world trade organizarion

7/29/2019 World Trade Organizarion

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Liberals like Smith and Ricardo viewed it as a

mutually beneficial bonanza to individuals andstates.

Realists viewed trade as a zero- sum game thatmakes some nation-states wealthier and more

powerful than others.

Marx and Lenin saw trade as a means of exploitationand redistributing income between developed anddeveloping nations.


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A Brief View of Intl TradeBy early 20th century, Britain was in economic decline.

This instigated a general retreat from free tradepractices during the First World War and fuelled

rampant protectionism during the inter-war period.

Disruptions to normal trade during the First World Warencouraged many countries to embark on domesticindustrial production in order to satisfy unmet import

demand. After the war, these new industries,threatened by resumption of imports and loss of marketshare, lobbied for, and obtained protection from foreigncompetition.


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In 1922, the United States introduced the FordneyMcCumber tariffs which raised average tariff levels

on dutiable imports from 27 percent to 39 percent.Despite the increase in tariff levels, the Fordney

McCumber Act introduced a single tariff rateapplicable to all countries. The US government

could claim that this new system was, at least,non-discriminatory and accorded each tradingpartner.


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The United States also used it to extract similar MFNtreatment from other countries. For example,France was pressured into granting the UnitedStates the same preferential tariff rate that itextended to Germany in 1927.

The FordneyMcCumber tariff from 1922 to 1929may be regarded as a successful example ofhegemonic power that probably raised the nationalincome of the United States by obtaining tariffconcessions from the rest of the world.


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*Most favored nation (MFN) treatment refers to apractice of nondiscriminatory trade and constitutes

a central pillar, of the postwar GATT regime.

The difference is that whereas the Fordney

McCumber tariffs introduced MFN treatment at

higher levels of tariffs, the GATT system is based

on MFN treatment at progressively lower levels of

trade restrictions.


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These gains were more than reversed when theUnited States introduced the infamous SmootHawley Tariff Act in 1930 and increased tarifflevels to 53 percent. This quickly provokedwidespread retaliation against American exports.

As access to the American market became morerestrictive, other countries introduced retaliatorytariffs. The net result was a spiralling of tariff levelsand average tariff in major countries increased toaround 50 percent.


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Some examples of post-SmootHawley retaliationare listed below:

In June 1930 Italy increased tariffs on American andFrench automobiles in retaliation for higher tariffs onolive oils, hats, etc.

Canada introduced new tariffs in retaliation ofAmerican restrictions on timber and agricultural

products.

Switzerland introduced a boycott on American exportsin response to American tariff on watches, shoes etc.

Due, largely, to the tariff war, total world trade,

between 1929 and 1933, shrank from about US$3billion to US$1 billion,10 and the world wasplunged into the Great Depression. This, arguably,also contributed to the onset of the Second World

War


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The GATT and Post-War Trade

StructureUntil after ww2 trade rules generally reflected

the interests of the dominant states.

Despite having histories of liberalism,protectionism was very high

The postwar structure was established in 1944

at the Bretton Woods conference in BrettonWoods, New Hampshire- new economicorder based on liberal ideals.


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The US promoted the establishment of anInternational Trade Organisation (ITO). The aimwas to create the ITO at a UN Conference onTrade and Employment in Havana, Cuba in 1947.

The signatories agreed to establish ITO that wouldsupplement the IMF and the IBRD. The ITO was tobe rule-oriented institution to oversee the transitionto free trade by 1952.


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Deviant members could be expelled and subject tosanctions but the consensus view was that thethreat of sanctions would be enough to securecompliance with the established trade rules.

It was agreed that voting within the ITO would bebased on one state, one vote, despite American

demands for weighted voting that would ensure itsdominance over the ITO. This was rejected by amajority of countries (35) present at the HavanaConference.


