chapter 5 the evolution of the global trade regime
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Chapter 5
The Evolution of the Global Trade
Regime
Chapter by Gilbert R Winham
John Ravenhill
Global Political Economy, 3rd edition
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 goal is
• 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
– It is a source of government revenue
– Used to protect domestic producers from foreign
competition
– Today, its importance is superseded by non-tariff
measures/barriers
• Trade agreements can serve as an effective
means of trade liberalization
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• In 1848, Corn Laws were repealed in Britain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 initiated a
period of liberalized trade between the UK
and Europe
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
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
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 more
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 post-WW II period
• American values that were imparted on the
international trade system
– Trade liberalization
– Multilateralism
– Legal approach to international trade relations
• Although US approach prevailed on most
issues, the trade regime has always been
based on a negotiated consensus
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 US Congress failed to rectify the agreement
– International community had to fall back on 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
do not reintroduce protectionism once tariffs were
lowered
– It was never intended to function as an
international organization
The ITO and the GATT (4)
• GATT principles, rules and norms
– 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
– Prohibition against quantitative and other non-tariff
restrictions to trade (Article XI)
• No restrictions other than duties/tariffs
• All restrictive measures were to be converted to tariffs
The ITO and the GATT (5)
• GATT principles, rules and norms (cont.)
– Reciprocity
• Derided by economists as countries that unilaterally
reduced tariffs would realize economic benefits
• Exceptions were made for special and differential
treatment for developing countries
– Safeguards (Article XIX)
• Temporary backtracking on commitments 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)
• 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 (1)
• 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 (2)
• Negotiations on services
– 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 (3)
• Negotiations on services (cont.)
– Global services market is essentially protectionist
due to different regulatory objectives & standards
• One important obstacle to trade in services is 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 (4)
• Other new issues
– Investment
• Investment was seen to be interchangeable with trade
• 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 (5)
• Other new issues (cont.)
– 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 acquiesced on this issue as they felt
their losses were compensated by gains elsewhere in the
overall accord
The Uruguay Round (6)
• Developing countries
– Developing countries have been 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 (7)
• Developing countries (cont.)
– Why did developing countries change their
position?
• Developing countries benefitted from two underlying
principles of the Uruguay Round
– 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)
The Uruguay Round (8)
• Developing countries (cont.)
– Why did developing countries change their
position? (cont.)
• Market-based economic reforms introduced in many
developing countries in the 1980s encouraged their
governments to look more favourably on the market-
based principles and objectives of the GATT
– The Uruguay Round Agreement represented the most far-
reaching commitments made by developing countries in
the international trade regime
The Uruguay Round (9)
• The various agreements reached at the
Uruguay Round 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
The Uruguay Round (10)
• A formal, integrated dispute settlements
system (DSU) was established
• The DSU was improved under WTO from its
GATT predecessor in a number of ways
– How panels were convened
– How panel decisions were adopted
– Scope and mechanics of dispute settlement
– Introduced obligation on member countries to use
DSU, and not unilateral measures, to resolve
disputes
The Uruguay Round (11)
• The DSU has been frequently used
– In about the first five years of operation, there
were some 193 member complaints on 151
distinct trade issues
• Outcome of DSU process is legally binding
– However, it is usually impossible to oblige a
powerful country to implement an adverse
decision that it is determined to ignore
• The complexity & costs of mounting litigation
at the WTO are onerous for developing
countries
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 was to
establish trade rules and to back them up
with a powerful dispute settlement system
– But 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
GATT
The WTO (3)
• The WTO is a "member-driven" organization
– Members, not the 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
– 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 to solve problems
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