The Trading System
Chapter 2
GATT
• General Agreement on Tariffs and Trade (GATT) was
established in Geneva in 1947.
• Objectives
– The objective was to create a framework that would
regulate international trade and stimulate international
commerce.
– To establish an orderly and transparent framework within
which barriers to trade could be gradually reduced, and
international trade thereby expanded.
Objectives of GATT
• The most important elements of the Agreement
included those of:
•
non-discrimination: the Most Favored Nation (MFN)
principle
• reciprocity
• transparency
• tariff reduction.
Exception and Waivers
• developing countries were given special status.
• countries that offer each other more favorable
treatment within a custom's union were allowed
to waive full adherence to the MFN clause.
• agricultural trade was given special treatment,
especially with regard to non-tariff barriers.
Uruguay Round
• The Uruguay round was launched at a meeting of
trade ministers in Punte del Este, Uruguay, in
October 1986.
• It was expected to last for four to five years and
instead took around eight years (until December
1993).
• What made the Uruguay round so contentious?
Uruguay round GATT Negotiations vs
Old GATT
• The old GATT was often criticized because it lacked
an enforcement mechanism
• One of the most sustentative achievement of the
Uruguay round was the creation of a new
international institutions, the WTO.
• The WTO is responsible for enforcing existing
international trade agreements and serve as a host
for new talks to liberalize trade.
INTRODUCTION
• The World Trade Organization (WTO) deals with the
rules of trade between nations at a global or nearglobal level.
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It’s an organization for liberalizing trade.
Above all, it’s a negotiating forum
It’s a set of rules
And it helps to settle disputes
• As of now, 159 countries are members of WTO
Time Line
WTO Structure
Ministerial conference
Trade Policy
Review Body
Committe
es/workin
g Parties
Council for
trade in
goods
General council
Council for
TRIPS
Council for
Trade in
services
Dispute
Settlement
Body(DSB)
Plurilaterals
Trade
Negotiation
s
Committee
Objectives of WTO
To raise the standard of living in member countries by ensuring full employment and
by expanding production and trade in goods and services.
To develop an integrated, viable and durable multilateral trading system.
To promote sustainable development in member countries by the optimal use of
resources.
To help the developing countries to get a share in the growth in the international
trade.
To reduce tariffs and other trade barriers among member countries and to eliminate
discriminatory treatment in international trade relations.
To insure linkages between trade policies, environmental policies and sustainable
development.
Function of WTO
1) It facilitates the implementation, administration and operation of the trade
agreements.
2) It provides the forum for further negotiations among member countries on matters
covered by the agreement as well as the new issues falling within its mandate.
3) It is responsible for the settlement of the differences and dispute among its member
countries.
4) It is responsible for carrying out periodic reviews of the trade policies of its member
countries.
5) It assists developing countries in trade policies issues through technical assistance
and training programme.
6) It encourages co-operation within international organizations.
Core Principles of WTO
Non - Discrimination
Reciprocity of Trade
Concessions
MFN - Any trade
concession a
nation offers to one
member, it must
offer to all
Trade Liberalization
Transparency and predictability
in import and export rules and
regulations.
Favorable treatment to less
developed countries.
National
Treatment. This
means that
imported products
must be treated
the same as
domestic goods.
WTO vs GATT: Main differences
• Nature
• GATT: applied on a provisional basis with no institutional
framework
• WTO: permanent framework with a permanent organization
• Scope
• GATT: trade in goods
• WTO: trade in goods and services and TRIPS
• Approach
• GATT: à la carte (many agreements selective)
• WTO: single undertaking
• Dispute settlement
Trade Blocs
Definition
• A trade bloc can be defined as a ‘preferential trade
agreement’ (PTA) between a subset of countries,
designed to significantly reduce or remove trade
barriers within member countries.
• When a trade bloc comprises neighboring or
geographically close countries, it is referred to as a
‘regional trade (or integration) agreement’.
• It is sometimes also referred to as a ‘natural’ trade
bloc to underline that the preferential trade is
between countries that have presumably low
transport costs or trade intensively with one another.
Characteristics
• The two principal characteristics of a trade bloc are
that:
– (1) it implies a reduction or elimination of barriers to
trade, and
– (2) this trade liberalization is discriminatory, in the sense
that it applies only to the member countries of the trade
bloc, outside countries being discriminated against in their
trade relations with trade bloc members.
• Though few, there exist as well regional integration
agreements in which co-operation rather than
preferential market access is emphasized.
Characteristics
• Trade blocs can also entail deeper forms of
integration, for instance of international competition,
investment, labor and capital markets (including
movements of factors of production), monetary
policy, etc.