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The US Congress indicated disapproval and the USgovernment did not even bother to submit theHavana Charter for ratification by the Congress

The draft ITO Charter was ambitious. It extendedbeyond world trade disciplines, to include rules onemployment, commodity agreements, restrictivebusiness practices, international investment, andservices


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Meanwhile, 15 countries had begun talks in

December 1945 to reduce and bind customs tariffsto give an early boost to trade liberalization, and tobegin to correct the legacy of protectionist

This first round of negotiations resulted in a package

of trade rules and 45,000 tariff concessionsaffecting $10 billion of trade, about one fifth of theworlds total. The group had expanded to 23 by the

time the deal was signed on 30 October 1947. The

tariff concessions came into effect by 30 June1948 and so the new General Agreement onTariffs and Trade was born, with 23 foundingmembers (officially contracting parties).


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From 1948 to 1994, the General Agreementon Tariffs and Trade (GATT) provided the

rules for much of world trade and presidedover periods that saw some of the highestgrowth rates in international commerce. Itseemed well-established, but throughout

those 47 years, it was a provisionalagreement and organization.


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The GATT was based on the principles of reciprocityand non-discrimination.

Reciprocal- as all members agreed to lower theirtrade barriers together. This was a way todiscourage or prevent nationals from enactingunilateral trade barriers.

Non-Discrimination and the MFN principle wouldprevent bilateral trade wars as MFN trading statusrequired that imports from all countries would betreated the same


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The GATT was not a set of rules that could beenforced by the organisation but depended on themembers to fulfill multilateral obligations with oneanother.

Also written into the GATT were exceptions:including tariffs and quotas on textiles, regionaltrade agreements (RTAs) etc so thatreconstruction after WW2 would be possible asmany nations already has balance of paymentshortages.


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Over time, however, the GATT acquired a smallsecretariat and became both a multilateral

agreement and an international organization TheGATT secretariat is staffed by a relatively smallstaff. In the mid-1960s the GATT Secretariat hadonly 179 full-time employees compared to the 773

staff members of the IMF.


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The GATT system was based on two main rules.

1. MFN principle 2. National treatment

1. The MFN clause required that where negotiationsbetween two or more countries lowered tariffs thelower tariff should be available to all exporters ofthat product- a spillover effect

To prevent trade benefits from being granted on apreferential basis to only a few countries becausethat would only lead to trade diversion rather thantrade creation

The same principle, of course, also applied when onecountry decided to increase existing tariff levels(Safeguard clause).


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Safeguards Clause: This provision essentially states that,if the GATT obligations cause a rise in imports to a

certain country, and these imports harm domesticproducers of competitive products, that country isallowed to temporarily protect its producers by enactingtrade restrictions - the GATT obligations therefore nolonger hold. However, the importing country is required

to compensate the exporting country by making tradeconcessions in other areas.

At first glance this might seem quite peculiar as the veryessence of the concept of comparative advantage and

international trade is that some countries can produceproducts at a lower price than others. Why is thisclause here?


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Safeguards Clause: This provision essentially states that,if the GATT obligations cause a rise in imports to acertain country, and these imports harm domestic

producers of competitive products, that country isallowed to temporarily protect its producers by enactingtrade restrictions - the GATT obligations therefore nolonger hold. However, the importing country is requiredto compensate the exporting country by making tradeconcessions in other areas.

At first glance this might seem quite peculiar as the veryessence of the concept of comparative advantage andinternational trade is that some countries can produce

products at a lower price than others. Why is thisclause here?

Power realism, adjustment after historic protection and

unforeseen circumstances...


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The MFN clause had the following three exceptions:

Pre-existing preferential trading arrangements were

excluded from MFN clause. Thus Britain was allowed tomaintain preferences granted to former colonies under theBritish imperial preferences. Later, GATT also allowedpreferential treatment for developing countries.

Customs unions and free trade areas were also exempted

from MFN conditions. Under this exclusion, free tradeagreements within the EU, for example, need not beextended to non-EU countries but the assumption was thatfree trade areas would gradually expand membership andbecome increasingly global in scope.

