The Evolution of the Global Trade Regime - Unife

The Evolution of the Global Trade Regime - Unife

Chapter 5 The Evolution of the Global Trade Regime Chapter by Gilbert R Winham John Ravenhill Global Political Economy, 3rd edition Lecture Plan • ...

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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a source of government revenue – Used to protect domestic producers from foreign competition – Today, its importance is superseded by non-tariff measures/barriers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for free trade had begun as part of a broader effort of political reform in British society • In 1848, Corn Laws were repealed in Britain – The laws had provided high protection to agricultural products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 marketbased principles and objectives of the GATT – The Uruguay Round Agreement represented the most farreaching 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 rulesbased 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