The World Trade Organization – WTO –. A rules-based, member-driven organization. “Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.” Created in 1995 by 120 nations to supersede and extend the GATT. Now:
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(WTO has now 148 members.)
Tariff = 100
GATT Negotiating Rounds
Uruguay Round—the 8th Round
In both cases, markets became more open to foreign competition and barriers to FDI were reduced.
Other goods agreements and annexes
Market access commitments
Countries’ schedules of commitments
Countries’ schedules of commitmentsWTO Current Structure
To provide a legal framework for incorporating the results of negotiations directed toward
“reciprocal and mutually advantageous exchange of market access commitments on a non-discriminatory basis.”
“The WTO does not tell governments how to
conduct their trade policies. Rather, the WTO is a
In reality, free trade (or freer trade) depends on what countries are willing to bargain with each other.
- NO -
if all agree, agreement is implemented; otherwise, it is not.
Bottom line: All countries have a voice.
Whenever possible, they try to shift the cost of their policies to other countries.
A government increases tariffs in a certain sector
local price rises
domestic supply (S) ; domestic demand (D)
import demand (M = D – S)
ReciprocityThe 2 Pillars of GATT/WTO Negotiations
Any tariff concession
a country gives to
another must be
extended to all other
the market access
obtained must be
equivalent to the
According to recent, cutting-edge research,
“As long as bilateral negotiations abide by MFN and satisfy reciprocity, they can be presumed to produce Pareto improvements across governments.
But if either MFN or reciprocity is violated, then this presumption may not be warranted.”
- Yes -
Agreements need to be self-sustainable.
Threat of retaliation
‘Free trade is not compatible with reasonable labor standards and environment protection.’
Germany individual country has an incentive to disrespect what it had agreed upon?
Environmental Performance Index
Income IndexEnvironmental Performance and Income
Suppose that a government individual country has an incentive to disrespect what it had agreed upon?
has agreed to
hold its tariffs low
as a result of a WTO negotiation.
The government faces pressure from import-competing interests to offer additional protection from imports.
Race to the bottom
The government faces pressure from labor (environment) interests to introduce new and more stringent standards.
Import-competing firms lobby for enhanced protection.
If property rights over negotiated market access levels were sufficiently complete,
none of these problems would arise.
A Simple Rule:
A company exports a product at a price lower than the price it normally charges on its own home market.
GSP (Generalized System of Preferences)
Preferential trade agreements (PTAs)
Free Trade Areas
member countries’ concessions to each other are not extended to third parties.
* Provision aimed at securing interests of
WTO members not participating in the PTA.*
* Provision aimed at avoiding partial PTAs—which
would lead to the practical elimination of the MFN rule.*
[Belgium, France, W. Germany, Italy, Luxembourg, Netherlands]
Hungary, Malta, Poland, Slovenia and Slovakia
How is that possible?
External tariffs usually fall after the formation of a trading bloc.
Not as much discrimination as one would predict.
Main reasons behind the failure