Bretton Woods, GATT, and the WTO PDF

Preview

Summary

Warning: Popup annotation has a missing or invalid parent annotation. Warning: Popup annotation has a missing or invalid parent annotation. Warning: Popup annotation has a missing or invalid parent annotation. Warning: Popup annotation has a missing or invalid parent annotation. Warning: Popup annot...

Description

BRETTON WOODS, GATT, AND THE WTO – TRADE IN A POLITICIZED WORLD

Trade policy is politically contentious because it has important domestic distributional consequences. As World War II drew to a close, John Maynard Keynes and Harry Dexter White were looking for ways to answer the question – how could an open global economy be restored in a world where domestic politics reigned supreme? Historical experience showed that when domestic needs clash with the requirements of the global economy, domestic needs ultimately emerge victorious. Keynes and White realized that it was better to accept this and build the safety valves into the system than to ignore it and risk total collapse.

The Bretton Woods Model The system they crafted came to be called the Bretton Woods regime, after the New Hampshire resort town at which Keynes, White, and other officials from forty-four nations met in July 1944 at a conference to draft the new rules. The deal created two new international organizations: the

considerations; loomed large in both of their minds. Yet the agreement that emerged from Bretton Woods transcended narrow national interests. The new regime allowed enough international discipline and progress towards

to

ensure vibrant world commerce. However, it . — full employment, economic growth, equity, social insurance, and the welfare state — and not the other way around. The goal would be

, not hyperglobalization.

The most notable American contribution to the postwar international economic system was multilateralism — rule-setting through international organizations, based on the principle of nondiscriminatio.

— the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade (GATT) —

e. This was a

very important innovation. Even though

, multilateralism

endowed these institutions with a

of the American power that

backed them up. They

or other major economic

powers, but

.

The

during the fifty years subsequent to the Bretton

Woods Conference was the

Even though the GATT was not constituted formally as a full-fledged

organization like the IMF or the World Bank, it was managed by a small secretariat in allowed it to become

This

.

Despite a slow start, successive rounds of multilateral trade negotiations (eight in all between 1947 and 1995) managed to

place since the 1930s and reduce

from their postwar heights. , considerably faster than anything experienced to date.

also

at a higher rate than ever before in rich and poor nations alike — both a cause and effect of the rapid rise in trade. In terms of the breadth and depth of economic progress, the Bretton Woods regime eclipsed all previous periods. Except for one odd thing:

As we have seen,

globalization requires a significant reduction in transaction costs in cross-border trade and finance. This did occur in certain areas. Trade in most manufactured products among industrial countries was progressively and substantially liberalized.

What pushed globalization along instead was the background of economic growth, equity, security, and stability that the Bretton Woods compromise helped sustain. It was seen that healthy national economies make for a bustling world economy, even in the presence of trade controls.

Consider the long list of areas liberalization barely touched.

Manufacturing sectors that were liberalized but began to face significant competitive threat from lower-cost/higher-productivity exporters soon received protection. So the

ed

from 1974 on by the Multi-Fibre Arrangement (MFA), a set of

.

The 1980s witnessed the spread of voluntary export restrictions (VERs), arrangements whereby (typically) Japanese exporters of autos, steel, and some other industrial products undertook to keep their exports within specific quotas. Meanwhile, policies. They typically were not required to offer tariff “concessions” during GATT negotiations. They had recourse to various GATT clauses that allowed them to resort to limitations on imports virtually on a permanent basis. Even for the industrial countries, the rules contained loopholes wide enough for an elephant to pass. business could buy itself protection through the GATT’s Anti With the AD arrangement, the exporter had sold its products at “less than normal value” and caused “injury” to the competing industry s could easily manipulate the notion of “less than normal value.” And punitive tariffs could be imposed even if the behavior in question constituted normal commercial practice. These

to obtain custom-made protection.

Finally,

If a government thought another one had

violated the rules, it could ask a GATT panel to adjudicate. If the panel ruled for the plaintiff and the panel’s report was approved by GATT’s membership, the guilty party had to change the offending policy or else the plaintiff was entitled to compensation. The only catch was that approval of the panel report required a unanimous decision. Every single member of GATT, including the government that had been found in violation of the rules, had to sign off on it. . So, the GATT rules left and they were the ensuing

they were

where they existed;

These features made the institution obviously deficient — and made , much more attractive from the

perspective of free trade. But to find fault with the GATT regime because it fell considerably short of free trade would be to judge GATT from an inappropriate perspective.

The considerable maneuvering room afforded by trade rules allowed advanced nations to build

. Even

in the developing world, national efforts were directed at fostering industrialization and economic growth. There was absence of strict external discipline. GATT’s purpose was never to maximize free trade. It was to achieve the maximum amount of trade

Much of the trade in manufactures carried out among advanced countries at similar levels of income

. Other kinds of trade —

in agriculture, say, or with developing countries — were different. They threatened farming groups, garment producers, or low-skilled workers with sharp income losses.

The WTO Regime: Striving for Deep Integration The creation of the World Trade Organization (WTO) in 1995, after nearly eight years of negotiations and as the culmination of the so-called “Uruguay Round” (the last under the GATT), ushered quite a different understanding. Along with the onset of financial globalization around 1990, .

What lay behind the transition? In part, the GATT became a victim of its own success. esented their desire to do it “even better,” by removing many of the impurities and shortcomings in the GATT regime.

and became increasingly willing to submit themselves to such global rules in their drive to Entangled with these changes was an important the

. The 1980s were the decade of was in the ascendancy, producing what has been

variously called the

. The belief system

combined excessive optimism about what markets could achieve on their own with a very bleak view of the capacity of governments to act in socially desirable ways. This new vision regarded any obstacle to free trade as an abomination to be removed. Correspondingly, the WTO envisaged much broader coverage than anything else accomplished under the GATT.

