trade in agricultural products Hope that further liberalization of tariffied

quotas will take place in the current Doha Round of trade negotiations


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Agreement on Textiles and Clothing

Requires countries reintegrate textile and clothing sectors back into GATT framework

At the end of ten-year period, all quotas on textile and clothing trade must be removed

Are stated in terms of product categories listed in an ATC Annex

Noteworthy points Integration is in terms of volume, not value Importing countries expanded Annex to include many

items never subject to MFA Safeguard clause can be invoked to slow down its

implementation


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Trade in Services

Composes more than 20% of total world trade and has at times grown faster than trade in goods

General Agreement on Trade in Services (GATS)—significant outcome of Uruguay Round Represented first time services were brought into a multilateral trade

agreement Negotiations were difficult due to fact that trade in services is less

tangible than trade in goods Defined trade in services as occurring in one of four modes

Mode 1: Cross-border trade Mode 2: Movement of consumers Mode 3: Foreign direct investment or FDI Mode 4: Movement of natural persons


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Trade in Services

Cross-border trade Mode of supply that does not require physical movement of

producers or consumers• For example, Indian firms provide medical transcription services to US

hospitals via satellite technology Movement of consumers

Consumer travels to the country of producer• For example, tourism services

Foreign direct investment Services that require a commercial presence by producers in country

of the consumers• For example, financial services

Temporary movement of natural persons Non-commercial presence by producers

• For example, consulting, construction, and instructional services


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Difficulty Negotiating GATS

Resistance from a number of developing countries

United States and European Union supported it Prevailed upon developing countries to allow

negotiations to move forward Each member was allowed to specify

nondiscrimination exemptions on a “negative list” of sectors upon entry into the agreement Were to last for 10 years


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Positive List Restrictions

GATS prohibited certain market access restrictions Number of service suppliers Total value of service transactions Total number of operations or quantity of output Number of personnel employed Type of legal entity in the case of FDI Share of foreign ownership in the case of FDI

These requirements were optional if a member identified ones they want to maintain in a second positive list


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Protocols to GATS

Second GATS Protocol: Revised Schedules of Commitments on Financial Services, 1995

Third GATS Protocol: Schedules of Specific Commitments Relating to Movement of Natural Persons, 1995

Fourth GATS Protocol: Schedules of Specific Commitments Concerning Basic Telecommunications, 1997

Fifth GATS Protocol: Schedules of Specific Commitments and Lists of Exemptions from Article II Concerning Financial Services, 1998


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Intellectual Property

An asset in the form of rights conferred upon a product of invention or creation by a country’s legal system

Agreement on Trade-Related Aspects of Intellectual Property Rights Most contentious aspect of Marrakesh Agreement Defined intellectual property as belonging to one of six categories

• Copyrights• Trademarks• Geographical indications• Industrial designs• Patents• Layout designs of integrated circuits

Applied the principle of nondiscrimination to intellectual property


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TRIPS Agreement Sets out obligations for members

Copyrights• Members must comply with 1971 Berne Convention on copyrights

Trademarks• Goods and services are to be protected for a term of no less than seven years• Provisions for the registration of trademarks must be made and are renewable

indefinitely Geographical indications

• Members must provide legal means to prevent false use of geographical indications

Industrial designs• Members must protect “independently created industrial designs that are new or

original” Patents

• Exceptions exist and include protection of public order, human, animal, and plant life

Layout designs of integrated circuits• Distribution of protected layout designs is forbidden


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TRIPS Agreement

Citizens and firms in developed countries own most of the world’s IP

Developing countries currently often have less IP protection than developed countries Especially in the case of patents

Raises cost of many goods and services to developing countries Represents a transfer from developing country consumers to

developed country producers Allows for greater transition periods for developing countries for the

six obligations• Developed countries must have instituted the above obligations by 1996• Developing countries must have instituted them by 2000• Least developed countries have until 2005


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TRIPs Agreement

In short to medium time frames welfare gains may be absent

Some economists from developing countries consider TRIPs to be a welfare-worsening, “non-trade” agenda item that has no place in WTO Lacks efficiency gains that characterize trade and restricts freedom

of countries to choose intellectual property regime that is best for them

Represents a significant concession on the part of developing world

Most contentious area of agreement is AIDS drugs US government has pressured countries to honor US patents on

AIDS drugs• Could price drugs above the reach of AIDS patients in certain countries,

increasing AIDS mortality rates Meeting in 2001 offered flexibility with regard to public health


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Benefits to Developing Countries from TRIPS?

Economist Keith Maskus (2000) argues Increased inward FDI and technology transfer Increased domestic innovation

TRIPs imposes short-term costs in the hopes of generating long-term benefits


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Dispute Settlement

Marrakesh Agreement included an Understanding on Rules and Procedures Governing the Settlement of Disputes

Original GATT was unclear about resolution of disputes—Marrakesh Agreement attempted to clarify dispute settlement procedures

WTO includes councils on trade in goods and services as well as a council on TRIPs Should help minimize occurrence of disputes


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Figure 7.2 Dispute Settlement in the WTO


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Dispute Settlement

If the consultation process fails to settle a dispute within 60 days, the complaining member may request the establishment of a panel Composed of three or five “well-qualified governmental or

non-governmental individuals” Function is to assist DSB in dispute settlement process

• Consults the parties involved and provides DSB with a written report of its findings

• DSB has 60 days to adopt report by consensus unless a party to dispute decides to appeal

The appeal of a panel report is referred to an appellate body

• Reviews the appeal and submits its report to the DSB• Any DSB member can effectively insist on the adoption of the

appellate body report


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Dispute Settlement

Dispute settlement procedure applies to all aspects of the Marrakesh Agreement

Improves procedures of old GATT and makes a significant contribution to the conduct of international trade

Effectiveness of procedures depends on members’ commitment to it A country has option of ignoring outcome of the dispute

settlement process• Complaining member has right to impose retaliatory tariffs on a

volume of imports from the other country determined by the DSB


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The Environment

In 1991, the GATT reactivated a long-dormant Working Group on Environmental Measures and International Trade (EMIT)

GATT dispute resolution panel issued its controversial opinion in the now-famous tuna-dolphin case Ruled against US law banning imports of Mexican tuna that involved

dolphin-unsafe fishing practices Argued import ban violated general prohibition against quotas and

United States had not attempted to negotiate cooperative agreements on dolphin-safe tuna fishing

• US environmental community reacted strongly against the GATT panel ruling, casting the GATT as anti-environment

Trade-environment issue has loomed large over the WTO ever since


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Committee on Trade and the Environment

EMIT was replaced by Committee on Trade and the Environment

Most developing country members of WTO have taken a dim view of the work of CTE Fear the possibility of further protection against their exports on

environmental grounds, what they term “green protection” Often view environmental matters as non-trade issues that have no

place in the trade policy agenda of the WTO Many trade economists support the developing-country view

that environmental issues represent an “intrusion” into WTO trade agenda Suggest environmental agenda could result in an inappropriate “one

size fits all” approach to environmental policies across WTO members


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Committee on Trade and the Environment

In 1999, WTO formally took up trade and environment issue Report argued increased trade can have both positive

and negative impacts on the environment Emphasizes trade-driven growth cannot always be

counted upon to deliver improvements in environmental quality through increased incomes

• Consequently, these higher incomes must be “translated into higher environmental quality” through mechanism of international cooperation

• Also emphasized that government subsidies to polluting and resource-depleting sectors such as agriculture, fishing, and energy can exacerbate the environmental consequences of trade

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Reinert/Windows on the World Economy, 2004 The World Trade Organization CHAPTER 7