July 29-30: The World Trade Organization

READING ASSIGNMENT: McGillivray, Fiona. 2000. Democratizing the World Trade Organization. Hoover

Institution Policy Paper No 105.On your own, read Pevehouse, Jon C. 2002. Democracy from the Outside-In? International

Organizations and Democratization. International Organization 56:3:515-549.

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Tomorrow…

• “cocktail party phrases” for the reading…

TODAY: All markets rest on political structures

Trade?

GATT/WTO

GATT/WTO• General Agreement on Tariffs and Trade became the World Trade

Organization in 1995

• GATT: 1947-1994

• Initial idea: International Trade Organization (ITO – discussed at Bretton Woods)

• But the ITO failed– Charter drafted 1948– United States Congress failed to approve it

• Meantime, GATT had been initially formed with 15 countries – grew from there.

• On 1 January, 1948 the GATT was signed by 23 countries

WTO• 153 members as of 2008

– http://www.wto.org/english/theWTO_e/whatis_e/tif_e/org6_e.htm

• Staff of only 635 – IMF: ~2000– World Bank: >10,000

• 2009 Budget: CHF 189,257,600 ~ $170-175 million– http://www.wto.org/english/thewto_e/secre_e/budget09_e.htm– World Bank operating budget ~ $1 billion– Total IMF resources >300 billion

• Derives most of its income from contributions by its members (size established according to a formula based on share of international trade)– http://www.wto.org/english/thewto_e/secre_e/contrib07_e.htm – share of international trade (%), based on trade in goods, services and

intellectual property rights for the last five years for which data are available. There is a minimum contribution of 0.015%

Initial members (1/1/1948)

• Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, the Czechoslovak Republic, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, the United Kingdom, and the United States

The WTO

What does the WTO do?

• Provides a forum for negotiations

• Administers trade agreements

• Provides a dispute settlement mechanism

3 components

1. A set of principles and rules

2. An intergovernmental bargaining process

3. A dispute settlement mechanism

(1) Principles & Rules

1. Market liberalism• In the aggregate gains from trade outweigh losses• Winners could compensate losers

2. Nondiscrimination

• Most Favored Nation (MFN): Treat all countries as well as its favorite trading partner

• National treatment: prohibits the use of taxes, regulations, other domestic policies to advantage domestic over foreign firms

Article I: Most Favored Nation (MFN)

Source: World Trade Organization, Legal Texts

Article I

General Most-Favoured Nation Treatment

1. With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III,* any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.

MFN exceptions

• Regional trade arrangements– Free-trade area (NAFTA) or a customs union

(EU)

• Generalized System of Preferences (from 1960s):– Developed countries can apply lower tariffs

for developing countries than for their peers

Article III: National Treatment

Source: World Trade Organization, Legal Texts

Article III*National Treatment on Internal Taxation and Regulation

1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.*

2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.*

(2) Intergovernmental Bargaining Process

• Bargain over what?

• Tariffs and nontariff barriers– Nontariff barriers? Health & safety regulations, standards

(environmental), government purchasing practices, quotas, bans, rules of origin, packaging/labeling conditions, complex regulatory environment, licensing

• Antidumping

• Intellectual property rights

• Textiles, agriculture, services, government procurement, e-commerce…

9 Bargaining Rounds

• 1947 Geneva

• 1949 Annecy

• 1951 Torquay

• 1956 Geneva

• 1960-61 Dillon Round

• 1964-67 Kennedy Round

• 1973–79 Tokyo Round

• 1986-93 Uruguay Round

• 2002-??? The Doha Round

What is Doha Trying to Get Done?

• Getting a deal done: agriculture for non-agricultural market access (NAMA)

• Rich countries are increasingly voicing demand for services, as per Singapore agenda

• http://www.youtube.com/watch?v=03GU14F2Zb0 (10 minutes)

(3) Dispute Settlement Mechanism

• “The dispute settlement mechanism ensures compliance by helping governments resolve disputes and by authorizing punishment in the event of noncompliance.” p25

• How do you tie your hands with out a rope?

