The World Trade Organization

and Trade
Lecture 2
 Outline
• Historical background
• Overview
• The Basic Principles
– Trade without discrimination
– Predictable, growing access to market
– Undistorted, fair competition
– Transparency
• Do trade agreement work?
 Why trade agreements?
• Why trade agreements exist?
• Barriers to trade generate profit opportunities: it pays off to lower
barriers.
• It is not only the theory of comparative advantage. Someone will
always potentially profit from free trade.
• The benefits of international trade are nothing else than the benefits
of exploiting arbitrage opportunities (price differences)
• If this is true, why free trade is not pervasive in the world?
• Second-best arguments for protection: Market failures are
compensated by trade policy
• The government has a stake: Electoral and tax earnings.
• Redistribution
• Infant industry argument
• Also:
• Interest groups and protection-Political
Economy arguments
• Those who benefit from trade most
(consumers) are poorly organised, but
those who loose are efficiently organised
and lobby harder for protection (Olson).
• However, exporters can lobby too!
(Rodrik)
 Preferential trade agreements
• Balance of these forces result in preferential trade
agreements (PTA’s) of different degrees.
• Fee trade agreement: groups of countries reduce or
eliminate tariffs or impediments to imports from other
countries in the group.
• Custom unions: In addition to the previous case,
countries co-ordinate to set a common external tariff to
imports from the rest of the world.
• Economic zone: Free movement of resources, not only
merchandises and services.
• Problem: Too many small groups…. Coordination failure
 Preferential trade agreements
• Two waves:
• First: Treaty of Rome 1957. Andean Pact,
CARICOM, Etc… Non US participation
• Second: NAFTA, Mercosur, Andean Community,
FTAA, ASAN.
• There is the possibility that a third wave is in the
making, after the collapse of the Doha (Cancún)
negotiations.
• This has lead to a constellation of agreements
and very complicated rules of origin generating
multitude of disputes and potential agreements.
 Multilateral agreements
• Multilateralism
• GATT WTO
• Coordination mechanism for achieving
mutually beneficial trade outcomes
(response to a coordination failure, ie. to
successive retaliations).
 History
• 1947 GATT is drawn to record the results of trade negotiations between 23
countries. Enters (provisionally) in force on January 1 1948

• 1950 US administration abandons efforts to seek congressional support for

the International Trade Organization

• 1949-1956 First four rounds of tariff negotiations

• 1957 Creation of the EEC

• 1962 Derogations to the GATT rules in the areas of cotton and fibers were
negotiated. Later to evolve in to the Multifibre agreements

• 1964-67 Kennedy Round. UNCTAD is created to press for trade measures

to favor the developing countries
 History cont.

• 1973-1979 The Tokyo round. Multifibre agreement negotiated in1974 to

restrict export growth, and extended several times thereafter

• 1986-1994 Uruguay Round of negotiations. April 15 1994: The Marrakech

protocol signed, establishing the creation of the World Trade Organization

• 2001- Doha Round of negotiations, TRIPS and Agriculture

The World Trade Organization (WTO/GATT)
Duration of GATT rounds and number of countries involved.

120
number of countries at start

100
Tokyo Uruguay
80
Kennedy
Third

60
Fourth
Second
First

40
Dillon
20

0
1945 1955 1965 1975 1985 1995
year
 Overview

• International Organization begins to operate on

January 1, 1995
• Membership: approx 140 countries
• Secretariat: 550 staff members, headed by a
Director General, based in Geneva
• Budget (2002): 140 million Swiss francs
• More infos: www.wto.org
 Overview
The Mission of the WTO

• Raise standards of living

• Ensure full employment
• Growing volume of real income and effective demand
through trade
• Seeking to protect and preserve the environment
• Secure for developing countries (especially LDC‘s) a
share in the growth of international trade that is
commensurate with the needs of their development
 Functions
• Administring and implementing the
multilateral and plurilateral trade
agreements
• Forum for multilateral trade negotiations
• Dispute settlement
• Overseeing national trade policy
• Cooperation with IMF and World Bank
 WTO: Basic Principles

(1) Trade without discrimination

(2) Predictable and growing access to
market
(3) Undistorted, fair competition
(4) Transparency
(1) Trade without discrimination

• MFN clause (art 1)

– Members are bound to grant the products of other
members treatment not less favorable than that accorded
to the products of any other country

• National Treatment (art 3)

– Once goods have cleared customs, imported goods must
be treated no less favourably than the equivalent
domestically-produced goods.
(1) Trade without discrimination
• Exception: Special and Differential Treatment of
Developing countries
• Two components:
– Protection component: Longer period to implement tariff
commitments
– Market access: Preferential access to developed countries
market under the generalized system of preferences
• Both measures are intended to be temporary, and
are supposed to promote trade liberalization in
developing countries
(1) Trade without discrimination
• In reality, the provisions have been criticized because
they do not produce incentives for trade liberalization
• Examples:
– Korea cut nominal tariffs by 6% after being dropped by the US
– Samoa, after being dropped announced a drastic liberalization
to lead to complete trade liberalization by 2010
• More generally: Change of focus on the issue after the
Uruguay Round of negotiations, reflecting broader
change of view on the role of trade in promoting
development and growth
 Outline
• An economic evaluation of the GATT-
WTO
– Rose AER (2004)
– Rose JIE (2004)
Source: Subramanian and Wei (2003)
Source: Subramanian and Wei (2003)
 GATT-WTO Evaluation

• Rose (AER 2004): We don‘t really know

that the WTO increases (or the GATT
increased) trade
• Rose (JIE 2004): There is no evidence
that GATT/WTO members actually have
more liberal trade policies
 Data

• WTO website for GATT/WTO accession

• Began in 1948 (covered 32 entities)
– 1960: 50 “contracting parties”
– 1970: 90c
– 1990: 112
– Now: 158 with 29 “observers”
• GSP bilateral preferences from UN’s Operation
and Effects of the Generalized System of
Preferences
– Interpolate from 1974, 1979, 1984 (data imperfect)
 Rose JIE (2004)
• Basic question: Do WTO members have more
liberal trade policies?
• No. Most measures of trade policy are not
correlated with GATT-WTO membership
• When trade liberalization occurs, it normally lags
behind GATT entry by many years
• GATT/WTO often admits countries that are closed
and remain closed for years after membership
 Seminar Questions for next week
• Read the article on the Economist “the cancun Challenge
and then answer the following questions:
• 1. What are trade agreement and why are they
important?
• 2. Do you think that Multilateral trade agreement are
better than Preferential trade agreements and why?
Motivate carefully your answer explaining the criterion
you are using to evaluate different agreements
• 3. Consider the two tables of data shown in the lecture.
Do you conclude that trade agreement have been
effective in promoting trade? Explain carefully your
answer.