Week 9 - The Evolution of the Global Trade Regime
(April 24)
Week 10 –No class (May 1)
Week 11- Regional Trade Agreements (May 8)
Week 12 –– Quiz - The Political Economy of Global
Financial Crisis (May 15)
Week 13 - Movie Display at the class - Inside Job
http://www.imdb.com/title/tt1645089/
(May 22)
Week 14 – Submission of movie reviews at the class
- Globalization, Growth, Poverty, Inequality,
Resentment, and Imperialism ( May 29)
Week 15 – Review before Final (June 5)
Week 8
The Evolution of the Global Trade
Regime
Lecture Plan
•
•
•
•
Introduction
Historical Antecedents: 1860 to 1945
The ITO and the GATT: 1947 to 1948
Multilateral Trade Negotiations: 1950s to
1980s
• The Uruguay Round: 1986 to 1994
• The WTO: 1995 and beyond
Introduction (1)
• The world trade regime is today the most
prominent example of cooperation between
countries in the entire international system
– It is rules-based where the goals are:
• To reduce the protectionism of national
regulation
• To reduce the uncertainty and unpredictability
of international trade relations
• To promote stability
Introduction (2)
• Tariffs are a form of trade regulation
– They are also a source of government revenue
– Used to protect domestic producers from foreign
competition
– Today, their importance is superseded by nontariff measures/barriers (i.e. countervailing duties,
anti-dumping duties )
• Trade agreements can serve as an effective
means of trade liberalization
Non-Tariff Barriers/Measures
(NTBs/NTMs)
A wide variety of official or unofficial
devices (other than tarriffs) that hinder
imports into an economy; for example,
quantitative
restrictions,
health
regulations, custom procedures.
Historical Antecedents (1)
• By second quarter of 19th century, campaign
for free trade had begun as part of a broader
effort of political reform in British society
• In 1848, Corn Laws were repealed in Britain
– The laws had provided high protection to
agricultural products
• In 1860, Cobden-Chevalier Treaty (AngloFrench treaty) initiated a period of liberalized
trade between the UK and Europe
Lord Palmerston Addressing the House of Commons During the Debates on the
Cobden–Chevalier Treaty in February 1860, as painted by John Phillip (1863).
Historical Antecedents (2)
• Between 1830s and 1870s, liberal commercial
exchange flourished
– Dominated economically by Great Britain
• Britain was the leading creditor country in the world
• Free trade was a key facet of British commercial policy
• Economic depression emerged after 1870 due to
increasing competition and decline in prices of
exports
– Protectionist policies returned and tariffs increased
• This trend was exacerbated by First World War and
continued until after Second World War
World Economy: Inter-War Period
• Economic chaos
– Economic interdependence disrupted by WWI
– Governments disagreed on measures to restore
international economic stability
– Gold standard broke down
• Misalignment of currencies
• Inconsistent adherence to ‘rules of the game’
Abandonment in 1931
– Beggar-thy-neighbour policies (increasing tariffs)
Historical Antecedents (3)
• Growing nationalism until Second World War
manifested in mercantilism, bilateralism, and
competitive exchange rate devaluations
– In 1930, Smooth-Hawley Act in United States
• Increased US tariffs to historic levels
• Expanded the scope of tariff coverage
• Foreign countries retaliated with further protectionism
– Global trade declined and broke down after 1930
• World trade fell by about two-thirds by the mid-1930s
Willis C. Hawley (left) and Reed Smoot in April 1929, shortly
before the Smoot-Hawley Tariff Act passed the House of
Representatives.
Historical Antecedents (4)
• In 1934, Reciprocal Trade Agreements Act
(RTAA) in the United States
– A revolution in US and international trade policy
– RTAA empowered US President to lower/raise
tariffs by up to 50% from Smoot-Hawley levels
when negotiating with other countries
• This transferred tariff-setting policy from Congress to
the Presidency
– Implicitly accepted that tariff rates were a bilateral
matter to be settled through negotiation, and not
unilaterally
Historical Antecedents (5)
• In 1934, RTAA (cont.)
– By 1939, US concluded 21 agreements
• All agreements made on most-favoured nation basis
– Slowed the negotiation process but extended the impact of
the agreements more widely
– Flow of international trade increased
– Public opinion became increasingly supportive of
free trade
– Experience in trade liberalization would become
useful after the Second World War
The ITO and the GATT (1)
• US was in a preponderant position for the first
two decades of the post-WW II period
• American values that were imparted on the
international trade system
– Trade liberalization
– Multilateralism
– Legal approach to international trade relations
• Although the US approach prevailed on most
issues, the trade regime has always been based
on a negotiated consensus
The idea of open markets was something that
liberal visionaries and hard-nosed geopolitical
strategists could agree upon. It united American
postwar planners, and it was the seminal idea that
informed the work of the 1944 Bretton Woods
conference on postwar economic cooperation… The
BW agreements allowed political leaders to
envisage a postwar economic order in which
multiple and otherwise competing political
objectives could be combined. As Roosevelt said at
the opening of the BW conference, “the economic
health of every country is a proper matter of
concern to all its neighbors, near and far.”
