The World Trade Organization

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The World Trade Organization

• READING ASSIGNMENT
• Busch, Marc. Overlapping Institutions, Forum
  Shopping, and Dispute Settlement in International
  Trade. International Organization 61(4) 735-761.

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Fixed Exchange Rate
The Trilemma
2
Open Capital Flows
Sovereign Monetary Policy
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Why are there imbalances?

• These days, foreign exchange markets conduct
  between 1 trillion and 1.5 trillion worth of
  business PER???
• Per year?
• Per month?
• Per day?
• Per hour?
• ? Exchange rate volatility!
• ? Exchange rate misalignments

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How do governments deal with these imbalances?
Trade international capital flows lead to
imbalances

• Avoid them? ? Capital controls!
• Fixed exchange rate? ? Sacrifice monetary policy!
• OR
• Floating exchange rate
• Trade-off exchange rate stability or
• domestic price stability with monetary policy
  autonomy

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Todays Plan

• History of the WTO
• What it does
• Relation to regional trade organizations

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All markets rest on political structures

• Trade?
• GATT/WTO

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GATT/WTO

• General Agreement on Tariffs and Trade became
• The World Trade Organization in 1995
• GATT 1947-1994
• Initial idea International Trade Organization
• discussed at Bretton Woods
• But the ITO failed
• Charter drafted 1948
• United States Congress failed to approve it
• Meantime, GATT had been initially formed with 15
  countries grew from there.
• On 1 January, 1948 the GATT was signed by 23
  countries

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Initial GATT members (1/1/1948)

1. Australia
2. Belgium
3. Brazil
4. Burma
5. Canada
6. Ceylon
7. Chile
8. China
9. Cuba
10. Czechoslovak Republic
11. France
12. India
13. Lebanon
14. Luxembourg
15. Netherlands
16. New Zealand
17. Norway
18. Pakistan
19. Southern Rhodesia

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Take-away

• The 3rd Bretton Woods Institution the ITO was
  never realized
• The GATT rose to take its place
• A pseudo-Bretton Woods Institution
• Started with narrower membership deepened than
  broadened membership

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WTO

• 153 members as of 2008. Currently 164
• http//www.wto.org/english/theWTO_e/whatis_e/tif_e
  /org6_e.htm
• Staff of only 635
• IMF 2000
• World Bank gt10,000
• 2009 Budget CHF 189,257,600 170-175 million
• http//www.wto.org/english/thewto_e/secre_e/budget
  09_e.htm
• World Bank operating budget 1 billion
• Total IMF resources approaching 1 trillion
• Derives most of its income from contributions by
  its members (size established according to a
  formula based on share of international trade)
• http//www.wto.org/english/thewto_e/secre_e/contri
  b07_e.htm
• (Detail share of international trade (), based
  on trade in goods, services and intellectual
  property rights for the last five years for which
  data are available. There is a minimum
  contribution of 0.015)

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Take-away

• International organization strength?
• Not a function of size (budget or staff)
• WTO has the smallest budget and staff of any of
  the major global organizations

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The WTO
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What does the WTO do?

• Provides a forum for negotiations
• Administers trade agreements
• Provides a dispute settlement mechanism

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3 components

1. A set of principles and rules
2. An intergovernmental bargaining process
3. A dispute settlement mechanism

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(1) Principles Rules

• Market liberalism
• In the aggregate gains from trade outweigh losses
• Winners could compensate losers
• Nondiscrimination
• Most Favored Nation (MFN) Treat all countries as
  well as its favorite trading partner
• National treatment prohibits the use of taxes,
  regulations, other domestic policies to advantage
  domestic over foreign firms

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Article I General Most-Favoured Nation
Treatment 1. With respect to customs duties and
charges of any kind imposed on or in connection
with importation or exportation or imposed on the
international transfer of payments for imports or
exports, and with respect to the method of
levying such duties and charges, and with respect
to all rules and formalities in connection with
importation and exportation, and with respect to
all matters referred to in paragraphs 2 and 4 of
Article III, any advantage, 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.
Source World Trade Organization, Legal Texts
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MFN exceptions

• Regional trade arrangements (RTAs)
• Free-trade areas (e.g., NAFTA) ok!
• Customs unions (e.g., EU) ok!
• (well get back to this later in the lecture)
• Generalized System of Preferences (from 1960s)
• Developed countries can apply lower tariffs for
  developing countries than for their peers

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Article III National Treatment on Internal
Taxation and Regulation 1. The contracting
parties recognize that internal taxes and other
internal charges, and laws, regulations and
requirements affecting the internal sale,
offering for sale, purchase, transportation,
distribution or use of products, and internal
quantitative regulations requiring the mixture,
processing or use of products in specified
amounts or proportions, should not be applied to
imported or domestic products so as to afford
protection to domestic production. 2. The
products of the territory of any contracting
party imported into the territory of any other
contracting party shall not be subject, directly
or indirectly, to internal taxes or other
internal charges of any kind in excess of those
applied, directly or indirectly, to like domestic
products. Moreover, no contracting party shall
otherwise apply internal taxes or other internal
charges to imported or domestic products in a
manner contrary to the principles set forth in
paragraph 1.
Source World Trade Organization, Legal Texts
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(2) Intergovernmental Bargaining Process

