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The World Trade Organization


  • pg 1
									The World Trade Organization
         and Trade
          Lecture 2
• 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
• 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!
  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,
• There is the possibility that a third wave is in the
  making, after the collapse of the Doha (Cancún)
• This has lead to a constellation of agreements
  and very complicated rules of origin generating
  multitude of disputes and potential agreements.
      Multilateral agreements
• Multilateralism
• Coordination mechanism for achieving
  mutually beneficial trade outcomes
  (response to a coordination failure, ie. to
  successive retaliations).
•   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.

number of countries at s tart

                                                                                         Tokyo      Uruguay



                                 1945                      1955             1965        1975     1985     1995

• 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
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
• Administring and implementing the
  multilateral and plurilateral trade
• 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
(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
• 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
• An economic evaluation of the GATT-
  – 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

• 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
             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
  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
• 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

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