Why Blocs are Good or Bad
• Blocs are Good:
– Forming a free trade area must be good because it is a move
towards free trade
– Free trade should improve welfare in these countries
• Blocs are Bad:
– Blocs may encourage people to buy from a high cost partner
supplier
– Trade regulations are still a problem
– Countries create friction with those that are left outside of
the bloc
Other Gains from a Trade Bloc
• Increase in Competition can reduce prices
• An increase in competition can lower production
costs
• Firms can lower costs by expanding their scales of
production
• Forming the trade bloc increases opportunities for
business investments
Types of Economic Blocs
Four stages (types) of economic integration
• FTA (free trade area):
• no internal tariffs among members, but each country
imposes its own external tariffs to the third country.
• NAFTA (North America Free Trade Agreement
• AFTA (ASEAN Free Trade Area)
• EFTA (European Free Trade Area)
• Customs union:
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•
•
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no internal tariffs and common external tariffs
Mercosur (Southern Common Market),
CACM (Central American Common Market)
CARICOM (Caribbean Community and Common Market)
Four stages (types) of economic integration
• Common market:
• free movement of products and factors (resources), which
is customs union plus factor mobility
• EU (European Union – previously EEC)
• Economic union:
• common market plus common currency
• coordination of fiscal and monetary policy
• EMU (Economic and Monetary Union)
Levels of economic integration
• Free trade area
• Customs union
• Common market
• Economic union
• Political union
8-25
Levels of economic integration
Fig 8.1
8-26
Types of Economic Blocs
Features of Bloc
Type of Bloc
Free Trade
Among
Members
Common
External
Tariffs
Free
Movement of
Factors of
Production
Free-trade Area

Customs Union


Common Market



Economic Union



Harmonization
of All
Economic
Policies

Economic case for integration
• Stimulates economic growth in countries
• Increases FDI and world production
• Countries specialize in those goods and services
efficiently produce.
• Additional gains from free trade beyond the
international agreements such as GATT and WTO
• Because they may be easier to negotiate outside of the
GATT and WTO
8-28
The political case for integration
• Economic interdependence creates incentives for
political cooperation
• This reduces potential for violent confrontation.
• Together, the countries have more economic clout to
enhance trade with other countries or trading blocs
8-29
Impediments to integration
• Integration is hard to achieve and sustain
• Nation may benefit but groups within countries may be
hurt
• Potential loss of sovereignty and control over domestic
issues
8-30
Major Trade Blocs
• NAFTA
• EU
• OECD
• OPEC
• SAAR
• ASEAN
Reasons for BLOCs
• Several reasons explain the recent emergence of
trade blocs.
• The so-called ‘old regionalism’ was motivated by the
desire to pursue in developing countries importsubstitution development at a regional level, to
insulate a region from the world economy and to
stabilize and foster the economy at a regional level.
Political and economic considerations also played a
major role.
Reasons for BLOCs
• The recent emergence of trade blocs (the so-called ‘new
regionalism’) has been explained by various factors.
• Recognizing the gains from liberalization, it is often argued that
concluding a PTA is politically easier than pursuing multilateral
trade liberalization agreements. It is easier to negotiate with few
partners than with a large number of participants in the
multilateral process as envisaged under the General Agreement of
Tariffs and Trade (GATT)/World Trade Organization (WTO).
• Not only concessions can be more easily exchanged among a
small number of countries, but effective enforcement
mechanisms can also be agreed upon at a lower cost.
• The length and difficulties encountered during the Uruguay
Round of GATT negotiations (1986-1994) is usually considered to
have contributed to increase the attractiveness of the regional
(i.e. preferential) path to trade liberalization.
Reasons for BLOCs
• PTAs also allow trading partners to go deeper and faster
in their liberalization process, addressing modern trade
barriers which are more varied, more complex and less
transparent than standard tariffs and quotas traditionally
considered under GATT Rounds.
• Preferential integration agreements can also entail
elements beyond standard trade policy concerns, such as
competition, investments, labour and capital market
considerations.
• In other words, the fewer the number of participants to
trade negotiations, the larger the number of issues on
which it is possible to reach an agreement.
Reasons for BLOCs
• Finally, trade blocs may serve to pursue noneconomic objectives, or objectives beyond the
immediate economic concerns of a PTA, such as
political stability, democratic development or security
issues (either domestic security, or as a response to
third-country security threats, or security threats
between partner countries)
Economic effects of economic integration
• Static effects: Short-term effects (shift of production)
• Trade creation: production shifts to more efficient member
countries from inefficient domestic or outside countries.
