ECON5335 - International Economics Chapter 6 GATT, the WTO and the World Bank.

ECON5335 - International Economics

Chapter 6

GATT, the WTO and the

World Bank

In 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 was set up as part of Bretton Woods Conference in 1944. Idea was to house it under an ITO First met in 1947 in Havana, Cuba and agreement signed by 23 countries1947-51 (Torquay round): negotiations explored which commodities covered by agreement – difficult task1959-79 (Dillon, Kennedy and Tokyo): negotiations cut tariff rates on a variety of commodities and extended areas.1986-93 (Uruguay) extended GATT into new areas such as services, capital, intellectual property and agriculture. 125 countries participated1994: GATT agreed on formation of WTO the following year. 150 countries are members.2001: WTO “hosts” the Doha round2005: Deadline for completion of Doha missed after talks break down in Cancun

i. Negotiate about what you want to negotiate aboutii. Negotiate details of tariff reductionsiii. Negotiate opt-out clausesiv. Tie everything together into an agreement with possible concessions

where there are trade-offs between issues

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

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.

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

Current Director-General of the WTO: Roberto Azevêdo (Brazil)

4 previous DGs (3 year terms) Pascal Lamy (France) Renato Ruggeiro (Italy) Mike Moore (NZ) Supachai Panitchpakdi (Thailand)Principles1. MFN = “Most favored nation” Under the WTO agreements, countries cannot normally

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

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

3. Transparency“Binding” = getting countries to commit not to increase tariffsThis promotes predictability and “transparency”4. Promote freer trade to underscore economic advantages of

“comparative advantage”.

Revamped 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”

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

Doha round tried to put developing countries as the central focus of this roundRound to address: agriculture, services, intellectural property, anti-dumping, subsidies, regional agreements, environment, least developed economies, Singapore issues — trade and investment, trade and competition policy, transparency in government procurement, trade facilitation See: www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htm14th Sept 2003, on 4th day of meeting in Cancun, talks broke down as Brazil and other developing countries walked out of the meetingsMain issue agriculture and US and EU unwilling to budge: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 be given a dollar's worth of market access in developing country 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 either.” US’s Schwab: "We are deeply disappointed that the EU failed to exhibit similar restraint and hope this will not jeopardise the few chances we have left to save the Doha Round.”

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

X = other variablesInitial answer was “no”Rose then asked, does this mean that WTO doesn’t affect trade policy - answer here was definitive “no”So question has to be asked: why no effect?A: i) few demands placed on developing countries

ii) no progress on liberalizing agriculture or textilesiii) many countries just substituted quotas for tariffsiv) liberalization usually comes before membershipv) many other reasons why trade has grown post-WWII

Of course, not all economists agree with this view – some say that the econometrics used is not sophisticated enough to pick up this effect

President is Robert B. Zoellick (US)Headquartered in Washington DC

Has more than 10000 employees working in more than 100 offices worldwideConsists of International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) and both are owned by 187 countriesIBRD aims to reduce poverty in middle income countriesIDA aims to reduce poverty in low income countriesAlso International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID).With extras, this makes up World Bank Group (WBG)

The World Bank was set up at the Bretton Woods conference in 1944Main aim is funding projects that support reduction in global povertyIt lends to NGOs, organizations, and assists countries implement policies by providing loans.

Major reform to mandates after riots in Seattle and lots of criticism2 sets of projects now undertaken

Poverty reduction strategies – usually micro-financingCountry assistance strategies – usually specific large-project oriented

Also research into various facets of development economics – e.g. gender, conflict, health, culture, migration, infrastructure, governance