HISTORY OF GATT & THE WTO SYSTEM

1. HISTORY OF GATT & THE WTO SYSTEM

2. A BriefHistory of the GATT • Beggar-thy-neighbourtariffpolicies of 1930s => WWII • BrettonWoodsConference at theend of the WWII, financeministersfromtheAlliednationsgatheredtodiscusscreation of a newmonetarysystemthatwouldsupportpostwarreconstruction, economicstability, andpeace. => IBRD & IMF => needfor a thirdinstitution, ITO. • 1940s: Representatives met todesign a postwartradingsystemthatwouldparalleltheinternationalmonetarysystem. • Draft a Charter for ITO, • Negotiatethesubstance of an ITO agreement (rulesgoverninggoverninginternationaltradeandreductions in tariffs. • 1947: 23 Members • Today: 153 Members

3. GATT TradeRounds

4. Timeline of GATT & WTO -1- • 1944: At theBrettonWoodsConference, whichcreatedthe IBRD and IMF, there is talk of a thirdorganisation, the ITO. • 1947: As supportforanotherinternationalorganisationwanes in the U. S. Congress, the General Agreement on TariffsandTrade is created. TheGattTreatyCreates a set of rulestogoverntradeamong 23 membercountriesratherthan a formalinstitution. • 1950: Formal U.S. Withdrawalfromthe ITO concept as the U.S. Administrationabandonseffortstoseekcongressionalratification of the ITO

5. Timeline of GATT & WTO -2- • 1951 – 1986: Periodicnegotiatingroundsoccur, withoccasionaldiscussions of reforms of GATT. In 1980s, seriousproblemswithdisputeresolutionsarise. • The Uruguay Round, a newround of tradenegotiations, is launched. Thisculminates in 1994 Treatythatestablishesthe WTO. • 1995: The WTO is created at theend of the Uruguay Round, replacing GATT. • 2009: The GATT consists of 153 members, accountingforapproximately 97% of worldtrade.

6. Success of GATT • Regularmeetings of GATT membersareknown as “negotiatingrounds • Primarilyfocus on furtherreductions in the in themaximumtariffsthatcountriescouldimpose on importsfromother GATT members • Tariffs on manufacturedproductsfellfrom a trade-weightedaverage of roughly 35% beforethecreation of GATT in 1947, toabout 6.4% at the start of the Uruguay round in 1986. • Thevolume of tradeamong GATT memberssurged: In 2000 thevolume of tradeamong WTO membersstood at 25 timesits 1950 volume.

9. UnsolvedProblems of GATT -1- • By the 1980s several problems had surfaced: • The dispute resolution mechanism of GATT was not effectively functioning. Longstanding disagreements among members regarding issues like government subsidies, regulations for FDI… • A number of commodities (agricultural products and textiles) were widely exempt from GATT disciplines. • Certain forms of administered trade protection (anti-dumping duties, VERs, counterveiling duties) were restricting trade and distorting trade patterns in many important sectors.

10. UnsolvedProblems of GATT -2- • Trade in services was expanding rapidly and GATT had no rules regarding trade in services. • Countries producing intellectual property were becoming increasingly frustrated by the lack of intellectual property protection in many developing nations. • Rules regarding trade related investment measures (eg. Domestic purchase requirements for plants built from FDI) were hotly disputed

11. Tokyo Round • A first attempt for reforming the system, • Progressive reduction of tariffs, average tariff on industrial products became 4.7%, • Discussion of fundamental problems: Agricultural product trade, Safeguards (emergency import measures), • A series of agreements and arrangements on non-tariff trade barriers => Small number of GATT members subscribed to them, • Several Codes on Plurilateral Commitments (Eg. Government Procurement, Civil Aircraft, Diary Products).

12. URUGUAY ROUND • Launched in 1986 toaddresstheproblems of GATT • Majorreformsintroduced: • WTO established, • A newdisputeresolutionmechanismbuiltup, • GATT’sauthorityexpandedtonewareas, agreementsregardingtrade in textiles, agriculture, services, andintellectualproperty, • New set of rulesregardingadministeredprotectioncameintoeffect.

13. FundamentalPrinciples of thegatt/wtoSystem • RECIPROCITY: A practicethatoccurs in GATT negotiatingrounds, wherebyonecountryofferstoreduce a barriertotradeand a secondcountry “reciprocates” byofferingtoreduceone of itsowntradebarriers. • Thepractice of swappingtariffconcessions, facilitatesthereduction of tradebarriers. • NONDISCRIMINATION: (Equaltreatment) Ifone GATT memberoffers a benefitor a tariffconcessiontoanother GATT member, it mustofferthesametariffreductiontoall GATT members.