A new contracting party to GATT could also be denied MFNprivileges by existing members. Indeed, when Japan joinedGATT in 1955, 14 member countries denied MFN privilegeson grounds of undesirable low wage competition.


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2. National treatmentwhich prohibited states fromdiscriminating against imports once these had

cleared all border measures and entered thedomestic market.


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Like the abortive ITO before it, GATT had a one state,

one vote principle and decisions required a majority

vote.

In practice, however, trade negotiations andagreements were based on the principle ofconsensus.

Amendments to the GATT required a two-third majorityexcept in the case of the MFN clause which requiredunanimity. Despite the absence of weighted voting.

GATT was more acceptable to the United Statesbecause it contained clear assurances that westerninterests would dominate. In 1965, however, anamendment and addition to GATT did provide forspecial consideration to be given developing countriesin, for example, stabilizing commodity prices and

improving access to markets in developed countries


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GATTs liberal achievements came from eight multilateral

tariff negotiating rounds. As a measure of thesenegotiations, average tariff on manufactured goodswas reduced from 47 percent in 1947 to below 5percent in 1990s.

Year Place/name Subjects coveredCountries

1947 Geneva Tariffs

231949 Annecy Tariffs

13

1951 Torquay Tariffs38

1956 Geneva Tariffs26

1960-1961 Gen-Dillon RoundTariffs 26

1964-1967 Gen-Kennedy RoundTariffs + anti-dumping 62


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1973-1979Tokyo RoundTariffs, non-tariff measures 102framework

1986-1994Uruguay Round Tariffs, non-tariff measures, rules,services, intellectual property, dispute settlement, textiles,

agriculture, creation of WTO, etc 123


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OPEC Oil Shocks

There were two "oil shocks" in the 70s.

The first was the increase in the price in thefall of 1973. This was a result of Nixondevaluing the dollar and abandoning the goldguarantee. See the Chronology below.

The second was in the summer of 1979 withthe Iranian Revolution


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Two Causes:

On August 15, 1971, the United States unilaterally pulledout of the Bretton Woods Accord taking the US off the

Gold Exchange Standard. The industrialized nationsfollowed suit with their respective currencies. Inanticipation of the fluctuation of currencies as theystabilized against each other, the industrialized nations

also increased their reserves (printing money) in amountsfar greater than ever before.

The result was a depreciation of the value of the US dollar,as well as the other currencies of the world.

Because oil was priced in dollars, this meant that oilproducers were receiving less real income for the sameprice. The OPEC cartel issued a joint communique statingthat, from then on, they would price a barrel of oil against

gold.

Th O i i f A b P l E i C i


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The Organization of Arab Petroleum Exporting Countries orthe OAPEC (consisting of the Arab members of OPEC,plus Egypt, Syria and Tunisia) proclaimed an oil

embargo. This was "in response to the U.S. decision tore-supply the Israeli military" during the Yom Kippur war.

To address these developments, the Nixon Administrationbegan negotiations with both Arab oil producers, and

with Egypt, Syria, and Israel to arrange an Israeli pullback. By January 1974 Henry Kissinger had negotiatedan Israeli troop withdrawal from parts of the Sinai. Thepromise of a negotiated settlement between Israel andSyria was sufficient to convince Arab oil producers to liftthe embargo in March 1974.


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The effects of the embargo were immediate. OPECforced the oil companies to increase payments

drastically. The price of oil quadrupled by 1974 tonearly US$12 per barrel (75 US$/m3).

This increase in the price of oil had a dramatic effecton oil exporting nations, for the countries of the

Middle East who had long been dominated by theindustrial powers were seen to have acquiredcontrol of a vital commodity. The traditional flow ofcapital reversed as the oil exporting nations

accumulated vast wealth.


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Such polices were called strategic trade policiessynonymous with state control over industry- tostimulate exports or bock foreign access to domestic

markets using promises, threats, or other bargainingtechniques.