– (commitment/enforcement questions)

– COSTS OF ESCALATION

Request for Consultation

Request for Panel

Panel Ruling

Retaliation

GATTWTO

Request for Consultations

Request for Panel

Panel Ruling

Appellate Body

Compliance Panel

Arbitration Panel

Dispute Settlement: GATT vs. WTO

•Under GATT, a defendant could block actions.•Under the WTO, this cannot happen

Concessions and Legal Escalation

Ruling for Complainant

Ruling for Defendant

Consultations

Panel Established, No Ruling

0

10

20

30

40

50

60

70

80

Stage Dispute Reaches

Pro

bab

ility

Def

end

ant

Con

ced

es

0

10

20

30

40

50

60

70

80

Source: Busch and Reinhardt 2000

61% of all instances of

full concessions under WTO occur prior to ruling

Full Concessions Under GATT/WTOBusch & Reinhardt. Developing Countries and GATT/WTO Dispute

Settlement.” Journal of World Trade 37 (4) 2003: 719-735.

NOTE: Displays predicted probabilities from Model 1, holding all other variables at their sample means, moving WTO from 0 to 1 and Complainant's Per Capita Income from its 10th percentile value ($2,152) to its 90th ($29,251), with 90 percent confidence intervals

GATT Developing

WTO Developing

WTO Developed

GATT Developed

0

10

20

30

40

50

60

70

80

90

100

Complainant Status by Period

Pro

b (

Fu

ll C

on

ce

ss

ion

s)

.27-.49

.41-.64

.63-.78

.33-.48

The WTO Effect• While the rich are doing better than the poor

going from GATT to WTO (as complainants)

• This is NOT because the rich win more often or get more compliance ex post.

• Rather, it is because rich countries settle more in advance of a ruling.

• Remember, the DV is concessions, not wins

• The effect of the WTO is through deterrence

Regional trade agreements

RTAs• Free Trade Area (e.g., NAFTA)

– Eliminate tariffs amongst members

– Members maintain independent trade policies with non-members

• Customs union (e.g., EU)

– Eliminate tariffs amongst members

– Common tariff policy with non-members

• Discriminatory?

– Allowed under GATT Article XXIV – as long as tariffs are no higher than the level applied by (ALL***) countries prior to the arrangement

– (MERCOSUR led Argentina to raise tariffs on non-members – but not above the level of the highest MERCOSUR member)

• Currently 190-250 RTAs in operation (up to 400 on the horizon for 2010)

• More than half are bilateral (e.g., KORUS)

• Most are free trade agreements

Customs Unions• Central American Common Market (CACM)

• Andean Community (CAN)

• Caribbean Community (CARICOM)

• Economic and Monetary Community of Central Africa (CEMAC)

• East African Community (EAC)

• Eurasian Economic Community (EAEC)

• European Economic Area (EEA) (plus EC – Andorra, EC – Turkey)

• Gulf Cooperation Council (GCC)

• Southern Common Market (MERCOSUR)

• Southern African Customs Union (SACU)

• West African Economic and Monetary Union (WAEMU)

Why RTAs not the WTO?

• Sign with particularly important markets

• New “forums” Forum shopping! (Busch)

• Signal commitment to free trade– Signal to whom? Voters? Investors?

• Milner, Mansfield, & Rosendorff: domestic voters – signal of good trade policy

• Oatley: investors – commit to free market policies to attract investment

Recall time-inconsistent preference problem!

• Individual’s preferences over time:

• Time 1: U(A2)>U(B2)

• Time 2: U(B2)>U(A2)

• Hostages would like to commit to not pressing charges.

H Promise

Not

K Free

Kill

H Testify

Not

(–,1) (–, 1) (0,1)

(T,-10 years)

Time 1 Time 2

Under democracy:

• Time 1: Voter elects a government that offers free trade.

• Time 2: Voter elects a protectionist government (raise tariffs).

