Week 6-7 The Evolution of the Global Trade Regime

Lecture Plan

• Introduction• Historical Antecedents: 1860 to 1945• The ITO and the GATT: 1947 to 1948• Multilateral Trade Negotiations: 1950s to

1980s• The Uruguay Round: 1986 to 1994• The WTO: 1995 and beyond

Introduction (1)• The world trade regime is today the most

prominent example of cooperation between countries in the entire international system– It is rules-based where the goals are:• To reduce the protectionism of national

regulation• To reduce the uncertainty and unpredictability

of international trade relations• To promote stability

Introduction (2)• Tariffs are a form of trade regulation– They are also a source of government revenue– Used to protect domestic producers from foreign

competition– Today, their importance is superseded by non-

tariff measures/barriers (i.e. countervailing duties, anti-dumping duties )

• Trade agreements can serve as an effective means of trade liberalization

Non-Tariff Barriers/Measures (NTBs/NTMs)

A wide variety of official or unofficial devices (other than tarriffs) that hinder imports into an economy; for example, quantitative restrictions, health regulations, custom procedures.

Historical Antecedents (1)

• By second quarter of 19th century, campaign for free trade had begun as part of a broader effort of political reform in British society

• In 1848, Corn Laws were repealed in Britain– The laws had provided high protection to

agricultural products• In 1860, Cobden-Chevalier Treaty (Anglo-

French treaty) initiated a period of liberalized trade between the UK and Europe

Lord Palmerston Addressing the House of Commons During the Debates on the Cobden–Chevalier Treaty in February 1860, as painted by John Phillip (1863).

Historical Antecedents (2)• Between 1830s and 1870s, liberal commercial

exchange flourished– Dominated economically by Great Britain

• Britain was the leading creditor country in the world• Free trade was a key facet of British commercial policy

• Economic depression emerged after 1870 due to increasing competition and decline in prices of exports – Protectionist policies returned and tariffs increased

• This trend was exacerbated by First World War and continued until after Second World War

World Economy: Inter-War Period

• Economic chaos– Economic interdependence disrupted by WWI– Governments disagreed on measures to restore

international economic stability– Gold standard broke down• Misalignment of currencies• Inconsistent adherence to ‘rules of the game’

Abandonment in 1931

– Beggar-thy-neighbour policies (i.e.increasing tariffs)

Historical Antecedents (3)

• Growing nationalism until Second World War manifested in mercantilism, bilateralism, and competitive exchange rate devaluations– In 1930, Smooth-Hawley Act in United States• Increased US tariffs to historic levels• Expanded the scope of tariff coverage• Foreign countries retaliated with further protectionism

– Global trade declined and broke down after 1930• World trade fell by about two-thirds by the mid-1930s

Willis C. Hawley (left) and Reed Smoot in April 1929, shortly before the Smoot-Hawley Tariff Act passed the House of Representatives.

Historical Antecedents (4)

• In 1934, Reciprocal Trade Agreements Act (RTAA) in the United States– A revolution in US and international trade policy– RTAA empowered US President to lower/raise

tariffs by up to 50% from Smoot-Hawley levels when negotiating with other countries• This transferred tariff-setting policy from Congress to

the Presidency

– Implicitly accepted that tariff rates were a bilateral matter to be settled through negotiation, and not unilaterally

Historical Antecedents (5)

• In 1934, RTAA (cont.)– By 1939, US concluded 21 agreements• All agreements made on most-favoured nation basis

– Slowed the negotiation process but extended the impact of the agreements more widely

– Flow of international trade increased– Public opinion became increasingly supportive of

free trade– Experience in trade liberalization would become

useful after the Second World War

The ITO and the GATT (1)

• US was in a preponderant position for the first two decades of the post-WW II period

• American values that were imparted on the international trade system– Trade liberalization– Multilateralism– Legal approach to international trade relations

• Although the US approach prevailed on most issues, the trade regime has always been based on a negotiated consensus

