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ECON3315 International Economic Issues
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  1. ECON3315International Economic Issues Instructor: Patrick M. Crowley Issue 4: GATT and the WTO

  2. Overview • GATT – some history and background • GATT rounds – how it worked • Uruguay round • GATT rounds – what was achieved? • Frustrations and deadlock • The WTO – organization • Dispute settlement mechanism • Case study: US gasoline • The Doha round • Issue: does GATT/WTO membership increase trade?

  3. GATT background In mid-1920s US became more protectionist. After 1929 stockmarket crash, Smoot-Hawley Tariff Act enacted, raising US tariffs by up to 60% Madsen (2002) estimates that effect of this and retaliation by other countries (“beggar-thy-neighbor”) reduced world trade by 14% In 1944, US and UK were determined not to let this happen again, and so idea of multilateral negotiations on trade under an ITO mooted

  4. GATT – some history and background • GATT was set up as part of Bretton Woods Conference in 1944. Idea was to house it under an ITO • First met in 1947 in Havana, Cuba and agreement signed by 23 countries • 1947-51 (Torquay round): negotiations explored which commodities covered by agreement – difficult task • 1959-79 (Dillon, Kennedy and Tokyo): negotiations cut tariff rates on a variety of commodities and extended areas. • 1986-93 (Uruguay) extended GATT into new areas such as services, capital, intellectual property and agriculture. 125 countries participated • 1994: GATT agreed on formation of WTO the following year. 150 countries are members. • 2001: WTO “hosts” the Doha round • 2005: Deadline for completion of Doha missed after talks break down in Cancun

  5. GATT rounds – how it worked • Negotiate about what you want to negotiate about • Negotiate details of tariff reductions • Negotiate opt-out clauses • Tie everything together into an agreement with possible concessions where there are trade-offs between issues

  6. Uruguay round

  7. GATT rounds – what was achieved? PLUSES 8 successful rounds led to significant tariff reduction – roughly 40% to 5% for industrialized countries. This boosted world trade – comparison of exports after WWI and WWII shows this. Other “spin-off” side agreements as common interests understood (e.g. govt procurement MINUSES Agriculture was “put aside” in the 1955 talks, but is now back on the table. Anti-dumping measures and VERs not tackled in the GATT talks… Source: Irwin, in Eichengreen (1995) Also dispute mechanism poorly designed

  8. Frustrations and deadlock In 1950s widespread frustration with the GATT process and little progress made. Caused some countries to decide to use Article XXIV to set up a preferential trading area – e.g. European Community in 1958. This led to a split in the economics profession, with Rudiger Dornbusch (MIT) applauding these “regional trade agreements” and Jagdish Bhagwati (Columbia) fiercely opposing them as detracting from multilateral efforts. Only in the Uruguay round did the impetus to reducing tariffs resume and substantially expand on previous achievements In Uruguay though, agriculture was a particularly contentious issue as both the EU and the US have vested interests in retaining protectionist measures in this area. Decision in Uruguay round to begin talks in other areas, and this required an umbrella organization, so WTO was formed.

  9. WTO Director-General: Pascal Lamy (France) HQ: Geneva, Switzerland Staff: 635 Formed in 1995 to “house” the GATT as other negotiations began to reduce trade barriers Now we have GATT, GATS, and TRIPS negotiations running side by side in each round of talks

  10. WTO organization 3 previous DGs (3 year terms) • Renato Ruggeiro (Italy) • Mike Moore (NZ) • Supachai Panitchpakdi (Thailand) Principles 1. MFN = “Most favored nation” Under the WTO agreements, countries cannot normally discriminate between their trading partners. Lower customs duty rate for one country has to be extended to all other WTO members. 2. “National treatment” = treating foreign firms as if they were domestic firms

  11. WTO organization 3. Transparency “Binding” = getting countries to commit not to increase tariffs This promotes predictability and “transparency” 4. Promote freer trade to underscore economic advantages of “comparative advantage”.

  12. Dispute settlement mechanism Revamped under Uruguay round Panels of experts settle disputes 1995-2005: 332 dispute cases raised Only 132 went to a full panel Most settled amicably “out of court”

  13. Case study: US imports of gasoline United States applied stricter rules on the chemical characteristicsof imported gasoline than it did for domestically-refined gasoline. Venezuela (and later Brazil) said this was unfair because US gasoline did not have to meet the same standards — it violated the “national treatment” principle

  14. The Doha round • Doha round tried to put developing countries as the central focus of this round • Round to address: agriculture, services, intellectural property, anti-dumping, subsidies, regional agreements, environment, least developed economies, Singapore issues — trade and investment, trade and competition policy, transparency in government procurement, trade facilitation • See: • 14th Sept 2003, on 4th day of meeting in Cancun, talks broke down as Brazil and other developing countries walked out of the meetings • Main issue agriculture and US and EU unwilling to budge: EU’s Mandelson: "What they're saying is that for every dollar that they strip out of their trade-distorting farm subsidies, they want to be given a dollar's worth of market access in developing country markets. That is not acceptable to developing countries and it's a principle that I, on Europe's behalf, certainly couldn't sign up to either.” US’s Schwab: "We are deeply disappointed that the EU failed to exhibit similar restraint and hope this will not jeopardise the few chances we have left to save the Doha Round.”

  15. Issue: does GATT/WTO membership increase trade? • Rose (2004) uses a gravity model to estimate whether WTO/GATT membership boosts trade. X = other variables • Initial answer was “no” • Rose then asked, does this mean that WTO doesn’t affect trade policy - answer here was definitive “no” • So question has to be asked: why no effect? A: i) few demands placed on developing countries ii) no progress on liberalizing agriculture or textiles iii) many countries just substituted quotas for tariffs iv) liberalization usually comes before membership v) many other reasons why trade has grown post-WWII • Of course, not all economists agree with this view – some say that the econometrics used is not sophisticated enough to pick up this effect