Chapter 5

The Evolution of the Global Trade

Regime

Chapter by Gilbert R Winham

John Ravenhill

Global Political Economy, 3rd edition

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 goal is

• 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

– It is a source of government revenue

– Used to protect domestic producers from foreign

competition

– Today, its importance is superseded by non-tariff

measures/barriers

• Trade agreements can serve as an effective

means of trade liberalization

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• In 1848, Corn Laws were repealed in Britain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 initiated a

period of liberalized trade between the UK

and Europe

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

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

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 more

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 post-WW II period

• American values that were imparted on the

international trade system

– Trade liberalization

– Multilateralism

– Legal approach to international trade relations

• Although US approach prevailed on most

issues, the trade regime has always been

based on a negotiated consensus

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 US Congress failed to rectify the agreement

– International community had to fall back on 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

do not reintroduce protectionism once tariffs were

lowered

– It was never intended to function as an

international organization

The ITO and the GATT (4)

• GATT principles, rules and norms

– 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

– Prohibition against quantitative and other non-tariff

restrictions to trade (Article XI)

• No restrictions other than duties/tariffs

• All restrictive measures were to be converted to tariffs

The ITO and the GATT (5)

• GATT principles, rules and norms (cont.)

– Reciprocity

• Derided by economists as countries that unilaterally

reduced tariffs would realize economic benefits

• Exceptions were made for special and differential

treatment for developing countries

– Safeguards (Article XIX)

• Temporary backtracking on commitments 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)

• 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 (1)

• 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 (2)

• Negotiations on services

– 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 (3)

• Negotiations on services (cont.)

– Global services market is essentially protectionist

due to different regulatory objectives & standards

• One important obstacle to trade in services is 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 (4)

• Other new issues

– Investment

• Investment was seen to be interchangeable with trade

• 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 (5)

• Other new issues (cont.)

– 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 acquiesced on this issue as they felt

their losses were compensated by gains elsewhere in the

overall accord

The Uruguay Round (6)

• Developing countries

– Developing countries have been 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 (7)

• Developing countries (cont.)

– Why did developing countries change their

position?

• Developing countries benefitted from two underlying

principles of the Uruguay Round

– 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)

The Uruguay Round (8)

• Developing countries (cont.)

– Why did developing countries change their

position? (cont.)

• Market-based economic reforms introduced in many

developing countries in the 1980s encouraged their

governments to look more favourably on the market-

based principles and objectives of the GATT

– The Uruguay Round Agreement represented the most far-

reaching commitments made by developing countries in

the international trade regime

The Uruguay Round (9)

• The various agreements reached at the

Uruguay Round 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

The Uruguay Round (10)

• A formal, integrated dispute settlements

system (DSU) was established

• The DSU was improved under WTO from its

GATT predecessor in a number of ways

– How panels were convened

– How panel decisions were adopted

– Scope and mechanics of dispute settlement

– Introduced obligation on member countries to use

DSU, and not unilateral measures, to resolve

disputes

The Uruguay Round (11)

• The DSU has been frequently used

– In about the first five years of operation, there

were some 193 member complaints on 151

distinct trade issues

• Outcome of DSU process is legally binding

– However, it is usually impossible to oblige a

powerful country to implement an adverse

decision that it is determined to ignore

• The complexity & costs of mounting litigation

at the WTO are onerous for developing

countries

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 was to

establish trade rules and to back them up

with a powerful dispute settlement system

– But 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

GATT

The WTO (3)

• The WTO is a "member-driven" organization

– Members, not the secretariat, are responsible for

setting the agenda and carrying out the functions

of the organization

– Through negotiations, members establish a rules-

based regime for regulating international trade

– 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 to solve problems