Global Trade Regime GATT The WTO Chapter 4

Global Trade Regime: GATT & The WTO Chapter 4 Dr. Senem SÖNMEZ SELÇUK

Dropping Barriers to World Trade • In 1947, faced with the prospect of rebuilding world trade after World War II, several nations began negotiating to limit worldwide tariffs and to encourage free trade. • Tariffs are taxes applied to imported or exported goods A tariff is also known as a customs duty • The word “tariff” comes from Tenerife, which is the name “tariff” Tenerife of an island in the Canary Islands. Folklore suggests that local Tenerife pirates forced passing ships to pay a fee to sail in the local waters around the island. International Trade Environment 2

• GATT (General Agreement on Tariffs and Trade) was the result of an international conference (UN Conference on Trade and Employment) held at Geneva in 1947 to consider a draft charter for the International 1947 Trade Organization (ITO) • The US initiated negotiations with 22 other countries that led to commitments to regulate 45, 000 tariff rates. • It was considered a provisional agreement that would be replaced once the ITO became operational to take over its functions. International Trade Environment 3

• So GATT began its provisional existence on January 1, 1948, when 23 contracting parties 1948 signed the agreement. • However, the US Congress refused in 1950 to ratify the treaty establishing the ITO. • GATT was in place from 1948 -1993, when it was 1948 -1993 replaced by the World Trade Organization (WTO) in 1995 • GATT text is still in effect under the WTO framework, subject to modifications. International Trade Environment 4

• The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement regulating multilateral international trade. • According to its preamble, its purpose is the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis". International Trade Environment 5

• Immediately after World War II, tariffs averaged 45 percent worldwide, adding a huge price increase 45 percent for goods from other countries and severely limiting world trade. • Eight rounds of tariff negotiations reduced the rounds of tariff negotiations average worldwide tariffs on manufactured goods from 45 percent to less than 7 percent • These negotiations were known as the General Agreement on Tariffs and Trade (GATT). International Trade Environment 6

• GATT created the basic principle of of nondiscrimination, with the intent to put all the nondiscrimination signing nations on an equal footing for trade and to reduce trade barriers. • The principle of nondiscrimination requires that trade agreements between any two nations apply to all GATT signers. That is, signing nations must give to all other GATT members the same favorable treatment that they give to any other nation. • GATT obligates each country to accord nondiscriminative, nondiscriminative most favored nation (MFN) treatment to all other contracting parties with respect treatment to tariffs. International Trade Environment 7

• Nondiscrimination also means that participants Nondiscrimination must treat industries from other nations no differently than the same industries in one’s own country. Once foreign products enter the market they must be treated the same as domestic products. • Exhibit 4. 1 shows the chronology of the GATT . 1 negotiations and the subjects covered at each stage. International Trade Environment 8

Exhibit 4. 1: A Chronology of GATT and the WTO

• After the initial success of the Geneva round of negotiations, Geneva round progress on tariff reductions slowed considerably. • This occurred because many tariff negotiations became bilateral. Bilateral trade negotiations take place between pairs bilateral of countries agreeing to reduce tariffs on particular products. • An important change occurred in the Kennedy round, so round named after President Kennedy, who was the driving force behind the negotiations. • At the Kennedy round, negotiations became multilateral, multilateral meaning several countries at once. Multilateral trade negotiations are more efficient because all the group members agree at once to reduce tariffs on broad categories of goods. International Trade Environment 10

• Prior to the Tokyo round of negotiations, the GATT countries worked only on reducing trade barriers based on tariffs. • A significant change with Tokyo negotiation round was the reduction in trade barriers of other forms. • Tariffs are not the only barriers countries use to protect domestic industries. There also existing non-tariff barriers to trade. International Trade Environment 11

• Non-tariff barriers to trade include, for example: • State subsidies that give some companies an advantage in the international market. • Boeing accuses Airbus of having unfair subsidies from European countries to design new aircraft. • Quotas that limit the amount of imports and/or exports. Quotas • The US has often used quotas to limit the amount of imports of certain product types. As a strategy to avoid more restrictive trade barriers, the Japanese with automobiles in the 1970 s and more recently the Chinese with textiles used voluntary quotas to restrict their imports into the US. International Trade Environment 12

• Non-tariff barriers to trade include, for example: • National regulations related to health and safety. regulations • The European Union restricts the sale of genetically modified foods or beef treated with growth hormones. This prevents the sale of many USproduced agricultural goods. • “Buy national” policies. Buy national” policies • These can require governments to procure from own -country suppliers and can also be nationalistic campaigns to encourage citizens to buy local. • These and other trade-restricting techniques were addressed in the Tokyo round International Trade Environment 13