(Ikenberry ,2001,p.163-214)
The ITO and the GATT (2)
• An agreement to establish an International
Trade Organization (ITO) was concluded in
1948
– ITO was meant to complement the World Bank
and IMF
– But the US Congress failed to ratify the agreement
– International community had to fall back on a
much narrower treaty: the General Agreement on
Trade and Tariffs (GATT)
The ITO and the GATT (3)
• General Agreement on Trade and Tariffs (GATT)
– A multilateral contract embodying trade rules
negotiated in 1947
– It provided a structure for the regulation of the
international trade system
– It was partly a mechanism to ensure that countries did
not reintroduce protectionism once tariffs were
lowered
– It was never intended to function as an international
organization
GATT principles, rules and norms -1
- Principle of non-discrimination
• This is a cornerstone of the international
trade system
• Article I: most-favoured nation principle
–Addressed external discrimination
• Article III: national-treatment
–Addressed internal discrimination
(obligation to treat imported products in
the same manner as those produced
domestically)
GATT principles, rules and norms -2
- Reciprocity
• Proposed by economists because countries
that unilaterally reduced tariffs would
realize economic benefits
• Exceptions were made for special and
differential treatment for developing
countries
GATT principles, rules and norms -3
– Safeguards (Article XIX)
• Temporary exceptions from some
commitments of obligations to allow for the
orderly adjustment of domestic markets
– Commercial considerations
• Support for the value of the free market
over government interventionism
Multilateral Trade Negotiations (1)
• Contracting Parties through GATT sponsored
rounds of multilateral negotiations to
liberalize trade
– First four rounds addressed some important
institutional matters but did not make significant
progress in liberalizing trade
– In early rounds, negotiations took place bilaterally
and were then multilateralized automatically
through the most-favoured nation principle
Multilateral Trade Negotiations (2)
• Kennedy Round (1963-67)
– First significant round after the initial introduction
of GATT in 1947
– Average tariff reduction of about 35%
• Adopted a linear approach to reducing tariffs
– Introduced an anti-dumping code
– International grain agreement
• established price ranges for wheat
• multilateral sharing of food aid to developing countries
– European Community participated as a single unit
for the first time
Multilateral Trade Negotiations (3)
• Tokyo Round (1973-79)
– Focus was on non-tariff barriers (NTBs) to trade
• Produced six legal codes that dealt with NTBs, covering
–
–
–
–
–
–
customs valuation procedures
import licensing
technical standards for products
subsidies and countervailing duty measures
government procurement
anti-dumping duty procedures
– Average tariff reductions of about 35% of industrial
nations’ tariffs (comparable to Kennedy Round)
• Tariffs were reduced in proportion to the size of the tariffs
Multilateral Trade Negotiations (4)
• Tokyo Round (1973-79) (cont.)
– GATT Articles, or “framework” agreements, were
revised to clarify and improve GATT language on
matters relating to developing countries
– In contrast to past GATT negotiations, the Tokyo
Round was a rule-making exercise of major
proportions
• Agreements of the Tokyo Round produced legal rules
that reached further into the nation state
The Uruguay Round (1986-94)
• Decision to launch Uruguay Round of
negotiations turned on disagreement over
– Inclusion of new issues (services, investment and
intellectual property), demanded in particular by
United States
• US argued it was necessary to expand the GATT regime
to keep it relevant in a changing world economy
• Developing countries argued that they did not have the
capacity to negotiate on an equal footing on these
issues
– Further liberalization in textiles and agricultural
products, which were of particular importance to
developing countries
The Uruguay Round-Services (1)
–Services are “processes in which skills and
knowledge are exchanged in order to
meet a particular consumer need”
• E.g. engineering consulting, financial
intermediation, tourism, legal advice
–By late-1980s, services accounted for
over half of GDP of developed countries
–Services were negotiated separately from
goods
The Uruguay Round- Services (2)
– Global services market is essentially protectionist
due to different regulatory objectives & standards
• One important obstacle to trade in services has
been the reluctance to grant foreign firms the
right to establish and do business in domestic
markets
– Key task for negotiators: how to incorporate GATT
principles of transparency, national treatment and
reciprocity in a conceptually new area?
