Chapter 5 - The Evolution of the Global Trade Regime PDF

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CHAPTER 5 The Evolution of the Global Trade Regime 1. Introduction 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 unce...

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CHAPTER 5

The Evolution of the Global Trade Regime 1. Introduction 

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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 Tariffs are a form of trade regulation. It is a source of government revenue. But in developed countries they give less importance. Today, its importance is superseded by non-tariff measures/barriers Trade agreements can serve as an effective means of trade liberalization

2. Historical Antecedents        

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By second quarter of 19 th century, campaign for free trade had begun as part of a broader effort of political reform in British society In 1848, Corn Laws were cancelled in Britain. The laws had provided high protection to agricultural products Between 1830s and 1870s, liberal commercial exchange flourished and 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 worsened by First World War and continued until after Second World War Growing nationalism until Second World War manifested (established) 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 (reacted) with further protectionism Global trade declined and broke down after 1930. World trade fell by about two-thirds by the mid-1930s In 1934, Reciprocal Trade Agreements Act (RTAA) in the United States was 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 By 1939, US concluded 21 agreements. All agreements made on most-favoured nation basis which slowed the negotiation process but also for the same reason extended the impact of the agreements more widely RTAA was successful in increasing the flow of international trade Public opinion became increasingly more supportive of free trade Experience in trade liberalization would become useful after the Second World War 1|Page

3. The ITO and the GATT  

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US was in a preponderant position for the first two decades of post-WW II period American values that were imparted (Communicated) on the international trade system  Trade liberalization which was problematic for European after the war  Multilateralism, intended to guarantee non-discrimination between all countries participating  Legal approach to international trade relations Although US approach prevailed on most issues, the trade regime has always been based on a negotiated consensus

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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 ratify the agreement In place of ITO, countries relied on and fall back on the General Agreement on Trade and Tariffs (GATT)

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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 ,through other measures, once tariffs were lowered  It was never intended to function as an international organization

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GATT principles, rules and norms i.  

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Principle of non-discrimination This is a cornerstone of the international trade system. Article I: most-favoured nation principle which addressed external discrimination. This principle had effect of evaluating economic over politics. Another aspect of non-discrimination, Article III: which obliged nations to treat foreign products not less favorable than domestic products with respect tax and other requirement. This addressed internal discrimination. Was difficult for nations to accept since this removed a whole range of policy tools that governments used to extend preferential treatment to domestic products. 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 Reciprocity This is normal aspect of negotiation. International trade promote this as a political imperative (Vital) where nation give tariff reduction in order to get the similar from the partner Derided (laugh at/mock) by economists as countries that unilaterally reduced tariffs would realize economic benefits Exceptions were made for special and differential treatment for developing countries. Coz can’t make equal treatment of unequal partners. Safeguards (Article XIX) Restrictive measures converted in to tariff protection, and then tariff reduced through multilateral negotiations. In these situations tariff reduction creates political problems. Temporary backtracking (go back) on commitments to allow for the orderly adjustment of domestic markets, for a period of time Commercial considerations Support for the value of the free market over government interventionism is implicit in the entire framework of GATT.

4. Multilateral Trade Negotiations 2|Page

GATT sponsored rounds of multilateral negotiations to liberalize trade.  First 4 rounds : 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 Kennedy Round – 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 to help to standardize the national policies – 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 Tokyo Round  1st: Focus was on non-tariff barriers (NTBs) to trade  Produced six legal codes that dealt with NTBs. The general thrust of the code negotiation was to effect a constitutional reform of GAAT law and to improve the openness and certainty of the rules governing the international trade.  These covers; i. Customs valuation procedures ii. Import licensing iii. Technical standards for products iv. Subsidies and countervailing duty measures v. Government procurement vi. Anti-dumping duty procedures  2nd: Tariff reductions was not the major focus. But, 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  3rd: GATT Articles, or “framework” agreements, were revised to clarify and improve GATT language on matters relating to developing countries. Such as;  Safeguard actions for developing purpose (infant industry promotion)  Trade measures taken to correct payment deficit  Export control  Deviation from Most favoured nation procedures for 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 a) Decision to launch Uruguay Round of negotiations turned on disagreement over followings;  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 since they concern to expand traditional exports to developing countries.  Further liberalization in textiles and agricultural products, which were of particular importance to developing countries b) Negotiations on services 3|Page

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By late-1980s, services accounted for over half of GDP of developed countries Services were negotiated separately from goods Services are “processes in which skills and knowledge are exchanged in order to meet a particular consumer need”. Include engineering consulting, financial intermediation, tourism, legal advice 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 new area? Due to the lack of information on trade in service, first had to make a common data base and then code of principles. Which later became as General Agreement on Trade in Services (GATS) Finally the Code of principles would have to be applied to the service sector

c) Investment  Investment was seen to be interchangeable with trade  Investment reinforces the effects of trade liberalization  There was considerable regulation by national authorities (importing country), in particular in “sensitive” industries  Negotiation of a multilateral investment agreement failed but agreement was reached on Trade-Related Investment Measures (TRIMs). Dealt with only a small proportion of issues raised. d) Trade-Related Aspects of Intellectual Property Rights (TRIPs)  Intellectual Property Rights was not well established in the international economy  Producers of high-tech products and pharmaceuticals required to internationalize the intellectual property protection that they enjoyed in their home countries  Developing countries viewed TRIPs as a potential barrier to trade. Ex: monopolies granted to pharmaceuticals, which was crucial to the public interest  Developing countries agreed on this issue as they felt their losses were compensated by gains elsewhere in the overall agreement e) Developing countries  Developing countries have been marginal players for most of the history of GATT  GATT focused mainly on trade (not economic development which was a main concern of developing countries)  Focused on tariff reduction (which was in conflict with the policy of import-substitution industrialization, for high protective tariff to force consumers to purchase domestic made products)  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 f) Why did developing countries change their position?  Developing countries benefitted from two underlying principles of the Uruguay Round i. Single undertaking: all issues of the negotiation were treated as a single package, with no exceptions ii. Consensus: agreement required the passive support of all participants  These principles combined to increase the power of small and medium size power at the Uruguay Round 4|Page

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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) Market-based economic reforms (improvement) introduced in many developing countries in the 1980s encouraged their governments to look more favourably on the market-based principles and objectives of the GATT The Uruguay Round Agreement represented the most far-reaching commitments made by developing countries in the international trade regime

5. The WTO     

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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. Have a legal personality.

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, liaison with WB & IMF) The WTO centralized the governance of the international trade system far more than GATT. The WTO is a "member-driven" organization Members are responsible for setting the agenda and carrying out the functions of the organization Through negotiations, members establish a rules-based system for regulating international trade Absence of consensus paralyzes the agenda and stops the WTO from dealing with problems Absence of consensus also raises that the WTO will be hidden as countries turn to other means to solve problems

Dispute settlements Understanding (DSU)  This is an important legal element drawn from the WTO agreement  The DSU was improved under WTO from its GATT predecessor in a number of ways  How panels were organized  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  Outcome of DSU process is legally binding  The complexity & costs of mounting litigation at the WTO are burdensome for developing countries

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