Even in the US a law was passed (Omnibus trade andcompetitive act of 1988) called the Super 301-a

provision of US trade law to spur the administrationinto tougher action against other countries' allegedlyunfair trading practices.

It requires the United States Trade Representative

(USTR) to retaliate against countries that:deny adequate and effective protection of intellectual

property rights

or deny fair and equitable market access to the United

States exports that rely on property rights protection.


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It requires the USTR to create a list of priority foreigncountries that have failed to protect IPRssuccessfully. After investigation of the offending

country the US may institute immediate tradesanctions and import duties of restriction.


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Uruguay Round

Trade ministers from 90 countries met in Uruguay in1986, and issued a declaration launching the UruguayRound of trade negotiations.

They agreed to standstill and rollback existing levels oftrade protectionism. The objective was to restoreconfidence in GATT and contains the crisis ofprotectionism.

Decision to incorporate into GATT system those sectorsthat had previously been excluded from GATT purview,like agriculture and textile, and formulate rules to dealwith a more complex and globalized trading world.


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It took seven and a half years, almost twice the originalschedule. By the end, 123 countries were taking part. Itcovered almost all trade, from toothbrushes to pleasure

boats, from banking to telecommunications, from thegenes of wild rice to AIDS treatments. It was thelargest trade negotiation ever, and most probably thelargest negotiation of any kind in history.

However, although the expanded membership base com-plicated the task of negotiators.


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For developing countries this was the first round thatpromised relief. The GATT had operated like a richmans club because while it offered some concessions,

such as the Generalized System of Preferences* itfailed to promote liberalization in areas of greatestinterest to developing countries.

Agriculture had been excluded from GATT purview and

trade in textile was regulated by a highly restrictiveMulti Fibre Agreement (MFA) that allocated exportquotas to each developing country with a textileexporting capacity.

*Developed countries unilaterally offered to permit duty freeimports of selected commodities from developing countries.

Over time, as overall tariff structures in developed countries

came down to insignificant levels, duty-free status for

developing countries lost most of the potential advantages.


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The agreement on textile committed developedcountries to phase out MFA over a 10-year period.

At the end of the phase-out period, on January 1,

2005, MFA quotas were lifted and replaced withtariffs, albeit at relatively high levels, to be phasedout eventually


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On new issues, the UR extended GATTs reach to include

services trade, foreign investments (TRIMs, or TradeRelated Investment Measures), and intellectual propertyrights (TRIPs, or Trade Related Aspects of Intellectual

Property Rights).

These were issues of particular concern to developed OECDcountries, which generated 84 percent of all servicesexports and 90 percent of all investment flows.

The TRIMs agreement required developed countries toremove all non- conforming TRIMs within two years, thedeveloping countries within five years, and the leastdeveloped countries within seven years.

Developing countries, on the other hand, opposed the

inclusion of these sectors -because of a fear that theirinefficient domestic services sector, such as banking,insurance and telecommunications, would be swamped bywestern multinationals.


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The UR accord stipulated that non-tariff barriers toagriculture trade be replaced by tariffs and that alltariffs, including existing tariffs, be reduced by anaverage of 36 percent, over six years, in the case ofdeveloped countries and 24 percent, over 10 years, in

the case of developing countries.


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A final significant outcome of the UR was the

decision to establish a World Trade

Organization (WTO):

While GATT had progressively acquired a semi-institutional status, it was still not the idealmechanism for globalized economic relations. Amore formal institutional arrangement wasconsidered appropriate to the new realities.The URagreement approved its establishment and theWTO began operations in January 1995, replacing

the GATT.


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One of the main weaknesses of GATT was its dispute

resolution mechanism, which, in keeping with theoriginal distaste for legalism, relied on negotiations andconciliation rather than on legal adjudication. Thissystem may have suited the early GATT, when it was asmall institution composed largely of western countries,

with similar cultural, social, political and economicbackgrounds, but the increase in membership andcompositional diversity enhanced the need for a morerule-based adjudication procedure.

