Topic 6 GATT, WTO and trade regulations PDF

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Topic 6: GATT, WTO and Trade RegulationsQ1. Discuss the key principles that underpin the GATT and the World Trade Organization. Clearly explain the rationale for these principles and whether they have been effective in reducing trade barriers between countries. General Agreement on Tariff and Trade ...

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Topic 6: GATT, WTO and Trade Regulations Q1. Discuss the key principles that underpin the GATT and the World Trade Organization. Clearly explain the rationale for these principles and whether they have been effective in reducing trade barriers between countries. -

General Agreement on Tariff and Trade (GATT) The first major postwar step towards liberalization of trade on a multilateral basis. Signed in 1947 GATT was crafted as an agreement among contracting parties, the member nations, to decrease trade barriers and place all nations on an equal footing in trading relations. It is a set of agreements among countries around the world to reduce trade barriers and establish broad rules for commercial policy. It was also 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. It is a result of unplanned actions. In 1995 the GATT transformed into the WTO

Principles: 1. Trade without discrimination - According to GATT, a member country should not discriminate between its trading partners. Most favored nation principle and national treatment principle. i) MFN principle: “Favor one, favor all” if the US reduces a tariff for another member, it must reduce its tariffs by the same for all under the no discrimination principle. - Exceptions: Countries can establish a FTA that applies only to goods traded within the group, or developing countries can allow special access (low tariffs) to their market. A country may also increase trade barriers against goods that are deemed to be traded unfairly from certain countries. - Effectiveness: A nation has the ability to punish unfriendly nations with high import tariffs on their goods and reward friendly nations with low tariffs. E.g. in 2016, the US granted MFN status to most of the nations with which it trades, with the exceptions of Cuba and North Korea ii) National Treatment principle - GATT members had to treat imported and domestically produced goods equally, once the foreign goods entered the market. Therefore, domestic regulations and internal taxes could not be biased against foreign products. Tariffs could apply to foreign products when they entered a country as imports. 2. Promoting Freer Trade The GATT promoted freer trade through its role in the settlement of trade disputes. Promoted the use of tariffs rather than quotas to protect their domestic industries. 3. Predictability: through binding and transparency When countries agree to open their markets and services, under GATT, they are ‘bound’ by their commitments. These bindings amounted to ceilings on import tariff rates. For developed countries, the bound rate have generally been the rates actually charged.

The GATT system tried to improve predictability and stability by making countries’ trade rules as clear and public (transparent) as possible. Countries were required to disclose their trade policies and practices publically within the country or by notifying the GATT secretariat. 4. Multilateral Trade Negotiations GATT used “multilateral” which involved all members participating in the negotiations to promote freer trade by reducing tariffs and non-tariff barriers - Kennedy Round: 1964-1967, 62 participants, achieved a 35% tariff reduction on manufactured goods - Tokyo Round: 1973-1979, 99 participants, achieved a 33% tariff cut predominantly on finished goods, also cuts to NTB’s. This round allowed relatively low tariffs, allowing to freer trade and liberalization for industrialized countries. - Uruguay Round: 1986-1993, 125 participants, achieved an across-the-board tariff cuts for industrial countries and achieved a 34% tariff cut. NTB’s were also reduced or eliminated. - Doha Round: 2002 …, 149 participants, aimed to decrease trade-distorting subsidies on farm goods; slash manufacturing tariffs by developing countries; cut tariffs on textiles and apparel products that poor countries especially cared about; free up trade in services; and negotiate global rules in four new areas – competition, government procurement and trade facilitation. Developing countries couldn’t agree and hence the negotiations broke down. World Trade organization (WTO) - In 1995, the GATT was transformed into the WTO - Requires that its members not only adhere to GATT rules but also to the broad range of trade pacts that have been negotiated under GATT auspices in recent decades - In 2019, the WTO consisted of 164 nations accounting for over 97% of world trade. - The WTO is the watchdog of international trade, regularly examining the trade regimes of individual members. - The WTO also settles trade disputes and acts as a third party Future of the WTO: - Failure of the Doha round has left observers question whether the future of the WTO. - The BRIC countries consider themselves poor enough to need protection for their industries while the rich see them as major economic competitors Q2. Discuss the most common criticisms of the World Trade organization. 1. Does the WTO reduce National Sovereignty? Yes because the US benefit from WTO trade dispute settlement by having a set of rules which it can use to hold other countries accountable for their trade actions. No because the US was careful enough to to structure the WTO dispute settlement rules to preserve the rights of Americans. The US cannot be forced to change its laws. America retains full sovereignty in its decision of whether or not to implement the panel’s recommendation. 2. Does the WTO harm the environment? Increased trade results in increased damage to the environment “Race to the bottom” – Many countries will export highly polluting or environmentally intensive production to areas with relatively low environment standards. During the 1990’s, the US banned imports of Mexican tuna caught in ways that drown dolphins but the WTO ruled against this ban as it was against world trade law. The free-trade policies of the WTO contradicted the goal of environmental quality.

