Week 9 - The Evolution of the Global Trade Regime (April 24) Week 10 – No class (May 1)

1. 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)

2. Week 8 The Evolution of the Global Trade Regime

3. 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

4. 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

5. 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source of government revenue • Used to protect domestic producers from foreign competition • Today, their importance is superseded by non-tariff measures/barriers (i.e. countervailing duties, anti-dumping duties ) • Trade agreements can serve as an effective means of trade liberalization

6. 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.

9. 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for free trade had begun as part of a broader effort of political reform in British society • In 1848, Corn Laws were repealed in Britain • The laws had provided high protection to agricultural products • In 1860, Cobden-Chevalier Treaty (Anglo-French treaty) initiated a period of liberalized trade between the UK and Europe

10. Lord Palmerston Addressing the House of Commons During the Debates on the Cobden–Chevalier Treaty in February 1860, as painted by John Phillip (1863).

11. 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

12. 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)

16. 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

17. Willis C. Hawley (left) and Reed Smoot in April 1929, shortly before the Smoot-Hawley Tariff Act passed the House of Representatives.

24. 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

25. 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

26. 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

28. The idea of open markets was something that liberal visionaries andhard-nosed geopolitical strategists could agree upon. It united Americanpostwar planners, and it was the seminal idea that informed the work ofthe 1944 Bretton Woods conference on postwar economic cooperation… The BW agreements allowed political leaders to envisage a postwareconomic order in which multiple and otherwise competing politicalobjectives 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)

30. 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)

32. 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

35. 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)

37. 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

38. 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

40. 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

42. 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

45. 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

46. 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

48. 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

49. 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