ECON3315 International Economic Issues

ECON3315ECON3315International Economic IssuesInternational Economic Issues

Instructor: Patrick M. CrowleyInstructor: Patrick M. Crowley

Issue 4: GATT and the WTO

OverviewOverview

GATT – some history and backgroundGATT – some history and background GATT rounds – how it workedGATT rounds – how it worked Uruguay roundUruguay round GATT rounds – what was achieved?GATT rounds – what was achieved? Frustrations and deadlockFrustrations and deadlock The WTO – organizationThe WTO – organization Dispute settlement mechanismDispute settlement mechanism Case study: US gasolineCase study: US gasoline The Doha roundThe Doha round Issue: does GATT/WTO membership Issue: does GATT/WTO membership

increase trade?increase trade?

GATT backgroundGATT backgroundIn mid-1920s US became more protectionist.

After 1929 stockmarket crash, Smoot-Hawley Tariff Act enacted, raising US tariffs by up to 60%

Madsen (2002) estimates that effect of this and retaliation by other countries (“beggar-thy-neighbor”) reduced world trade by 14%

In 1944, US and UK were determined not to let this happen again, and so idea of multilateral negotiations on trade under an ITO mooted

GATT – some history and backgroundGATT – some history and background

GATT was set up as part of Bretton Woods Conference in GATT was set up as part of Bretton Woods Conference in 1944. Idea was to house it under an ITO 1944. Idea was to house it under an ITO

First met in 1947 in Havana, Cuba and agreement signed by First met in 1947 in Havana, Cuba and agreement signed by 23 countries23 countries

1947-51 (Torquay round): negotiations explored which 1947-51 (Torquay round): negotiations explored which commodities covered by agreement – difficult taskcommodities covered by agreement – difficult task

1959-79 (Dillon, Kennedy and Tokyo): negotiations cut tariff 1959-79 (Dillon, Kennedy and Tokyo): negotiations cut tariff rates on a variety of commodities and extended areas.rates on a variety of commodities and extended areas.

1986-93 (Uruguay) extended GATT into new areas such as 1986-93 (Uruguay) extended GATT into new areas such as services, capital, intellectual property and agriculture. 125 services, capital, intellectual property and agriculture. 125 countries participatedcountries participated

1994: GATT agreed on formation of WTO the following year. 1994: GATT agreed on formation of WTO the following year. 150 countries are members.150 countries are members.

2001: WTO “hosts” the Doha round2001: WTO “hosts” the Doha round 2005: Deadline for completion of Doha missed after talks 2005: Deadline for completion of Doha missed after talks

break down in Cancunbreak down in Cancun

GATT rounds – how it workedGATT rounds – how it worked

i.i. Negotiate about what you want to negotiate aboutNegotiate about what you want to negotiate about

ii.ii. Negotiate details of tariff reductionsNegotiate details of tariff reductions

iii.iii. Negotiate opt-out clausesNegotiate opt-out clauses

iv.iv. Tie everything together into an agreement with possible Tie everything together into an agreement with possible concessions where there are trade-offs between issuesconcessions where there are trade-offs between issues

Uruguay roundUruguay round

GATT rounds – what was achieved?GATT rounds – what was achieved?PLUSES

8 successful rounds led to significant tariff reduction – roughly 40% to 5% for industrialized countries.

This boosted world trade – comparison of exports after WWI and WWII shows this.

Other “spin-off” side agreements as common interests understood (e.g. govt procurement

MINUSES

Agriculture was “put aside” in the 1955 talks, but is now back on the table.

Anti-dumping measures and VERs not tackled in the GATT talks…

Source: Irwin, in Eichengreen (1995)

Also dispute mechanism poorly designed

Frustrations and deadlockFrustrations and deadlock

In 1950s widespread frustration with the GATT process and little progress made.

Caused some countries to decide to use Article XXIV to set up a preferential trading area – e.g. European Community in 1958.

This led to a split in the economics profession, with Rudiger Dornbusch (MIT) applauding these “regional trade agreements” and Jagdish Bhagwati (Columbia) fiercely opposing them as detracting from multilateral efforts.

Only in the Uruguay round did the impetus to reducing tariffs resume and substantially expand on previous achievements

In Uruguay though, agriculture was a particularly contentious issue as both the EU and the US have vested interests in retaining protectionist measures in this area.

Decision in Uruguay round to begin talks in other areas, and this required an umbrella organization, so WTO was formed.