The WTO streamlined dispute resolution by establishingthe Dispute Settlement Body (DSB) to hear disputesbetween members. On average, the GATT dealt with six disputesa year but the WTO, in its first two years, dealt with 40 disputes peryear. By October 2004, the WTO had adjudicated in about 317 trade

disputes


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Tariffs have been all but eliminated in a wide varietyof sectors. This has meant that non-tariff tradebarriers have become more important since, in the

absence of tariffs, only such barriers significantlydistort the overall pattern of trade-liberalization.

The WTO's strengthened dispute resolutionmechanism was designed to have the authority to

sort out the fine line between national prerogativesof safety standards etc and unacceptable traderestrictions

Dispute Resolution at the WTO


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Disputes in the WTO are essentially about brokenpromises. WTO members have agreed that if theybelieve fellow-members are violating trade rules,

they will use the multilateral system of settlingdisputes instead of taking action unilaterally.

A dispute arises when one country adopts a tradepolicy measure or takes some action that one or

more fellow-WTO members considers to bebreaking the WTO agreements, or to be a failure tolive up to obligations.


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A third group of countries can declare that they have aninterest in the case and enjoy some rights.

If a case runs its full course to a first ruling, it should not

normally take more than about one year 15 monthsif the case is appealed. The agreed time limits areflexible, and if the case is considered urgent (e.g. ifperishable goods are involved), it is accelerated asmauch as possible.

The Uruguay Round agreement also made it impossiblefor the country losing a case to block the adoption ofthe ruling. Under the previous GATT procedure, rulingscould only be adopted by consensus, meaning that a

single objection could block the ruling. Now, rulings areautomatically adopted unless there is a consensus toreject a ruling any country wanting to block a rulinghas to persuade all other WTO members (including its

adversary in the case) to share its view.


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Although much of the procedure resembles a court ortribunal, the preferred solution is for the countriesconcerned to discuss their problems and settle the

dispute by themselves. The first stage is thereforeconsultations


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How long to settle a dispute?

60 days-Consultations, mediation, etc

45 days-Panel set up and panellists appointed

6 months-Final panel report to parties

3 weeks-Final panel report to WTO members

60 days-Dispute Settlement Body adopts report (if noappeal)

Total = 1 year-(without appeal)

60-90 days-Appeals report

30 days-Dispute Settlement Body adopts appealsreport

Total = 1y 3m-(with appeal)


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They further noted that

the Appellate Bodyand the disputesettlement panels votein secret, and thatthey could authorizenations to retaliateagainst violations ofthe trade agreementswith unilateral

sanctions.

WTO Di t S ttl t


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WTO Dispute Settlement

from a Development

PerspectiveProtection can undermine a developing countrys interest

in reallocating resources to the affected export sector,since poor countries tend to have fewer alternative

export markets, and fewer export goods.

As a result, the mere anticipation of such protectionismcan deter or dilute much needed trade reform indeveloping countries.

Dispute settlement system can help insure against thisrisk by maintaining market access once it is won


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But...

Developing countries face substantial hurdles in using

WTO dispute settlement.

1. Their lack of market size with which to crediblythreaten retaliation for noncompliance. Even with alegal victory in hand, a developing country may not be

able to compel the defendant to liberalize, since itsthreat to retaliate lacks credibility.

This may deter developing countries from filingcomplaints in the first place.

2. A developing country might also be reluctant to initiatea dispute because of fears of reprisals, such as thesuspension of foreign aid or unilateral tradepreferences


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3. Lack of legal capacity: To take full advantage ofWTO law, developing countries need the facility to

aggressively pursue their rights in the increasinglycomplex legal trade regime. It needs experiencedtrade lawyers to litigate a case, but also seasonedpoliticians and bureaucrats to decide whether it is

worth litigating a caseIt needs a staff to monitor trade practices abroad, but

also the domestic institutions to participate ininternational negotiations on complex issues, like

health and safety standards, which figure soprominently on the WTOs agenda.