• The final round of the GATT was the Uruguay round. Negotiations in Uruguay began in 1986 round and ended in 1993 with agreements to reduce tariffs even further, liberalize trade in agriculture and services, and eliminate some non-tariff barriers to international trade, such trade as excessive use of health regulations to keep out imports. • Most importantly, the Uruguay talks also established the World Trade Organization (WTO) to succeed GATT. International Trade Environment 14

• GATT in general prohibits the use of quantitative restrictions on imports and exports • The Exceptions are; 1) Agriculture - when government needs to remove surplus Agriculture of agricultural and fisheries products. Important to US 2) Balance of payments - to safeguard balance of payments. If a country's foreign exchange reserve is low. 3) Developing countries - LDCs may use import quotas to encourage infant industries. 4) National Security - Strategic controls on certain exports. Patents, Copyrights, Public Morals International Trade Environment 15

World Trade Organization (WTO) • Differing from GATT, which, as we have seen, is a series of governmental agreements, the WTO is a formal organizational structure for continued formal organizational structure negotiations and for settling trade disputes among member nations. • There are now 164 nations in the WTO, up from 92 nations when the 1986 GATT talks began, including 29 of the UN-classified least developed countries. International Trade Environment 16

• In 1995, the GATT was folded into newly established WTO, but it has not disappeared. • The Creation of the WTO, The Creation of the WTO therefore, therefore did not produce a wholly new set of international trade rules. • The rules at the center of the world trade system are those that were initially established in 1947 and that have been gradually revised, amended, and extended ever since. International Trade Environment 17

• As the center of the world trade system, the WTO As the center of the world trade system provides a forum for trade negotiations, negotiations administers the trade agreements that governments conclude, and provides a a mechanism through which governments can resolve trade disputes • As a political system, the WTO can be broken down As a political system into three distinct components: • a set of principles and rules, • an intergovernmental bargaining process, and • a dispute settlement mechanism International Trade Environment 18

• The WTO is based on two core principles: principles market liberalism and nondiscrimination. liberalism nondiscrimination • Market liberalism provides the economic rationale for the trade system. Market liberalism asserts that an open, or liberal, international trade system raises the world's standard of living. • Every country —no matter how poor or how rich— enjoys a higher standard of living with trade than it can achieve without trade. Moreover, the gains from trade are greatest —for each country and for the world as a whole— when goods can flow freely across national borders unimpeded by government-imposed barriers. International Trade Environment 19

• Nondiscrimination is the second core principle of the Nondiscrimination core principle multilateral trade system. Nondiscrimination ensures that each WTO member faces identical opportunities to trade with other identical opportunities WTO members. • This principle takes two specific forms within the WTO. The principle takes two specific forms first form, called Most-Favored Nation (MFN), prohibits (MFN) governments from using trade policies to provide special advantages to some countries and not to others. • MFN is found in Article I of GATT and states, "any advantage, MFN Article I of GATT favour, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. " International Trade Environment 20

• Stripped of this legal terminology, MFN simply requires each WTO member to treat all WTO members the same way as it treats its favorite trading partner • For example, the United States cannot apply lower tariffs to goods imported from Brazil (a WTO member) than it applies to goods imported from other WTO member countries. If the United States reduces tariffs on goods imported from Brazil, it must extend these same tariff rates to all other WTO members. MFN thus assures that all countries have access to foreign markets on equal terms. International Trade Environment 21

• WTO rules do allow some exceptions to MFN • The most important exception concerns regional most important exception trade arrangements. Governments are allowed to arrangements depart from MFN if they join a free-trade area or customs union. • In the North American Free Trade Agreement (NAFTA), for example, goods produced in Mexico enter the United States duty free, whereas the United States imposes tariffs on the same goods imported from other countries. • In the European Union, goods produced in France enter Germany with a lower tariff than goods produced in the United States. International Trade Environment 22

• A second exception is provided by the second exception Generalized System of Preferences (GSP), (GSP) enacted in the late 1960 s. The GSP allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than they apply to the same goods coming from other advanced industrialized countries. • These exceptions aside, MFN ensures that all countries trade on equal terms. International Trade Environment 23

• National treatment is treatment the second form of nondiscrimination found in the WTO. National treatment prohibits governments from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. • National treatment is found in Article III of the GATT, which treatment of the GATT states that "the products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. " International Trade Environment 24

• In plainer English, national treatment requires governments to treat domestic and foreign versions of the same product (" the same product like products" products in GATT terminology) similarly once they enter the domestic market • For example, the U. S. government cannot establish one fuel efficiency standard foreign cars and another for domestic cars. If the U. S. government wants to advance this environmental goal, it must apply the same requirement to domestic and foreign auto producers. • Together, MFN and national treatment ensure that MFN firms in every country face the same market opportunities and barriers in the global economy. International Trade Environment 25