There is a need for tougher environmental laws if firms wish to increase production/trade. 3. Failed to remove tariffs on agriculture - One of the aims of the Doha Round was to minimize tariffs on agricultural and industrial goods, to remove agricultural and farm subsidies and to relax non-tariff barriers. Due to the large number of participants, these objectives cannot be met to please all. 4. Slow progress - The WTO should aim to get each deal completed in a matter of months, not years. It is better to have some small trade deals than none at all. Q3. Discuss the impact of the World Trade Organization Trade Remedy laws that are designed to produce a fair trading environment. Please limit your discussion to the impact of countervailing duties and anti-dumping duties. Designed to produce a fair trading environment for all parties engaging in international trade. Countervailing duties = Subsidized imports. Dumped imports = Anti-dumping duty Countervailing duties: Protection against foreign export subsidies - neutralize the negative effects of subsidies. - laws that allow the imposition of import duties when a U.S. industry is allegedly harmed by subsidies in the exporting country - The WTO views export subsidies as unfair competition. Import countries can retaliate by levying a Countervailing duty. The size of the duty is dependent on the amount of the export subsidy. The purpose is to increase the price of the imported good to its fair market value. - Once the foreign nation stops subsidizing exports of that product, the countervailing duty is removed. - Example: Lumber imports from Canada o US demand for lumber < domestic supply of lumber o US import lumber wood from Canada and feel they have a disadvantage by subsidies that the Canadian government provide its lumber producers. o It costs the US higher fees to cut trees than in Canada. (to allow Canadian sawmills to be profitable) - The Canadian government agreed to increase cutting fees which reduced US imports by 14% and increased the price of lumber housing by 20-35%. - In order to resolve the dispute, the Softwood Lumber Agreement was implemented with an expiry of 2015. - In 2017, failure to reach a new lumber agreement led to Trump implementing tariffs of up to 24% on Canadian lumber shipped to the US. Trump highlighted that the tariff was to level the playing field for American lumber companies. Anti-dumping Duties: Protection against Foreign Dumping (imports) The objective of US anti-dumping policy is to offset two unfair trading practices by foreign nations: 1. export sales in the US at prices below the average total cost of production, and 2. price discrimination in which foreign firms sell in the US at a price less than that charged in the exporter’s home market. - Both practices inflict economic hardship on U.S. import-competition producers; by reducing the price of the foreign export in the US market, they encourage US consumers to buy a smaller quantity of the domestically produced good.

There must be evidence of 1) dumping 2) Material Injury, such as lost sales, profit or jobs, and 3) a link between the dumped imports and the alleged injury. - If found guilty of dumping, and is causing material injury to the domestic industry, then the US response is to impose an antidumping duty on dumped imports equal to the margin of dumping. - The effect of the duty is to offset the extent to which the dumped goods’ prices fall below average total cost, or below the price at which they are sold in the exporters’ home market. - Anti-dumping duties increase the price of imported goods, and decrease consumer welfare.  Even though dumping may benefit consumers in the short run, they contend that it is unfair for domestic producers to have to compete with unfairly traded goods. -

Q4. Evaluate the effectiveness of Economic Sanctions. - Economic sanctions are government-mandated limitations placed on customary trade or financial relations among nations. They have been used to protect the domestic economy, reduce nuclear proliferation, set compensation for property expropriated by foreign governments, combat international terrorism, preserve national security and protect human rights. - The nation initiating the economic sanctions, the imposing nation, hopes to impair the economic capabilities of the target nation to such an extent that the target nation will succumb to its objectives. - Trade sanctions: boycotts on imposing-nation exports, quotas o imposing-nation imports from the target nation. - Financial sanctions: limitations on official lending or aid. E.g. during the late 1970’s, the U.S. policy of freezing the financial assets of Iran was seen as a factor in the freeing of the U.S. hostages. While in 1987 the U.S. imposed sanctions on Iran to discourage nuclear proliferation.

