The World Trade Organization and Trade Lecture 2

Outline Historical background Overview The Basic Principles –Trade without discrimination –Predictable, growing access to market –Undistorted, fair competition –Transparency Do trade agreement work?

Why trade agreements? Why trade agreements exist? Barriers to trade generate profit opportunities: it pays off to lower barriers. It is not only the theory of comparative advantage. Someone will always potentially profit from free trade. The benefits of international trade are nothing else than the benefits of exploiting arbitrage opportunities (price differences) If this is true, why free trade is not pervasive in the world? Second-best arguments for protection: Market failures are compensated by trade policy The government has a stake: Electoral and tax earnings. Redistribution Infant industry argument Also:

Interest groups and protection-Political Economy arguments Those who benefit from trade most (consumers) are poorly organised, but those who loose are efficiently organised and lobby harder for protection (Olson). However, exporters can lobby too! (Rodrik)

Preferential trade agreements Balance of these forces result in preferential trade agreements (PTA’s) of different degrees. Fee trade agreement: groups of countries reduce or eliminate tariffs or impediments to imports from other countries in the group. Custom unions: In addition to the previous case, countries co-ordinate to set a common external tariff to imports from the rest of the world. Economic zone: Free movement of resources, not only merchandises and services. Problem: Too many small groups…. Coordination failure

Preferential trade agreements Two waves: First: Treaty of Rome Andean Pact, CARICOM, Etc… Non US participation Second: NAFTA, Mercosur, Andean Community, FTAA, ASAN. There is the possibility that a third wave is in the making, after the collapse of the Doha (Cancún) negotiations. This has lead to a constellation of agreements and very complicated rules of origin generating multitude of disputes and potential agreements.

Multilateral agreements Multilateralism GATT  WTO Coordination mechanism for achieving mutually beneficial trade outcomes (response to a coordination failure, ie. to successive retaliations).

History 1947 GATT is drawn to record the results of trade negotiations between 23 countries. Enters (provisionally) in force on January US administration abandons efforts to seek congressional support for the International Trade Organization First four rounds of tariff negotiations 1957 Creation of the EEC 1962 Derogations to the GATT rules in the areas of cotton and fibers were negotiated. Later to evolve in to the Multifibre agreements Kennedy Round. UNCTAD is created to press for trade measures to favor the developing countries

History cont The Tokyo round. Multifibre agreement negotiated in1974 to restrict export growth, and extended several times thereafter Uruguay Round of negotiations. April : The Marrakech protocol signed, establishing the creation of the World Trade Organization Doha Round of negotiations, TRIPS and Agriculture

The World Trade Organization (WTO/GATT) Duration of GATT rounds and number of countries involved.

Overview International Organization begins to operate on January 1, 1995 Membership: approx 140 countries Secretariat: 550 staff members, headed by a Director General, based in Geneva Budget (2002): 140 million Swiss francs More infos:

Overview The Mission of the WTO Raise standards of living Ensure full employment Growing volume of real income and effective demand through trade Seeking to protect and preserve the environment Secure for developing countries (especially LDC‘s) a share in the growth of international trade that is commensurate with the needs of their development

Functions Administring and implementing the multilateral and plurilateral trade agreements Forum for multilateral trade negotiations Dispute settlement Overseeing national trade policy Cooperation with IMF and World Bank

WTO: Basic Principles (1) Trade without discrimination (2) Predictable and growing access to market (3) Undistorted, fair competition (4) Transparency

(1) Trade without discrimination MFN clause (art 1) –Members are bound to grant the products of other members treatment not less favorable than that accorded to the products of any other country National Treatment (art 3) –Once goods have cleared customs, imported goods must be treated no less favourably than the equivalent domestically-produced goods.

(1) Trade without discrimination Exception: Special and Differential Treatment of Developing countries Two components: –Protection component: Longer period to implement tariff commitments –Market access: Preferential access to developed countries market under the generalized system of preferences Both measures are intended to be temporary, and are supposed to promote trade liberalization in developing countries

(1) Trade without discrimination In reality, the provisions have been criticized because they do not produce incentives for trade liberalization Examples: –Korea cut nominal tariffs by 6% after being dropped by the US –Samoa, after being dropped announced a drastic liberalization to lead to complete trade liberalization by 2010 More generally: Change of focus on the issue after the Uruguay Round of negotiations, reflecting broader change of view on the role of trade in promoting development and growth

Outline An economic evaluation of the GATT- WTO –Rose AER (2004) –Rose JIE (2004)

Source: Subramanian and Wei (2003)

GATT-WTO Evaluation Rose (AER 2004): We don‘t really know that the WTO increases (or the GATT increased) trade Rose (JIE 2004): There is no evidence that GATT/WTO members actually have more liberal trade policies

Data WTO website for GATT/WTO accession Began in 1948 (covered 32 entities) –1960: 50 “contracting parties” –1970: 90c –1990: 112 –Now: 158 with 29 “observers” GSP bilateral preferences from UN’s Operation and Effects of the Generalized System of Preferences –Interpolate from 1974, 1979, 1984 (data imperfect)

Rose JIE (2004) Basic question: Do WTO members have more liberal trade policies? No. Most measures of trade policy are not correlated with GATT-WTO membership When trade liberalization occurs, it normally lags behind GATT entry by many years GATT/WTO often admits countries that are closed and remain closed for years after membership

Seminar Questions for next week Read the article on the Economist “the cancun Challenge and then answer the following questions: 1. What are trade agreement and why are they important? 2. Do you think that Multilateral trade agreement are better than Preferential trade agreements and why? Motivate carefully your answer explaining the criterion you are using to evaluate different agreements 3. Consider the two tables of data shown in the lecture. Do you conclude that trade agreement have been effective in promoting trade? Explain carefully your answer.