• These two core principles are accompanied by hundreds of other rules. Since 1947, governments have concluded about 60 distinct agreements that together fill about 30, 000 pages. These rules jointly provide the central legal structure for international trade • As a group, these rules constrain the policies that governments can use to control the flow of goods, services, and technology into and out of their national economies. • Some of these rules are proscriptive, such as prohibition against proscriptive government discrimination. Others are prescriptive, such as prescriptive requirements for governments to protect intellectual property. • All rules entail obligations to other WTO members that impose constraints on the ability of governments to regulate the interaction between the national and the global economies. International Trade Environment 26

• All WTO rules are created by governments through the WTO's second component, intergovernmental bargaining • Intergovernmental bargaining is the WTO's primary decision-making process, and it focuses on negotiating decision-making process agreements that directly liberalize trade and indirectly support that goal. • To liberalize trade, governments must alter policies trade that restrict the cross-border flow of goods and services. International Trade Environment 27

• Such policies include tariffs, which are taxes that tariffs governments impose on foreign goods entering the country. They also include a wide range of nontariff health and safety nontariff barriers such as barriers regulations, regulations government purchasing practices, practices and many other government regulations • Intergovernmental bargaining focuses on negotiating agreements that reduce and eliminate these government-imposed barriers to market access. International Trade Environment 28

• Rather than bargain continuously, governments organize their negotiations in bargaining rounds, each with a definite starting date bargaining rounds and a target date for conclusion. • At the beginning of each round, governments meet as the WTO Ministerial Conference, the highest level of WTO decision making. Ministerial Conference • Meeting for three or four days, governments establish an agenda detailing establish an agenda the issues that will be the focus of negotiation and set a target date for the set a target date conclusion of the round. • Once the Ministerial Conference has ended, lower-level national officials based at WTO headquarters in Geneva conduct detailed negotiations on conduct detailed negotiations the topics embodied in the agenda. Periodic stock takings are held to reach interim agreements. • Once negotiations have produced the outlines of a complete agreement, a final Ministerial Conference is held to conclude the round. final Ministerial Conference is held • The resulting agreement is then ratified by WTO members and ratified by WTO members implemented according to an agreed timetable. International Trade Environment 29

• To date, eight of these bargaining rounds have been concluded, eight of these bargaining rounds have been concluded and a ninth, a ninth the Doha Round, began in 2001. • These bargaining rounds are usually extended affairs. Although the earlier rounds were typically concluded relatively quickly, the trend over the last 30 years has been for multiyear rounds • The Uruguay Round, for example, was officially launched in 1986 Uruguay Round (though it had been discussed since 1982) and was not concluded until December 1993. • The Doha Round, launched in 2001, was initially scheduled to end The Doha Round in late 2005. Yet, as late as mid-2017, governments remained unable to reach agreement. • The growing length of bargaining rounds reflects the growing complexity of the issues at the center of negotiations and the complexity of the issues growing diversity of interests among WTO member governments International Trade Environment 30

• The rules established by intergovernmental bargaining provide a framework of law for international trade relations. • Participation in the WTO, therefore, requires governments to accept common rules that constrain their actions. By accepting these constraints, governments shift international trade relations out of an anarchic international environment in which "might makes right" into a rule-based system in which all countries have common rights and responsibilities. • In this way, the multilateral trade system brings the rule of law into international trade relations. International Trade Environment 31

• The WTO's third major component, the dispute third major component settlement mechanism, ensures that governments comply with the rules they establish. • As in all political systems, individual compliance with established rules is not guaranteed. • Even though most governments comply with most of their WTO obligations most of the time, there are times when some don't. Moreover, if all governments believed they could disregard WTO rules with impunity, they would comply less often. • The dispute settlement mechanism ensures compliance by helping governments resolve disputes and by authorizing helping governments resolve disputes punishment in the event of noncompliance. International Trade Environment 32

• The dispute-settlement mechanism ensures compliance by providing an independent quasijudicial tribunal. judicial tribunal • This tribunal investigates the facts and the relevant WTO rules whenever a dispute is initiated and then reaches a finding. • A government found to be in violation is required to alter the offending policy or to compensate the country or countries that are harmed. International Trade Environment 33