G Offer

Not

F Invest

Not

G Tariffs

Not

(0,0) (0,0) (1,1)

(T,0)

Time 1 Time 2

Suppose that T>1>0

• Trade agreements may be a way to signal commitment and lock-in specific policies

• Question: Is this commitment credible?

• Always pose this question when it comes to commitment

• E.g., have I provided a credible commitment for you to work hard?

• Illustration of credibility:– http://www.youtube.com/watch?v=EmpB_O60fTY&NR=1

– http://www.youtube.com/watch?v=7l2y8HDU7-U&feature=related

– http://www.youtube.com/watch?v=FnMLGkj91Og&feature=related

Creation or diversion?• Should we stick to the WTO or rely on RTAs if

we want to increase global trade?

• Trade creation: RTAs lowers tariffs amongst members, who trade more amongst themselves

• Trade diversion: RTAs lead members to abandon non-member partners

• The impact of the RTA on trade is the difference

• Oatley: No one knows the answer

Richardson hypothesis• Richardson [J. Intern. Econ. 34 (1993) 39] boldly predicts that trade

diversion (and trade creation) may actually cause tariffs to decline!

• The hypothesis is fundamentally attributable to the presence of a political component in the governments' objective functions.

• Evidence? Bohara, Alok K., Kishore Gawande and Pablo Sanguinetti. 2004. Trade Diversion and Declining Tariffs: Evidence from Mercosur. Journal of International Economics 64(1): 65-88.

• This study employs data on Argentinian tariffs before and after Mercosur

• Argentina was smaller than Brazil, many of its industries faced the possibility of decline due to free trade with Brazil, a country twice its size in total output

• Result: CONFIRMS RICHARDSON HYPOTHESIS!!!

The US and Trade

2008 top 10 US trading partners (imports + exports)

Country Name Total in Billions of US $

Canada 596

China 409

Mexico 367

Japan 206

Germany 152

UK 112

Korea 83

France 73

Brazil 63

Netherlands 61

http://www.census.gov/foreign-trade/top/index.html

2008 top 10 US trading partners (SURPLUS)

Country_Name Total in Billions of US $

Netherlands 19

United_Arab_Emirates 14

Hong_Kong 15

Belgium 12

Singapore 13

Australia 12

Brazil 2

Qatar 3

Turkey 6

Egypt 4

2008 top 10 US trading partners (DEFICITS)

Country_Name Total in Billions of US $

China -266

Japan -73

Mexico -64

Germany -43

Canada -75

Ireland -23

Italy -21

Korea -13

Saudi Arabia -42

Taiwan -11

KORUS FTA

• The United States and the Republic of Korea signed the United States-Korea Free Trade Agreement on June 30, 2007.

• If approved, the Agreement would be the United States' most commercially significant free trade agreement in more than 16 years.

• Korea is the 7th largest US trading partner.

• The International Trade Commission estimates that implementation of the FTA would increase annual U.S. goods exports to Korea by $10-11 billion and increase U.S. GDP by $10-12 billion annually.

• US GDP ~ $14 trillion12,000,000,000 / 14,000,000,000,000 ~ 0.1%

• Concerns remain with the Agreement, particularly with respect to autos and the need for further progress on reopening Korea's market to U.S. beef.

• Source: http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta

Should Korea enter into the FTA with the US?

• Who will benefit in Korea?

• Who will be hurt?

Take-home points• WTO is a small international organization

• Purposes: Provide a negotiation forum, administer trade agreements, provide a dispute settlement mechanism

• Chief principles: MFN, Nondiscrimination

• Major negotiation issues: tariffs, nontariff barriers, antidumping, intellectual property rights, textiles, agriculture, services

• Regarding disputes - most are settled before full escalation

• So the WTO does not cast many rulings - but it still may have a big effect as a deterrent!

• Regional trade agreements - FTAs and Customs Unions

• Why? important markets, forum shopping, signal

• RTAs good or bad for trade? Creation or diversion

• Richardson: Diversion may lead to creation by weakening special interests through free trade in the region

• RTAs good or bad for Korea???

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