14. NONDISCRIMINATION -1- • MostFavouredNationTreatment: Grant someone a specialfavour, thenhaveto do thesameforallother WTO members. Eachmembertreatsalltheothermembers as “mostfavouredtradingpartners”. • NationalTreatment:Importedorlocally-producedgoodsshould be treatedequally – at leastaftertheforeigngoodshaveenteredthe market. • FreerTrade:Loweringtradebarriers, graduallyandthroughnegotiation. Tradebarriersconcernedincludecustomsdutiesandmeasuressuch as importbansorquotas, redtape, andexchange rate policies.

15. NONDISCRIMINATION -2- • Predictabilitythroughbindingandtransparency: Oncelowered, promising not toraisetradebarriersgivesbusinesses a clearerview of theirfutureopportunities. Withstabilityandpredictability, investment is encouraged, jobsarecreated, andconsumers can fullyenjoythebenefits of competition (variety, andlowerprices). • Percentages of TariffsBoundBeforeandAfterthe 1986 – 1994 Talks

16. A Question • Why is reciprocity important in reducing barriers to trade? Don’t countries benefit by unilaterally reducing their tariffs because lower tariffs lead to lower domestic prices? • Theories of International Economics tell us that, it depends on the size of the country: • If the country is small, captures all the benefits from trade => no need for reciprocity

17. Impact of a tariff on a smallcountry • Importtariffs=Tax • Raisethepricethatconsumers pay for a good, • Providetaxrevenuetothegovernment • Potentialtocreateinefficiencies in consumptionandproductiondecisions, • Verysmallcountrywillbenefitbyunilaterallyloweringitstariffs, • Becauseverysmallcountriesareunabletoaffecttheworldprices

18. Impact of a tariff on a largecountry • Reciprocitybecomesimportantwhenlargecountriesarechangingtheirtradingpolicies, • Becauseimportdemandwillcompriselargeshare of worldwidedemand, pricesareaffected • If a tariff is imposed • Quantity of Importsdemandedwilldecrease • WoldPricefalls • Terms of TradeImproves • Cost of tariff is pushed on toforeignproducers • Country is betteroff • Consumers pay higherprices, but gov’tcollectrevenue, andimportcompetingproducersearnhigherrevenue

19. The use of tariff policy by the large country • Beggar-thy-neighbour policy • Importing Country better off • Exporting Country worse off • Inefficiencies in the world trading system • Level of production becomes too high in importing country, and level of production becomes too low in exporting country

20. T-o-T DrivenPrisoner’s Dilemma • Twosituations: • Twoparties can improvetheirsituationsbyactingcooperatively, • However, indivudualincentivestheyfaceleadthemtoactnon-cooperatively. • The problem facingthecountries at theend of WWII wasthattheyknewtheywouldcollectively be betteroffunderfreetrade. Thougheachcountrybenefitedfromitsownimporttariff, it alsosuffered at thehand of itstradingpartner’simporttariffs.

21. GATT MECHANISM • A mechanismwasneededbywhichcountriescouldjointlycommittotariffreductionsthatwouldreducethelossesduetoproductionandconsumptiondistortions, andthroughgains in efficiency, makeallcountries, betteroff. • Practice of reciprocaltariffreductionsprovidedthenecessarymechanismforcountriestocommittofreertrade • Inallcountries, thereallocation of labourandcapitalawayfromprotectedimportcompetingfirmsandtowardexportsectorswouldgeneraterealefficiencygains => ExportOrientedGrowthStrategy !

22. Power of NonDiscrimination • Convenienceandpracticality, • Settingthesametariffpolicy on importsfromallcountriesensuresthatresourcesareallocatedtotheirmostproductiveuse, • On theimportside, nondiscriminationensuresthatcountriespurchaseimportsfromthelowest-costsourcecountry, (trade diversion is prevented) • Preventsre-reouting in order to circumvent high tariffs, in whichexportershipsitsgoodsto a thirdcountryrepackages it, andthenships it to a final destination where it will qualify for the third country’s preferential tariff, sometimes substantial transformation becomes necessary that leads the firm to move a stage of production to the third country, • On export side, nondiscriminationprotectsexportingcountriesfrombilateralopportunism. If one country were later to offer a lower tariff rate to a third country, this could erode the value of the original tariff concession to the first trading partner.