• The WTO, therefore, is an international political system that regulates national trade policies • It is based on a set of rules that constrain what governments can do a set of rules to restrict the flow of goods into their countries and to encourage the export of domestic goods to foreign markets. • All of these rules have been created (and can be amended) through a process of consensus-based intergovernmental bargaining • Because compliance with the rules cannot be taken for granted, governments have established a dispute settlement mechanism to mechanism help ensure that members comply. • By creating rules, establishing a decision-making process to extend and revise them, and enforcing compliance, governments have brought the rule of law into international trade relations. the rule of law International Trade Environment 34

• As an organization the WTO has several objectives These include: • administering trade agreements based on GATT and those negotiated later; • cooperating with other international organizations such as the UN and the World Bank; • providing technical assistance and training for developing countries; • monitoring the trade policies of member nations; • providing a forum for current and future trade negotiations; • adjudicating trade disputes. International Trade Environment 35

• Since 1995, tariffs on industrial products have fallen from an average of 6. 3 percent to 3. 8 percent. • Nearly all of the world’s trade occurs among WTO member countries. • Exhibits 4. 2 and 4. 3 show, respectively, descriptions of the basic functions and agreements of the WTO and its organizational structure International Trade Environment 36

Exhibit 4. 2: WTO Agreements and Functions

Exhibit 4. 3: WTO Structure

• The most recent series of talks began in 2001 Members met in Doha, Qatar, in what are now called Doha the Doha talks, with the wide-ranging objectives of Doha talks trade reduction, but with particular emphasis on reducing trade barriers for food and reducing the developed world’s subsidies for farmers. The talks farmers are ongoing. • However, the goal of reducing agricultural subsidies has proven difficult to attain as the developed nations such as the US have resisted eliminating subsidies to farmers, a sensitive political issue in many countries. farmers International Trade Environment 39

• The US pays farmers approximately $20 billion in subsidies per year. In 2000 the subsidies reached a peak at $32. 3 billion, according to the US Department of Agriculture. • The EU is even a bigger spender, paying out farmers roughly $50 billion. • Japan is another big farm subsidizer, particularly in Japan rice. • Recently, Brazil, Argentina and India took the issue of US cotton subsidies to the WTO, arguing that the United States exceed allowable subsidy levels. International Trade Environment 40

• According to the International Food Policy Research Institute, a Washington DC group funded partly by the World Bank, subsidies by industrialized nations cost developing countries about $24 billion annually in lost income. International Trade Environment 41

• Quotas on textiles (fabrics for clothing and other cloth goods), in contrast to the continuing battle over agricultural products, ended on January 1, 2005 • The result was an immediate surge in textile imports into the US and the EU. However, so large was this growth that both the EU and the US negotiated or imposed import limitations under WTO rules that import limitations allow temporary controls to avoid extreme market disruption. • The paradox, of course, is that these same forces can shift entire industries such as textile manufacturing from developed countries such as the US to low-cost countries such as China and India. International Trade Environment 42

• Is free trade working? • The WTO thinks so and the data seem to support its conclusion. Since the early GATT agreements, world trade has grown at more than four times the output of the world’s gross domestic product. This suggests that the world’s economies are increasingly more intertwined and mutually stimulated. • There are, however, critics • Some argue that the WTO favors the developed nations, because it is more difficult for poorer nations to compete in a nonregulated world. International Trade Environment 43

• Environmentalists note that free trade encourages Environmentalists large MNCs to move environmentally damaging production to poorer and often environmentally sensitive countries. That is, commercial interests countries have priority over the environment, health, and safety. • Free trade also brings into conflict different policies on the protection of the environment and sustainability practices. International Trade Environment 44

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• Labor unions see free trade leading to the migration of jobs from higher-wage countries to lower-wage countries • The WTO trade agreements alter the competitive landscape for MNCs. International managers must be aware of how trade policies influence their industries and companies. International Trade Environment 46

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Problems 1) WTO failed to liberalize trade in agricultural products to any failed to liberalize trade in agricultural products significant degree. This was one of the major goals of the Uruguay Round. Intellectual Property Rights is another problem. 2) Steady erosion of MFN principle by the EU, and to a lesser erosion of MFN principle extent by the NAFTA. 3) Lack of discipline of nonmembers (25 observers + 14 others). of discipline of nonmembers WTO has not done anything to eliminate pirate activities in Africa. It has no military force to discipline rogue nations that disrupt trade. 4) WTO has not been able to regulate currency manipulation as has not been able to regulate currency manipulation a protective instrument to restrict imports. International Trade Environment 48

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Difference between GATT and WTO 1) GATT was a provisional agreement by contracting parties with no legal enforcement power. WTO is a binding permanent agreement by members. 2) GATT only included trade in goods. WTO additionally includes trade in services, international investments and intellectual property rights. 3) GATT had no provisions to settle trade disputes. WTO set up a dispute settlement body and disputes are quickly resolved. International Trade Environment 50