– General Agreement on Trade in Services (GATS)
• Code of principles providing international
standard of treatment
The Uruguay Round- Investment
• Investment was increasingly seen to be
interchangeable with trade as means of
servicing foreign markets
• Investment reinforces the effects of trade
liberalization
• There was considerable regulation by
national authorities, in particular in
“sensitive” industries
• Negotiation of a multilateral investment
agreement failed but agreement was
reached on Trade-Related Investment
Measures (TRIMs)
The Uruguay Round- Intellectual Property
– Trade-Related Aspects of Intellectual Property
Rights (TRIPs)
• Producers of high-tech products and
pharmaceuticals sought to internationalize
the intellectual property protection that they
enjoyed in their home countries
• Developing countries viewed TRIPs as a
potential barrier to trade, e.g. monopolies
granted to pharmaceuticals
– Developing countries consented on this issue as
they felt at the time that their losses were
compensated by gains elsewhere in the overall
accord
The Uruguay Round- Developing
Countries (1)
– Marginal players for most of the history of GATT
– GATT focused mainly on trade (not economic
development) and tariff reduction (which was in
conflict with the policy of import-substitution
industrialization)
– Although initially reluctant to participate in the
Uruguay Round, developing countries became its
greatest supporters from 1991 onwards
• Developing countries put pressure on US and
EU to settle their differences
The Uruguay Round- Developing Countries (2):
Why change in their position ?
• Single undertaking: all issues of the negotiation were
treated as a single package, with no exceptions
• Consensus: agreement required the passive support of
all participants
• Economic advantages found in agreements on
agriculture, textiles and clothing
• Benefits from institutional agreements (the strong
dispute settlement mechanism and the creation of the
WTO)
• Market-based economic reforms introduced in many
developing countries in the 1980s encouraged the
market-based principles and objectives of the GATT
The Uruguay Round-Developing Countries
The
Uruguay
Round Agreement
represented the
most far-reaching
commitments
made
by
developing
countries in the
international trade
regime
The Uruguay Round: Outcome
• The various agreements reached expanded
the rules of the international system of trade
– New issues (e.g. services) were brought under
multilateral rules for the first time
– The agreements advanced the rules-based, as
opposed to power-based, nature of trade relations
Average Tariffs after the Uruguay Round (%)
The headquarters of the WTO, in Geneva, Switzerland.
The WTO (1)
• Created in agreements of the Uruguay Round
– Came into existence on 01 January 1995
– The creation of the WTO reinforced the role of trade
in international economic relations
• The WTO represents a contract between its
members, the purpose of which is to establish
trade rules and to back them up with a powerful
dispute settlement system
– Unlike GATT, the WTO is a formally constituted
international organization
The WTO (2)
• The WTO’s continuity with the GATT
– Continued with many of the consensual practices
– Formalized many of the customary practices that had
first emerged under GATT (e.g. dispute settlement,
maintenance of a forum for negotiations)
• The WTO centralized the governance of the
international trade system far more than had
occurred under GATT
The WTO (3)
• The WTO is a "member-driven" organization
– Members, not the (relatively small) secretariat,
are responsible for setting the agenda and
carrying out the functions of the organization
– Through negotiations, members establish a rulesbased regime for regulating international trade
The WTO (4)
• The WTO is a "member-driven" organization
(cont.)
– Absence of consensus paralyses the agenda and
stops the WTO from dealing with problems
– Absence of consensus also raises the spectre that
the WTO will be eclipsed as countries turn to
other means (such as regional agreements) to
solve problems
WTO Negotiations (1)
• Successful negotiations at ministerial
conferences post Uruguay Round in financial
services and information technology
• Doha Declaration on TRIPS and Public Health
(2001)
WTO Negotiations (2)
• Doha Round Negotiations Launched in 2001
– Failure to Reach Agreement:
• Increased number of countries, often organized into
informal negotiating groups
• Increasing significance of the BRICs gives them greater
negotiating power
• Focus on agricultural issues
• Disagreement on “development” dimensions of agenda
Week 9 - The Evolution of the Global Trade Regime
(April 24)
Week 10 –No class (May 1)
Week 11- Regional Trade Agreements (May 8)
Week 12 –– Quiz - The Political Economy of Global
Financial Crisis (May 15)
Week 13 - Movie Display at the class - Inside Job
http://www.imdb.com/title/tt1645089/
(May 22)
Week 14 – Submission of movie review at the class Globalization, Growth, Poverty, Inequality, Resentment,
and Imperialism ( May 29)
Week 15 – Review before Final (June 5)