• Bargain over what?
• Tariffs and nontariff barriers
• Nontariff barriers? Health safety regulations,
  standards (environmental), government purchasing
  practices, quotas, bans, rules of origin,
  packaging/labeling conditions, complex regulatory
  environment, licensing
• Antidumping
• Intellectual property rights
• Textiles, agriculture, services, government
  procurement, e-commerce

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9 Bargaining Rounds

• 1947 Geneva
• 1949 Annecy
• 1951 Torquay
• 1956 Geneva
• 1960-61 Dillon Round
• 1964-67 Kennedy Round
• 197379 Tokyo Round
• 1986-93 Uruguay Round
• 2002-??? The Doha Round

Take-away? The rounds are getting longer because
remaining issues are more difficult.
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(3) Dispute Settlement Mechanism

• The dispute settlement mechanism ensures
  compliance by helping governments resolve
  disputes and by authorizing punishment in the
  event of noncompliance. (Oatley txtbook, p25)
• How do you tie your hands with out a rope?
• (commitment/enforcement questions)
• COSTS OF ESCALATION
• AND LEGITIMIZING RETALIATION!

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Regional trade agreements
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RTAs

• Free Trade Area (e.g., NAFTA)
• Eliminate tariffs amongst members
• Members maintain independent trade policies with
  non-members
• Customs union (e.g., EU)
• Eliminate tariffs amongst members
• Common tariff policy with non-members
• Discriminatory?
• Allowed under GATT Article XXIV as long as
  tariffs are no higher than the level applied by
  (ALL) countries prior to the arrangement
• (MERCOSUR led Argentina to raise tariffs on
  non-members but not above the level of the
  highest MERCOSUR member)
• Currently 190-250 RTAs in operation (up to 400 on
  the horizon for 2010)
• More than half are bilateral (e.g., KORUS)
• Most are free trade agreements

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Customs Unions

• Central American Common Market (CACM)
• Andean Community (CAN)
• Caribbean Community (CARICOM)
• Economic and Monetary Community of Central Africa
  (CEMAC)
• East African Community (EAC)
• Eurasian Economic Community (EAEC)
• European Economic Area (EEA) (plus EC Andorra,
  EC Turkey)
• Gulf Cooperation Council (GCC)
• Southern Common Market (MERCOSUR)
• Southern African Customs Union (SACU)
• West African Economic and Monetary Union (WAEMU)

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Why RTAs not the WTO?

• Sign with particularly important markets
• New forums ? Forum shopping! (Busch)

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Why would you go to NAFTA?
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Why would you go to NAFTA?
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Choose the forum that best suits you!

• NB
• In the absence of the regional option, you may
  prefer no litigation at all!
• By moving a lil bit toward free trade under
  NAFTA
• Anti-trade interest groups may weaken
• Eventually get to WTO position?
• Richardson Hypothesis?

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Take-home points

• WTO is a small international organization
• Purposes Provide a negotiation forum, administer
  trade agreements, provide a dispute settlement
  mechanism
• Chief principles MFN, Nondiscrimination
• Major negotiation issues tariffs, nontariff
  barriers, antidumping, intellectual property
  rights, textiles, agriculture, services
• Regarding disputes - most are settled before full
  escalation
• So the WTO does not cast many rulings - but it
  still may have a big effect as a deterrent!
• Regional trade agreements - FTAs and Customs
  Unions
• Why? Forum shopping

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Thank youWE ARE GLOBAL GEORGETOWN!
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Concessions and Legal Escalation

• 61 of all instances of full concessions under
  WTO occur prior to ruling

Source Busch and Reinhardt 2000
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Full Concessions Under GATT/WTOBusch
Reinhardt. Developing Countries and GATT/WTO
Dispute Settlement. Journal of World Trade 37
(4) 2003 719-735.
.63-.78
.41-.64
.33-.48
.27-.49
NOTE Displays predicted probabilities from
Model 1, holding all other variables at their
sample means, moving WTO from 0 to 1 and
Complainant's Per Capita Income from its 10th
percentile value (2,152) to its 90th (29,251),
with 90 percent confidence intervals
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The WTO Effect

• While the rich are doing better than the poor
  going from GATT to WTO (as complainants)
• This is NOT because the rich win more often or
  get more compliance ex post.
• Rather, it is because rich countries settle more
  in advance of a ruling.
• Remember, the DV is concessions, not wins
• The effect of the WTO is through deterrence

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What is Doha Trying to Get Done?

• Getting a deal done agriculture for
  non-agricultural market access (NAMA)
• Rich countries are increasingly voicing demand
  for services, as per Singapore agenda
• http//www.youtube.com/watch?v03GU14F2Zb0 (10
  minutes)

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Dispute Settlement GATT vs. WTO

• Under GATT, a defendant could block actions.
• Under the WTO, this cannot happen

GATT
WTO
Request for Consultation
Request for Panel
Panel Ruling
Request for Consultations
Request for Panel
Panel Ruling
Appellate Body
Retaliation
Compliance Panel
Arbitration Panel