WORLD TRADE ORGANISATIONAND TRADE LIBERALISATION Jacob A. Jordaan Utrecht University School of Economics j.a.jordaan@uu.nl Outline • Introduction • Organising international trade liberalisation • GATT/WTO • Scope, functions and structure • Key characteristics • Dispute settlement and enforcement of rules • Negotiating forum • Uruguay round last successful one • MTN and reciprocity • Tariffs versus Non-Tariff Barriers • Towards deeper integration • Discussion Lecture 4 World Trade Organization 2 Literature • Chapter 2 The World Trade Organisation • Chapter 4 Negotiating Forum • Chapter 13 Towards deeper integration? The ‘Trade and’ agenda Lecture 4 World Trade Organization 3 Introduction • Trade liberalisation generates positive welfare effects • But how can we organise trade liberalisation? • Many countries, different characteristics, power relations, etc. • Institutionalising trade negotiations • System of established and prevalent (social) rules that structure (social) interactions • Economics: Growing recognition of importance institutions • At the international level: institutions more enabling and facilitating • GATT (1947) / WTO • No guarantee that countries select optimal trade policies • Growing number of rules and regulations that facilitate negotiations • Continued strive towards free trade Lecture 4 World Trade Organization 4 World Trade Organization • Post WWII: attempts to create International Trade Organisation • Instead: General Agreement on Tariffs and Trade + IMF + World Bank • Extensions • General Agreement on Trade in Services • Trade related aspects of intellectual property rights (TRIPS) • 1995 consolidation into one organisation: WTO Lecture 4 World Trade Organization 5 Lecture 4 World Trade Organization 6 Geneva, Switzerland WTO • GATT: flexible forum to negotiate and make deals • WTO: common institutional framework for trade negotiations • Sets the rules of the game • Functions of WTO • Implementation of multilateral trade agreements • Forum for negotiations • Dispute settlement • Trade policy review mechanism • Cooperation with IMF and World Bank to achieve coherent policy making Lecture 4 World Trade Organization 7 Organisational structure Lecture 4 World Trade Organization 8 Lecture 4 World Trade Organization 9 Main principles WTO 1. Non-discrimination a. Most favoured nation principle • Economic reason (consumer can buy cheapest imports) • Limits market power of large countries • Increase costs of trade barriers (not possible to introduce trade barriers against one country) b. National treatment principle • Foreign goods treated like domestic goods once they are in the trade area • Virtually all-encompassing Lecture 4 World Trade Organization 10 Main principles WTO (cont.) 2. Binding and enforceable commitments • MFN ensures that all member countries are included • Dispute settlement ensures that all countries can resort to WTO in case of conflict 3. Transparency • Enforcement of commitment • Information crucial: negotiate trade deals, non tariff barriers, do countries play by the rules? • Sources of information: committees, working groups; publications • Reduces pressure on dispute settlement system • “Ownership” of WTO 4. Safety valves • Possibilities to restrict trade Lecture 4 World Trade Organization 11 Lecture 4 World Trade Organization 12 Negotiating forum • Thus far, several trade rounds have been concluded • Last one: Uruguay Round (1986-1994) • Outcomes • Average tariffs reduced by 38% • Plus tariffs became “bound” • Agriculture and textiles and clothing subjected to rules • Creation of WTO • New agreements on services and TRIPS • Majority of Tokyo Round codes extended to all members • Doha Round • Agreement to create a transparency mechanism for PTAs and to mobilise and monitor the provision of additional “aid for trade” by high income countries. Market access and rule-making outcomes not clear yet Lecture 4 World Trade Organization 13 Trade negotiations • Prisoner’s dilemma captures key challenge • P = profit; c = costs • Whatever Country A choses to do, Country B will pick protection Lecture 4 World Trade Organization 14 How to deal with this? • The concept of reciprocity = exchange of market access commitment on a reciprocal basis • Two advantages a) The total gains from liberalisation increase b) Trade liberalisation becomes politically more feasible = Import competing versus exporting firms/industries Lecture 4 World Trade Organization 15 Reciprocity • Actions conditional on actions by counterpart • Often however, negotiations start bilateral, and then turn multilateral (MFN) • This may create free rider problem • Solution: Principle supplier rule / green room consultations • Multilateral balancing • First difference reciprocity • Impact on welfare not used as measure to calculate reciprocity! Lecture 4 World Trade Organization 16 Trade negotiations • Countries are trading market access: barter trade • Often long list of possible products / industry codes, etc. • Can create tricky situations • What if a country can not find a product in another country that it wants to barter for? • Number of participants may solve this, but may also make it more complex • Country A wants something from country B, who wants something from country C, who wants something from country A • Valuation of different goods/products/industries, etc. • Don’t forget: the deal is that a country “allows” another country to sell a product cheaper than that the country can make itself, but only if the other country also buys products from the country! Lecture 4 World Trade Organization 17 Tariffs world wide Lecture 4 World Trade Organization 18 Commitment to trade liberalisation services Lecture 4 World Trade Organization 19 Tariff Barriers • GATT/WTO very successful in lowering tariffs • Developed