- Economic sanctions placed against a target country have the effect of forcing it to operate -

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inside its PPF. Economic sanctions can also result in an inward shift in the target nation’s PPF. It helps if sanctions are imposed by a large number of nations. Multilateral sanctions generally result in greater economic pressure on the target nation than do unilateral measures. Sanctions tend to be more effective if the target nation has substantial economic and political relationships with the imposing nation(s) before the sanctions are imposed. Then the potential costs to the target nation are high if it does not comply with the wishes of the imposing nation.

 Why use economic sanctions? - National governments and international bodies e.g. UN & EU have imposed economic sanctions to coerce, deter, punish or shame entities that endanger their interests or violate international norms of behavior. - It is a preferred option compared to military intervention. Yet sanctions do not necessarily prevent armed conflict, adding to the economic cost. - Economic sanctions generally inflict economic costs to all countries involved, including those imposing the sanction ‘Shooting one’s self in the foot’ Examples of financial and economic sanctions: - EU & US implemented sanctions on Iraq for embargo on arms and restrictions on trade in cultural goods.

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EU implemented a sanction on Moldova which restricts on admission for certain persons.

Q5. Outline the impact of the imposition of sanctions on Russia in 2014 on EU countries. - Responding to political unrest by pro-Russian supporters in Ukraine, In Feb 2014, Putin sent Russian troops into the country, seizing control of the Crimea Region in Ukraine. He also provided arms and expertise for pro-Russian rebels living in Ukraine. - Ukraine responded that Russia’s aggression was illegal and must half. Putin denied supporting the rebels. - After months of disjointed action, the US, the EU and other major nations came together to impose a coordinated package of economic sanctions against Russian individuals, entities and sectors for Russia’s role in the Ukrainian crisis. The sanctions were intended to convince Putin that his aggression against Ukraine would come at a high cost to Russia and that it must be ended. Type of Sanction - The sanction banned travel to the US, Canada and the EU by Russian officials and politicians. - Sanctions were also levied against the Russian state-owned banks, which made it harder for these lenders to provide funds for investment throughout Russia. - Also the U.S. froze the financial assets of wealthy Russian businessmen, with holdings in the U.S. Impact on EU (Imposing Nation) - GDP growth has stayed positive within the EU, although trade with Russia composes a larger share of the total economy. The impact has consequently been greater on the EU, in comparison to the U.S. although its worst effects appear to have been mitigated. In 2015, Russia was the EU’s fourth largest trading partner, compared to the 30th largest trading partner for the US. Impact on Russia (Target Nation) - In Russia, on the other hand, GDP growth has decreased since the imposition of sanctions, contracting by 2.8 percent in 2015. While it is harder to causally link the impact of sanctions with Russia’s decline in economic growth, it appears the decrease in trade has impacted the country’s economic prospects. The future of the sanctions regime seems to hinge primarily on the political interests of the US and the EU The future - Thus, the US and EU sanctions against Russia provide a united front to challenge Russia’s increasing aggression and disregard for international law, but they are less likely to produce a change in Russia’s current actions. - The continued use of sanctions may help to limit future behavior through the increasing of perceived costs of aggression by Russia, while also providing a deliberate effort to delegitimize acts that violate international law. - It follows that while the sanctions regime may be unable to force Russia to abandon its illegal annexation of Crimea, the sanctions are still worthwhile in preventing similar behavior in the future. Conclusion - Russia has adapted to sanctions and partially overcome their effects through commercial diversification as well through the control of civil society by the state. However, sanctions

will have a long-term effect on the future economic strategy of Russia by blocking the modernization of the country, allowing corruption to flourish and inhibiting growth....