WTOWTO

Director-General: Pascal Lamy (France)

HQ: Geneva, Switzerland

Staff: 635

Formed in 1995 to “house” the GATT as other negotiations began to reduce trade barriers

Now we have GATT, GATS, and TRIPS negotiations running side by side in each round of talks

WTO organizationWTO organization

3 previous DGs (3 year terms)3 previous DGs (3 year terms) Renato Ruggeiro (Italy)Renato Ruggeiro (Italy) Mike Moore (NZ)Mike Moore (NZ) Supachai Panitchpakdi (Thailand)Supachai Panitchpakdi (Thailand)PrinciplesPrinciples1. MFN = “Most favored nation” 1. MFN = “Most favored nation” Under the WTO agreements, countries cannot Under the WTO agreements, countries cannot

normally discriminate between their trading normally discriminate between their trading partners. Lower customs duty rate for one partners. Lower customs duty rate for one country has to be extended to all other WTO country has to be extended to all other WTO members.members.

2. “National treatment” = treating foreign firms as 2. “National treatment” = treating foreign firms as if they were domestic firmsif they were domestic firms

WTO organizationWTO organization

3. Transparency3. Transparency

““Binding” = getting countries Binding” = getting countries to commit not to increase to commit not to increase tariffstariffs

This promotes predictability This promotes predictability and “transparency”and “transparency”

4. Promote freer trade to 4. Promote freer trade to underscore economic underscore economic advantages of advantages of “comparative advantage”.“comparative advantage”.

Dispute settlement mechanismDispute settlement mechanismRevamped under Uruguay round

Panels of experts settle disputes

1995-2005:

332 dispute cases raised

Only 132 went to a full panel

Most settled amicably “out of court”

Case study: US imports of gasolineCase study: US imports of gasoline

United States applied stricter rules on the chemical characteristicsof imported gasoline than it did for domestically-refined gasoline.

Venezuela (and later Brazil) said this was unfair because US gasoline did not have to meet the same standards — it violated the “national treatment” principle

The Doha roundThe Doha round Doha round tried to put developing countries as the central focus Doha round tried to put developing countries as the central focus

of this roundof this round Round to address: agriculture, services, intellectural property, anti-Round to address: agriculture, services, intellectural property, anti-

dumping, subsidies, regional agreements, environment, least dumping, subsidies, regional agreements, environment, least developed economies, Singapore issues — trade and investment, developed economies, Singapore issues — trade and investment, trade and competition policy, transparency in government trade and competition policy, transparency in government procurement, trade facilitation procurement, trade facilitation

See: See: www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htm 1414thth Sept 2003, on 4 Sept 2003, on 4thth day of meeting in Cancun, talks broke down day of meeting in Cancun, talks broke down

as Brazil and other developing countries walked out of the as Brazil and other developing countries walked out of the meetingsmeetings

Main issue agriculture and US and EU unwilling to budge:Main issue agriculture and US and EU unwilling to budge:EU’s Mandelson: "What they're saying is that for every dollar that EU’s Mandelson: "What they're saying is that for every dollar that they strip out of their trade-distorting farm subsidies, they want to they strip out of their trade-distorting farm subsidies, they want to be given a dollar's worth of market access in developing country be given a dollar's worth of market access in developing country markets. That is not acceptable to developing countries and it's a markets. That is not acceptable to developing countries and it's a principle that I, on Europe's behalf, certainly couldn't sign up to principle that I, on Europe's behalf, certainly couldn't sign up to either.” either.” US’s Schwab: "We are deeply disappointed that the EU failed to US’s Schwab: "We are deeply disappointed that the EU failed to exhibit similar restraint and hope this will not jeopardise the few exhibit similar restraint and hope this will not jeopardise the few chances we have left to save the Doha Round.”chances we have left to save the Doha Round.”

Issue: does GATT/WTO membership increase Issue: does GATT/WTO membership increase trade?trade?

Rose (2004) uses a gravity model to estimate whether WTO/GATT Rose (2004) uses a gravity model to estimate whether WTO/GATT membership boosts trade.membership boosts trade.

X = other variablesX = other variables Initial answer was “no”Initial answer was “no” Rose then asked, does this mean that WTO doesn’t affect trade Rose then asked, does this mean that WTO doesn’t affect trade

policypolicy

- answer here was definitive “no”- answer here was definitive “no” So question has to be asked: why no effect?So question has to be asked: why no effect?

A: i) few demands placed on developing countriesA: i) few demands placed on developing countries

ii) no progress on liberalizing agriculture or textilesii) no progress on liberalizing agriculture or textiles

iii) many countries just substituted quotas for tariffsiii) many countries just substituted quotas for tariffs

iv) liberalization usually comes before iv) liberalization usually comes before membershipmembership

v) many other reasons why trade has grown post-WWIIv) many other reasons why trade has grown post-WWII Of course, not all economists agree with this view – some say that Of course, not all economists agree with this view – some say that

the econometrics used is not sophisticated enough to pick up this the econometrics used is not sophisticated enough to pick up this effecteffect