ECON3315 International Economic Issues

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ECON3315International Economic Issues

• Instructor Patrick M. Crowley

Issue 4 GATT and the WTO
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Overview

• GATT some history and background
• GATT rounds how it worked
• Uruguay round
• GATT rounds what was achieved?
• Frustrations and deadlock
• The WTO organization
• Dispute settlement mechanism
• Case study US gasoline
• The Doha round
• Issue does GATT/WTO membership increase trade?

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GATT background
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-neighb
or) 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
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GATT some history and background

• 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 countries
• 1947-51 (Torquay round) negotiations explored
  which commodities covered by agreement
  difficult task
• 1959-79 (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 participated
• 1994 GATT agreed on formation of WTO the
  following year. 150 countries are members.
• 2001 WTO hosts the Doha round
• 2005 Deadline for completion of Doha missed
  after talks break down in Cancun

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GATT rounds how it worked

1. Negotiate about what you want to negotiate about
2. Negotiate details of tariff reductions
3. Negotiate opt-out clauses
4. Tie everything together into an agreement with
   possible concessions where there are trade-offs
   between issues

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Uruguay round
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GATT rounds what was achieved?
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
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Frustrations and deadlock

• 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.

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WTO
Director-General Pascal Lamy (France) HQ
Geneva, Switzerland Staff 635 Formed in 1995 to
house the GATT as other negotiations began to
reduce trade barriers
Now we have GATT, GATS, and TRIPS negotiations
running side by side in each round of talks
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WTO organization

• 3 previous DGs (3 year terms)
• Renato Ruggeiro (Italy)
• Mike Moore (NZ)
• Supachai Panitchpakdi (Thailand)
• Principles
• 1. 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

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WTO organization

• 3. Transparency
• Binding getting countries to commit not to
  increase tariffs
• This promotes predictability and transparency
• 4. Promote freer trade to underscore economic
  advantages of comparative advantage.

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Dispute settlement mechanism
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
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(No Transcript)
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Case study US imports of gasoline

• 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

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The Doha round

• Doha round tried to put developing countries as
  the central focus of this round
• Round 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/dohaexplai
  ned_e.htm
• 14th Sept 2003, on 4th day of meeting in Cancun,
  talks broke down as Brazil and other developing
  countries walked out of the meetings
• Main issue agriculture and US and EU unwilling to
  budge
• EUs 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.
• USs 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.

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Issue does GATT/WTO membership increase trade?

• Rose (2004) uses a gravity model to estimate
  whether WTO/GATT membership boosts trade.
• X other variables
• Initial answer was no
• Rose then asked, does this mean that WTO doesnt
  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
  textiles
• iii) many countries just substituted quotas for
  tariffs
• iv) liberalization usually comes before
  membership
• v) 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