Many developing countries lack even a single full-time WTO representative

H d l i


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However, developing

countries have been

winning disputes...Poorer complainants have filed and won concessions

from large industrialized states in a wide variety ofdisputes, with millions of dollars at stake.

These cases have involved exports of underwear(Costa Rica v. US), shrimp (Thailand and Pakistanv. US), wool shirts (India v. US), gasoline(Venezuela and Brazil v. US), sardines (Peru v.

European Communities) and poultry (Brazil v.European Communities), among other products

Why?


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These complainants have benefited from the factthat defendants worry about the normativecondemnation that goes along with a legal defeat,rather than threats of direct retaliation.

Defendants prefer to avoid being found noncompliant

because such a label may damage their prospects ofgaining compliance when they, in turn, file ascomplainants.

While it is true that larger countries can morecredibly threaten to retaliate, threats of retaliation are

not the key to the system.The inability of poor countries to retaliate is a problem,

but it is a separate problem that has nothing to dowith the utility of the dispute settlement procedure for

a developing country complainant.


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WTO Rounds Continued..

The organization is currently endeavoring to persistwith a trade negotiation called the DohaDevelopment Agenda (or Doha Round), whichwas launched in 2001 to enhance equitable

participation of poorer countries which represent amajority of the world's population.

However, the negotiation has been dogged bydisagreement between exporters of agricultural

bulk commodities and countries with largenumbers of subsistence farmers on the preciseterms of a 'special safeguard measure' to protectfarmers from surges in imports. At this time, the

future of the Doha Round is uncertain.


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On pharmaceuticals, underTRIPS, developingcountries argued for access to cheappharmaceuticals produced by countries like India

and Brazil to combat tropical diseases and healthepidemics, like AIDS.

In principle, any country had the right to manufacturepharmaceuticals developed by major drug

companies under compulsory licensing provisionsbut few developing countries had a domesticmanufacturing capacity to benefit from compulsorylicensing.


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India and Brazil, have relatively sophisticatedmanufacturing capabilities and produce generic

medications, under license from westernpharmaceutical companies, for a range of healthproblems confronting developing countries,including anti-retroviral medicines to address a

growing AIDS problem in Asia and Africa.Compulsory licensing provisions, however, prevented

producers of generic medicines from exporting toother countries.

Negotiations, however, became deadlocked whendeveloping countries demanded access togenerics for all health crises but the United Stateswas prepared to accept it for only a few specific

health epidemics, like TB, malaria and AIDS.


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The other main issue was agriculture and developedcountries that could not convince domestic interestgroups to accept freer trade in agriculture.

The main issues, as in the UR, were tariff protectionand subsidies.

In 2003, the OECD countries provided US$257 billionin various subsidies to their farmers, grosslydistorting global production and trade, particularly ofrice, sugar and milk.

In that same year the total Official DevelopmentAssistance (ODA) to developing countries by OECD wasonly about US$70 billion. In principle, developingcountries could forego development assistance ifdeveloped countries scaled back farm protection andpermitted imports from developing countries.

To press for a liberalization of agriculture


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To press for a liberalization of agriculturetrade, a number of developing countriesformed the Group of Twenty (G20) justbefore a WTO mid-term review of theDR in September 2003.

WTO convened in September 2003, inCancun, to review progress in the DR.The Cancun meeting negotiations

quickly degenerated into a farce whenthey pushed to have the so-calledSingapore Issues, such as tradefacilitation and government

procurement policies, added to thenegotiating agenda. Developingcountries, led by the G20, refused tobroaden the agenda without prioragreement on agricultural liberalization.

The G-20 accounts for

60% of the world'spopulation, 70% of itsfarmers and 26% ofworlds agriculturalexports


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Negotiations resumed after a one year hiatus butdifferences between the developed and developingcountries, especially on agriculture, could not be

reconciled. The DR was to have been concluded in2005 but that did not happen

The most recent round of negotiations, 2329 July2008, broke down after failing to reach a

compromise on agricultural import rules.


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Conclusions?

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