• Trade diversion: production shift to inefficient member
countries from more efficient outsiders.
• Dynamic effects: Long-term effects
• Cost reduction due to economies of scale
• Cost reduction due to increased competition.
European Union
Regional economic integration in Europe
• Europe has two trade blocks
• European Union
• Seen as the emerging power with almost 27 members
• European Free Trade Association
• Has only four members
8-38
Evolution of the European Union
• Product of two political factors:
• Devastation of WWI and WWII and desire for peace
• Desire for European nations to hold their own, politically
and economically, on the world stage
• 1951 - European Coal and Steel Community.
• 1957- Treaty of Rome establishes the European
Community
• 1994 - Treaty of Maastricht changes name to the
European Union
8-39
8-40
Political structure of the European
Union
• European Commission
– 27 Commissioners appointed by members for 5 year terms
– A president of the commission is chosen by member states, the
president then chooses other members in consultation with the
states.
– Entire commission has to be approved by European parliament
before it can begin work.
– Proposing, implementing and monitoring legislation
– set objectives and priorities for action
– propose legislation to Parliament and Council
– manage and implement EU policies and the budget
– enforce European Law (jointly with the Court of Justice)
– represent the EU outside Europe (negotiating trade agreements
between the EU and other countries, etc.).
Political structure of the European Union
• European council
• Heads of state and commission
• President resolves policy issues and sets policy direction
• Defines "the general political directions and priorities" of the
Union. It is thus the Union's strategic (and crisis solving) body,
acting as the collective presidency of the EU.
• Votes that a country gets in the council are related to the size of
the country
8-42
Political structure of the European Union
• European parliament
• 766 directly elected members
• Propose amendments to legislation, veto
power over budget and single-market
legislation, appoint commissioners
• Court of justice
• Council of ministers
8-43
Political structure of the European
Union
• Court of justice
– The Court of Justice interprets EU law to make sure it is applied in the
same way in all EU countries. It also settles legal disputes between EU
governments and EU institutions. Individuals, companies or organisations
can also bring cases before the Court if they feel their rights have been
infringed by an EU institution.
– One judge from each country
– Hears appeals of EU laws
• Council of ministers
– One representative from each member country
– Ultimate controlling authority
– No EU laws without approval
8-44
EURO – Currency of the World??
• Maastricht Treaty in 1991 committed to adopting a
common currency by 1999.
• 18 of the 28 nations in Europe use this currency.
• The name euro was officially adopted on 16
December 1995. The euro was introduced to world
financial markets as an accounting currency on 1
January 1999, replacing the former European
Currency Unit (ECU) at a ratio of 1:1 (US$1.1743).
Euro coins and bank notes entered circulation on 1
January 2002
8-46
The Euro: Benefits and costs
• Benefits:
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Savings from using only one currency
Easy to compare prices, resulting in lower prices
Forces efficiency and slashing costs.
Creates liquid pan-Europe capital market.
Increases range of investments for individuals and
institutions
8-47
The Euro: Costs and benefits
• Costs:
• Countries lose monetary policy control.
• European Central Bank controls policy for the “Euro
zone”
• EU is not an” optimal currency area”.
• Country economies are different
• Euro puts the economic cart before the political horse
Enlargement of the EU
• EU in 2014 is the single largest market with a
population greater than the US.
• Accounts for 1/6th of the worlds trade.
– Population of EU is about 504 million, 7.4 % of the world.
– Create European barriers to trade from the outside?
– Might effect EU bureaucracy and decision making process
• More countries are set to join the EU.
8-48
• The EU is the world’s largest trading bloc, and second
largest economy, after the USA. In 2014 the value of
the EU's output totalled $18.5 trillion
• . The five largest Economies, Germany, France, the
United Kingdom, Italy and Spain, account for around
70% of the 28-country trading bloc.
Members
• Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden, The Netherlands, and the United
Kingdom
• On 23 June 2016, the United Kingdom voted
in a referendum to leave the European Union after 43 years as a
member state. The process was officially initiated on 29 March 2017,
indicating that the UK is scheduled to leave the EU on 29 March 2019
• Population estimated at 515 million (July 2016);
• GDP (PPP) estimated at US$19.18 trillion (2016); and
Total Trade US$4.503 trillion (2014 est.)
NAFTA
NAFTA
The North American Free Trade Agreement (NAFTA)
• Agreement signed on 1 January 1994.
• Members: Canada, Mexico, and the United States of America.
• Goals: Eliminate trade barriers among member states, promote
conditions for free trade, increase investment
opportunities, and protect intellectual property rights.