, two areas which had eluded trade negotiators in the past, were

now firmly

. In services, countries were required to specify areas they

were willing to open up, and the extent of liberalization varied across countries and sectors such as banking and telecoms. In agriculture, import quotas were to be phased out and converted into tariffs and subsidie s. The quota regime of the Multi-Fibre Arrangement, which governed trade in textiles and clothing, would also be phased out within a decade. In addition, there were new rules on patents and copyrights, requiring

ubsidies. And there were prohibitions on government rules requiring firms to use local content or limit their imports in relation to their exports. For the first time,

except for the poorest among them which

remained exempt, h

The

of the WTO was a

. A new appellate court gave

recourse to countries on the losing side of a panel decision. But the appellate body’s decision — whether in favor of the plaintiff or the defendant — would become final only if it was not reversed collectively by every single member of the organization. Evading the trade regime’s judicial verdict had been child’s play

under the GATT; now it became virtually impossible. The new process could be lengthy and open to delaying tactics. But the significance of the new dispute settlement system cannot be underestimated. It takes multilateralism to new heights. Countries that lose their cases have to remove the offending policies or provide compensation to the plaintiff. This is as true of big, powerful counties as small ones. as it did in cases involving U.S. tax and environmental policies. What have WTO cases been about? One of the most contested cases that came before the WTO was the European ban on hormone-treated beef. The European Union (EU) directive, which went into effect in 1989 following years of intense pressure from consumer groups, effectively shut out U.S. beef exports to Europe. In one of its best-known decisions, the WTO Appellate Body ruled in 1998 that the European Union’s prohibition of hormone

the European Union has failed to comply with WTO’s ruling, risking . Other examples of the WTO’s reach abound. In one of the earliest complaints filed under the WTO, U.S. Also, automotive industry promotion programs in India, Indonesia, and China, patent rules on pharmaceuticals and agricultural chemical products in India, and credit subsidies for the aircraft industry in Brazil have all been found inconsistent with WTO rules. All these cases led to the policies in question being modified, except for the hormone beef case, which is yet to be resolved. Such rulings have raised the ire of anti-globalization advocates and made the WTO a dirty word in many circles. Nevertheless, we should note that the

The WTO’s difficulties hit a high public note in November 1999 during the trade body’s meeting in Seattle. A disparate assortment of demonstrators — ranging from labor and consumer advocates to students to anarchists — . There were two main

axes of conflict.

by the results of the Uruguay Round; they sought

as the rich countries wanted.

Two years later, trade ministers had better luck when they met in

— an emirate in the Middle

East. They were now able to launch a new round of negotiations, christened the “Development Round.” Notably, a

As subsequent events demonstrated, the negotiations have stalled several times since 2001 and have yet to be concluded. As time went on, it became clear that . Academic studies underscored that the removal of European subsidies would actually

by raising the prices they

would have to pay for their food imports. world’s poor. An increase in world prices for cotton, a non

Robert Lawrence makes a useful distinction between “shallow” and “deep” versions of global integration. Under

— —

.

Trade and Wages in the Real World A wave of academic studies during the nineties downplayed the The

, but the evidence at

the time seemed to point to other instigating factors. In particular, was “skill biased technological change” —

that raised the

while reducing the demand for less educated workers. However, in 2008, Paul Krugman said that globalization’s negative effects on domestic equity could not be written off so easily. Krugman cited

since the mid-1990s which he felt intensified the

.

. China has penetrated a large share of the American market and wages in China are a tiny fraction of those in the United States (Krugman cites a ratio of 3 percent). These facts suggest that , particularly for workers at the low end of the income distribution. These conclusions are controversial among economists, and even Krugman has had to admit that the evidence is not all there. A more detailed look at trends in distribution and in trade exposes some By some measures, . Much of China’s exports are in technologically sectors such as computers, where they

to

the wages of low-skill workers. Then there are ways in which China’s exports may have improved matters by reducing poor households’ cost of living: China tends to exports goods that make up a large share of

—

—

Even if the economywide consequences are small, however, they provide . Consider a shoe machine operator in the United States. It is inconceivable that this change would not have had a substantial impact on his or her wages. Indeed, according to one estimate, shoe machine operator’s earnings over this period. Similar effects hold for many other occupations in the

Krugman is not the only prominent economist who has been having second

a

staunch free trade advocate until recently, wrote a couple of remarkable opinion pieces in which he . The opposition to globalization, he said, reflects a “growing recognition by workers that what is good for the global economy and its business champions [is] not necessarily good for them.” He agreed that there were “reasonable grounds” for this view. Greater global integration “places of this pressure’’. Alan Blinder, a Princeton professor and former vice chairman of the Federal Reserve Board, warned of the “disruptive effect” of what he called “the next Industrial Revolution.” Thanks to new information and communication technologies, certain medical and education services, and financial services, are now increasingly

. He

points out that the

The

that Blinder talks about

larger

and larger parts of the economy reorganize along the lines of comparative advantage. It is a Broad-based economic growth could help diminish the tensions, but that objective would . To free trade fundamentalists, none of these arguments weakens the case for trade liberalization. Take Jagdish Bhagwati, the Columbia University economist and prominent free trade advocate.

But more fundamentally, he thinks that these authors draw the wrong policy lessons. If trade makes some people worse off and exacerbates inequality, the correct response is to enhance social safety nets and adjustment assistance.

This argument is fine in principle. But the

The reality is that we lack the domestic and global strategies needed to manage globalization’s disruptions....