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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 s tart 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.
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