• Population of over 478 million (July 2015 est.,)
• GDP (PPP) US$21.818 trillion (2015 est.,)
Purpose
• Grant the signatories most favored nation status.
• Eliminate barriers to trade and facilitate the cross-border movement
of goods and services.
• Promote conditions of fair competition.
• Increase investment opportunities.
• Provide protection and enforcement of intellectual property rights.
• Create procedures for the resolution of trade disputes.
• Establish a framework for further trilateral, regional, and multilateral
cooperation to expand the trade agreement's benefits.
Provisions of NAFTA
• Elimination of tariffs
• Elimination of nontariff barriers
• Harmonization of trade rules (subsidies,
antidumping, safety standards)
• Liberalization of capital movement (FDI)
• Protection of intellectual properties
• Dispute settlement
• Provisions on labor and environmental standards
Economic Effects of NAFTA
• Trade
• Trade among members increased faster than trade with
the rest of world
• Investment
• Mexico is the main beneficiary (FDI not only from the U.S.
and Canada, but also from other countries)
• Employment
• Difficult to measure because of too many confounding
variables
• Overall employment effect in the area including the U.S.
has been positive
Issues related to NAFTA
• Rule of origin and local content
– Rule of origin: products must originate from North
America to get preferential treatment.
– Local content: the percentage of value of a product that
must be from North America to be considered as North
American origin
– Currently 50% for most products and 62.5% for autos.
Political pressure to increase this percentage
Regional economic integration of the Americas
• Regional economic integration is on the rise in the
Map 8.3
Americas
• NAFTA
• MERCOSUR
• Plans for FTAA
8-60
PROS
NAFTA
• Enlarged and productive
regional base
• Labor-intensive industries
move to Mexico
• Mexico gets investment
and employment
• Increased Mexican income to
buy US/Canada goods
• Demand for goods increases
jobs
• Consumers get lower prices
8-61
CONS
• Loss of jobs to Mexico
• Mexican firms have to
compete against efficient
US/Canada firms
• Mexican firms become
more efficient
• Environmental
degradation
• Loss of national
sovereignty
U.S.-Mexico-Canada Agreement (USMCA)
• The Agreement between the United States of America, the United
Mexican States, and Canada (USMCA) is a free trade
agreement between Canada, Mexico, and the United States that has
been ratified by each country except Canada.
• Rather than a wholly new agreement, it has been characterized as
"NAFTA 2.0
Provisions
• Canada will curb some of the ways it protects its dairy
industry, such as allowing more American milk, butter,
cheese and other dairy products to enter Canada dutyfree, with reciprocal treatment for Canadian dairy exports
to the U.S.
• Starting as early as 2020, to qualify for zero tariffs when
crossing borders, a car or truck must have 75% of its
components manufactured in Canada, the U.S. or Mexico,
up from 62.5% currently.
• Stronger protections for patents and trademarks in areas
such as biotech, financial services and domain names
MERCOSUR
MERCOSUR
• Goals: Integration of member states for acceleration of sustained
economic development based on social justice, environmental
protection, and combating poverty.
• Population: 295 million people (2014 est.);
• GDP (PPP): US$3.2 trillion
• Official site is available only in Spanish and Portuguese.
• Established on 26 March 1991 with the Treaty of Assunción.
• Full members include Argentina, Bolivia, Brazil, Paraguay, Uruguay,
and Venezuela. Associate members include Chile, Colombia, Ecuador,
and Peru.
• Associate members have access to preferential trade but not to tariff
benefits of full members. Guyana and Suriname signed Framework
Agreements in 2013.
• Mexico, interested in becoming a member of the region, has an
observer status.
ASEAN
Association of South East Asian Nations
• Established on August 8, 1967, in Bangkok/Thailand.
• Member States: Brunei Darussalam, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
• Goals: (1) Accelerate economic growth, social progress and cultural
development in the region and (2) Promote regional peace and
stability and adhere to United Nations Charter.
• Important Indicators for 2014: Population 622 million; GDP US$2.6
trillion; and Total Trade US$1 trillion.
Association of South East Asian Nations ASEAN
• The most important elements of economic cooperation are trade
liberalization, industrial development, banking and finance, and
investment.
• Trade liberalization was intensified in 1992 with the establishment of the
ASEAN Free Trade Area (AFTA) over a period of ten years.
• Also, various schemes of industrial cooperation were established during
the 1970s and 1980s and there was cooperation in the fields of tourism,
services, and intellectual property.
• Although AFTA will not lead to complete free trade and its trade
liberalization process has been modest, it has grown into an important
regional arrangement.