The idea of open markets was something that liberal visionaries and hard-nosed geopolitical strategists could agree upon. It united American postwar planners, and it was the seminal idea that informed the work of the 1944 Bretton Woods conference on postwar economic cooperation… The BW agreements allowed political leaders to envisage a postwar economic order in which multiple and otherwise competing political objectives could be combined. As Roosevelt said at the opening of the BW conference, “the economic health of every country is a proper matter of concern to all its neighbors, near and far.” (Ikenberry ,2001,p.163-214)

The ITO and the GATT (2)

• An agreement to establish an International Trade Organization (ITO) was concluded in 1948– ITO was meant to complement the World Bank

and IMF– But the US Congress failed to ratify the agreement– International community had to fall back on a

much narrower treaty: the General Agreement on Trade and Tariffs (GATT)

The ITO and the GATT (3)

• General Agreement on Trade and Tariffs (GATT)– A multilateral contract embodying trade rules

negotiated in 1947– It provided a structure for the regulation of the

international trade system– It was partly a mechanism to ensure that countries

did not reintroduce protectionism once tariffs were lowered

– It was never intended to function as an international organization

GATT principles, rules and norms -1 - Principle of non-discrimination• This is a cornerstone of the international

trade system• Article I: most-favoured nation principle–Addressed external discrimination

• Article III: national-treatment–Addressed internal discrimination

(obligation to treat imported products in the same manner as those produced domestically)

GATT principles, rules and norms -2

- Reciprocity

• Proposed by economists because countries

that unilaterally reduced tariffs would

realize economic benefits

• Exceptions were made for special and

differential treatment for developing

countries

GATT principles, rules and norms -3

– Safeguards (Article XIX)

• Temporary exceptions from some

commitments of obligations to allow for the

orderly adjustment of domestic markets

–Commercial considerations

• Support for the value of the free market

over government interventionism

Multilateral Trade Negotiations (1)

• Contracting Parties through GATT sponsored rounds of multilateral negotiations to liberalize trade– First four rounds addressed some important

institutional matters but did not make significant progress in liberalizing trade

– In early rounds, negotiations took place bilaterally and were then multilateralized automatically through the most-favoured nation principle

Multilateral Trade Negotiations (2)

• Kennedy Round (1963-67)– First significant round after the initial introduction

of GATT in 1947– Average tariff reduction of about 35%• Adopted a linear approach to reducing tariffs

– Introduced an anti-dumping code– International grain agreement• established price ranges for wheat • multilateral sharing of food aid to developing countries

– European Community participated as a single unit for the first time

Multilateral Trade Negotiations (3)

• Tokyo Round (1973-79)– Focus was on non-tariff barriers (NTBs) to trade

• Produced six legal codes that dealt with NTBs, covering – customs valuation procedures– import licensing– technical standards for products– subsidies and countervailing duty measures– government procurement– anti-dumping duty procedures

– Average tariff reductions of about 35% of industrial nations’ tariffs (comparable to Kennedy Round)• Tariffs were reduced in proportion to the size of the tariffs

Multilateral Trade Negotiations (4)

• Tokyo Round (1973-79) (cont.)– GATT Articles, or “framework” agreements, were

revised to clarify and improve GATT language on matters relating to developing countries

– In contrast to past GATT negotiations, the Tokyo Round was a rule-making exercise of major proportions• Agreements of the Tokyo Round produced legal rules

that reached further into the nation state

The Uruguay Round (1986-94)• Decision to launch Uruguay Round of

negotiations turned on disagreement over– Inclusion of new issues (services, investment and

intellectual property), demanded in particular by United States• US argued it was necessary to expand the GATT regime

to keep it relevant in a changing world economy• Developing countries argued that they did not have the

capacity to negotiate on an equal footing on these issues

– Further liberalization in textiles and agricultural products, which were of particular importance to developing countries

The Uruguay Round-Services (1)

–Services are “processes in which skills and knowledge are exchanged in order to meet a particular consumer need”• E.g. engineering consulting, financial

intermediation, tourism, legal advice–By late-1980s, services accounted for

over half of GDP of developed countries–Services were negotiated separately from

goods

The Uruguay Round- Services (2)– Global services market is essentially protectionist

due to different regulatory objectives & standards• One important obstacle to trade in services has

been the reluctance to grant foreign firms the right to establish and do business in domestic markets

– Key task for negotiators: how to incorporate GATT principles of transparency, national treatment and reciprocity in a conceptually new area?