countries instrumental in this • Developing countries benefit from increased market access and especially cheaper imports • In EU, one of the key achievements has been the strong lowering of tariffs on intra and inter-EU trade • Single Market 1992 • Still not completely fixed! • New Single Market Proposal • Met with markedly less enthusiasm Lecture 4 World Trade Organization 20 EU 1992: elimination of tariffs • Total potential gains: 200 billion ECU (5% EU GDP) • Removal of tariffs • Removal of entry barriers • Economies of scale • Short run • Long run • Presented as technical exercise • To gain political support Lecture 4 World Trade Organization 21 Findings (1) Lecture 4 World Trade Organization 22 Findings (2) Lecture 4 World Trade Organization 23 Non-Tariff Barriers • More difficult to deal with • From border (tariffs) to behind the border restrictions • Range of quantitative restrictions; becoming less important • Quotas, Embargoes, Voluntary export restraints, Performance requirements • Non-tariff barriers / Non Tariff Measures • Technical/quality standards • Customs practices • Sales and distribution; Licensing • Government procurement • Entry taxes and other charges Lecture 4 World Trade Organization 24 International Trade Centre • Survey among 8,100 exporting firms in EU Lecture 4 World Trade Organization 25 Impact NTMs Lecture 4 World Trade Organization 26 Lecture 4 World Trade Organization 27 How to deal with NTBs? • Calculating value of concessions much more difficult • How do you calculate tariff-equivalents? • Links with other issues, interest groups • Regulation versus protection / industrial support • More sensitive: how to present as technical exercise? • First difference liberalisation difficult • Negotiations more focused on transparency and non- discrimination • But does that limit the progress / benefits? Lecture 4 World Trade Organization 28 Example of important NTB • German beer purity law (Reinheitsgebot) • Bavarian law from 1516 • Food safety and restriction of use of wheat in beer to facilitate bread production • 1907 law applied in entire country • Started to work as NTB against import of beer from other countries • Lobby groups in Germany managed for long time to keep law in place • 1987 European court decided that this went against the common market principle • Now the German Beer federation is trying to get the Reinheitsgebot recognized by the UNESCO for the World Heritage List Lecture 4 World Trade Organization 29 Battle of Seattle 1999 Lecture 4 World Trade Organization 30 Developed versus developing countries Lecture 4 World Trade Organization 31 What to make of this? Lecture 4 World Trade Organization 32 Recent trade liberalization processes • The ‘Trade and’ Agenda • Trade and trade liberalization increasingly linked to various other issues • These issues are important • But should they be linked to trade liberalization? • “Easy gains” from trade liberalization have been obtained • Liberalization measures at the border = shallow integration • If we want more gains • Need for deep integration = measures behind the border • Good explanation why links are made between trade lib and other issues?! • Cooperation on regulatory policies Lecture 4 World Trade Organization 33 Terminology is changing • From market access to market contestability • Look at policies, regulations, etc. that impact upon competition • Trade policies • Foreign Direct Investment • Government procurement • Subsidies • Rules and regulations discriminating against foreign firms • Important discussions to be had whether this can be done through the traditional WTO principles or that other arrangements are necessary • e.g. PTAs, bilateral investment treaties, etc. Lecture 4 World Trade Organization 34 What about non-economic objectives? • These feature strongly in the media • We need to think carefully whether the link with trade liberalization is always there • Environment • Social standards • Labor rights • Democracy • Institutions • Race to the bottom argument? Lecture 4 World Trade Organization 35 Doha round • All these aspects play a role in negotiations started in Doha • Much more difficult to create uniformity, harmonization, mutual recognition, etc. • Developed versus developing countries • Economic versus non-economic considerations • Suitability of WTO to provide appropriate framework for negotiations? • Little consensus on topics to be discussed • Coalition forming smaller and developing countries more effective • Emerging economies are starting to play a more important role • Doha Round talks are suspended now Lecture 4 World Trade Organization 36 Lecture 4 World Trade Organization 37 Lecture 4 World Trade Organization 38 Main points • Multilateral trade liberalisation is particular process • WTO represents key institution facilitating this process • Reciprocity, non-discrimination, etc. • Has achieved remarkable progress up until Uruguay round • Still tariffs not completely eliminated • Non tariff barriers prove to be more difficult • Searching for alternative ways to foster trade • From shallow integration to deep integration • Coinciding with growing protests against trade liberalisation • Increasingly links are made with variety of issues, topics, etc. • Growing stagnation of integration process Lecture 4 World Trade Organization 39 Discussion points (1) Is the WTO still the best institutional setting for contemporary processes of trade liberalisation? Lecture 4 World Trade Organization 40 Discussion points (2) The current move towards deep integration is taking the process of trade liberalisation too far Lecture 4 World Trade Organization 41 Discussion points (3) Environment, Labor rights, Social rights are intricately linked to trade liberalization Lecture 4 World Trade Organization 42