SAARC
South Asian Association for Regional Cooperation
• Its member states include Afghanistan, Bangladesh, Bhutan, India,
Nepal, the Maldives, Pakistan and Sri Lanka.
• SAARC comprises 3% of the world's area, 21% of the world's
population and 3.8% (US$ 2.9 trillion) of the global economy, as of
2015.
• SAARC was founded in Dhaka on 8th December, 1985. Its secretariat is
based in Kathmandu, Nepal
• The organization promotes development of economic and regional
integration.
• SAARC maintains permanent diplomatic relations at the United
Nations as an observer and has developed links with multilateral
entities, including the European Union.
South Asian Association for Regional
Cooperation - SAARC
• The SAARC was set up in 1985 with seven members: Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. This
arrangement mostly involves functional cooperation in the areas of
agriculture, poverty alleviation, transport, and
telecommunications.
• Trade and economic cooperation was initiated through the South
Asian Preferential Trading Arrangement (SAPTA) with the aim of
encouraging the removal of tariff and nontariff barriers and of
working toward the creation of a free-trade area (SAFTA) by 2005.
• The SAARC has no institutional arrangements and its goals are very
modest, the main reason being divergent views among members
and territorial conflicts especially between India and Pakistan.
Impact on business
• Opportunities: Creation of single markets
• Protected markets, now open
• Lower costs doing business in single market
• Threats:
• Differences in culture and competitive practices make
realizing economies of scale difficult
• More price competition
• Outside firms shut out of market
• EU intervention in mergers and acquisitions
8-72
• The emergence of Asia from the underdevelopment that
persisted until the middle of the last century is the great
economic achievement of our time.
• This has created a new model for economic growth built on
globalization and the patient accumulation of human and
nonhuman capital over decades.
• The new growth paradigm places a premium on skillful
management by public and private authorities.
• The performance of the leading countries in developing this
paradigm – Japan, then the Asian Tigers, and now China
and India – has changed the course of economic
development in Asia and around the world.
OECD
• The Organisation for Economic Co-operation and Development
(OECD) is an international organisation that works to build better
policies for better lives.
• Its goal is to shape policies that foster prosperity, equality,
opportunity and well-being for all. Member countries span the globe,
from North and South America to Europe and Asia-Pacific
• the OECD brings around its table 39 countries that account for 80% of
world trade and investment, giving it a pivotal role in addressing the
challenges facing the world economy
• 36 Member countries span the globe, from North and South America to
Europe and Asia-Pacific.
• They are represented by ambassadors at the OECD Council, which defines
and oversees our work, as set out in the OECD Convention.
• Member countries engage with the experts, use the data and analysis to
inform policy decisions, and play a key role in our country reviews, which
are designed to encourage better performances.
• The European Commission participates in the work, but it does not have
the right to vote.
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Members
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Australia
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Estonia
Finland
France
Germany
New Zealand
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Greece
Hungary
Iceland
Ireland
Israel
Italy
Japan
Korea
Latvia
Lithuania
Luxemburg
Mexico
Netherlands
Members
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Norway
Poland
Portugal
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
United kingdom
United states
OPEC
Threats to Open Trading System
Issues raised by WTO during the Millennium round of trade
negotiations
• Simplification of customs procedures.
• Increasing transparency in government procurement of
goods and services.
• Granting duty-free access to ADC markets for the poorest
countries.
• Extension ofthe interim agreement not to impose customs
duties on Internet transactions or e-commerce.
• Further reduction of trade barriers on industrial products.
• Reductions of barriers, particularly high tariffs in less developed countries, to
trade in services, including information technology, financial services, and
telecommunications.
• Reduction offishing subsidies that promote over-fishing.
• Reviewing WTO antidumping and antisubsidy rules to curb abuse ofthese
otherwise legitimate trade rules.
• Paving the way for agreement on foreign investment and competition Policy
• Reviewing problems in implementing existing (“builtin”) agreements on textiles, intellectual property
protection, and investment rules.
• Establishing a forum involving the World Trade
Organization,
• International Labor Organization, and United Nations
Conference on Trade and Development (UNCTAD), as
well as other organizations to discuss links among
trade, economic development, and labor questions
Major Threats
“issues of fair labor standards, human rights,
and environmental protection center”
Threats
• Protectionist measures
• Competition from products of other countries in the home
country lead to such measures.
• Regionalism
• Formation of custom unions and free trade agreements are
examples of such challenges.
• Non tariff barriers
• Sector specific barriers
• To protect agriculture in the home country, products from
other economies are discouraged.
Other topics for Discussion
• Developments in Open Trade Theory
• Bilateral Agreements
• Multilateral Agreements