– General Agreement on Trade in Services (GATS)• Code of principles providing international

standard of treatment

The Uruguay Round- Investment

• Investment was increasingly seen to be interchangeable with trade as means of servicing foreign markets• Investment reinforces the effects of trade

liberalization• There was considerable regulation by

national authorities, in particular in “sensitive” industries• Negotiation of a multilateral investment

agreement failed but agreement was reached on Trade-Related Investment Measures (TRIMs)

The Uruguay Round- Intellectual Property

– Trade-Related Aspects of Intellectual Property Rights (TRIPs)• Producers of high-tech products and

pharmaceuticals sought to internationalize the intellectual property protection that they enjoyed in their home countries• Developing countries viewed TRIPs as a

potential barrier to trade, e.g. monopolies granted to pharmaceuticals–Developing countries consented on this issue as

they felt at the time that their losses were compensated by gains elsewhere in the overall accord

The Uruguay Round- Developing Countries (1)

– Marginal players for most of the history of GATT– GATT focused mainly on trade (not economic

development) and tariff reduction (which was in conflict with the policy of import-substitution industrialization)

– Although initially reluctant to participate in the Uruguay Round, developing countries became its greatest supporters from 1991 onwards• Developing countries put pressure on US and

EU to settle their differences

The Uruguay Round- Developing Countries (2): Why change in their position ?

• Single undertaking: all issues of the negotiation were treated as a single package, with no exceptions

• Consensus: agreement required the passive support of all participants

• Economic advantages found in agreements on agriculture, textiles and clothing

• Benefits from institutional agreements (the strong dispute settlement mechanism and the creation of the WTO)

• Market-based economic reforms introduced in many developing countries in the 1980s encouraged the market-based principles and objectives of the GATT

The Uruguay Round-Developing Countries

The Uruguay Round Agreement represented the most far-reaching commitments made by developing countries in the international trade regime

The Uruguay Round: Outcome

• The various agreements reached expanded the rules of the international system of trade– New issues (e.g. services) were brought under

multilateral rules for the first time– The agreements advanced the rules-based, as

opposed to power-based, nature of trade relations

Average Tariffs after the Uruguay Round (%)

The headquarters of the WTO, in Geneva, Switzerland.

The WTO (1)

• Created in agreements of the Uruguay Round– Came into existence on 01 January 1995– The creation of the WTO reinforced the role of trade

in international economic relations• The WTO represents a contract between its

members, the purpose of which is to establish trade rules and to back them up with a powerful dispute settlement system– Unlike GATT, the WTO is a formally constituted

international organization

The WTO (2)

• The WTO’s continuity with the GATT– Continued with many of the consensual practices – Formalized many of the customary practices that had

first emerged under GATT (e.g. dispute settlement, maintenance of a forum for negotiations)

• The WTO centralized the governance of the international trade system far more than had occurred under GATT

The WTO (3)

• The WTO is a "member-driven" organization

– Members, not the (relatively small) secretariat, are responsible for setting the agenda and carrying out the functions of the organization

– Through negotiations, members establish a rules-based regime for regulating international trade

The WTO (4)

• The WTO is a "member-driven" organization (cont.)

– Absence of consensus paralyses the agenda and stops the WTO from dealing with problems

– Absence of consensus also raises the spectre that the WTO will be eclipsed as countries turn to other means (such as regional agreements) to solve problems

WTO Negotiations (1)

• Successful negotiations at ministerial conferences post Uruguay Round in financial services and information technology

• Doha Declaration on TRIPS and Public Health (2001)

WTO Negotiations (2)

• Doha Round Negotiations Launched in 2001– Failure to Reach Agreement:• Increased number of countries, often organized into

informal negotiating groups• Increasing significance of the BRICs gives them greater

negotiating power• Focus on agricultural issues• Disagreement on “development” dimensions of agenda