23. Exceptionstogatt’snondiscriminationprinciple • Regional Trade Agreements • Free Trade Agreements • Customs Unions • Administered Protection • Special Tariffs that can be used for particular purposes • Safeguards, • Anti-Damping Duties • Countervailing Duties

24. RegionalTradeAgreements • Free Trade Area: Members maintain their original external tariff with the rest of the world, but engage in free trade with one another. • Customs Union: All members set the same external tariff for imports from non-members and eliminate the tariffs from members. • When GATT members form a CU, CET can be no higher than a weighted average of the tariffs of the members countries before the CU was formed.

25. TradeCreation vs. TradeDiversion • Is it controversialthat GATT members form a regionaltradeagreement? • TradeCreation vs TradeDiversion • Reduction of tariffsamong RTA membersleadstotradecreation, • But mayalsocreate a diversion of tradeawayfrom a non RTA countryto a RTA member, • Ifthenon RTA country is thelowestcostproducer, theremay be no worldwideefficiencygains • Argument: Since theTariffPreference (thedifferencebtw. thetarifffor RTA membersandothers), is verysmall it cannotimposehugetradediversion. • Tariffpreferenceassociatedwith anti-damping dutiescreatesubstantial “tradedeflection” effect (exportsaredivertedtocountrieswithlowerimporttariffs)

26. AdministeredTradeProtection • Administered Protection refers to trade restrictions that provide protection from imports above and beyond the protection afforded by the tariffs that were negotiated as part of GATT. • Deviation from GATT’s principle of nondiscrimination: • Permits; • Anti-Damping Duties, • Countervailing Duties, • Safeguard Measures, and • Tariffs to assist with BoP problems. VERs are no longer allowed.

27. ProArguments: • TemporaryTariffthatareusuallydiscriminatorywasallowedfor a variety of reasons: • AdministeredProtectionimprovesworldwidewelfare. Protectionmaymakesomecountriesbetteroff, someworseoff, but ifweaddupgainsandlosses, thesum total is positive, • AdministeredProtectionimprovesthewelfare of politicallypowerfulimportingcountries, and, especially, theirimportcompetingsectors. Somegroupprofitsfromtheuse of administeredprotection. Eventhoughprotectionmayreduceworldwidewelfare, thosewhobenefitarepoliticallypowerfulenoughtoseethat it remainswithintheagreement.

28. SAFEGUARDS • A safeguardmeasure is a temporarytarifforquotathat is usedtoprotect a domesticindustryfrom “fair” foreigncompetition, • In 1940s, US gov’tinsistedthat a safeguardprovision be part of everytradetreatythat it signed, • Toencouragecountriestomakegreaterconcessions, GATT includedtwoprovisionsunderwhichcountriescouldreintroduceprotectivetradepolicies, • Article XIX SafeguardProvision, Countriesremainedfreetotemporarilyraise a tariffabovethemaximumlevelorintroduce a temporaryquantitativerestriction • Article XXVIII: allowstopermanantlyraisetariffs

29. Safeguards - rules • Measuresshould be nondiscriminatory, • Eg. US Global SteelSafeguardraisedtheimporttariff on steelformanycountries, but grantedexemptionsforsteelimportsfrommany of freetradepartners, such as Canada, Mexico,.. => Violation of GATT rules! • Safeguardsshouldonly be usedwhenimportsincreaseunexpectedly, or as a result of unforeseendevelopments, • If a countryimposed a safeguard on a productitstradingpartnersthatwere hurt bythesafeguardcouldretaliatewiththeirowntariffincreases on otherproducts => Uruguay RoundReforms: No retaliationforthefirstthreeyears. • Safeguardsmayprovide an incentiveforprotectedfirmstoinnovatequickly, ifthecost of newtechnology is falling

30. Anti-Damping Duties • Anti-Damping Duty is a tariffthat an importingcountryimposes on imports of a productthathavebeendumpedintoitsdomestic market bysomeexportingcountry’sfirms • Evidencethatforeignfirmssoldtheirproducts at lessthan normal valueandthis has injuredthedomesticindustry. • Anti-Damping Code: Allowscountriestoviolatenondiscriminationruleandimpose an additionaltariff on importsfrom a firmthat is dumping. Allowspriceundertakings, • PredatoryDumping • SporadicDumping • PersistentDumping

31. CountervailingDuties • Tariffs used to offset the effects of a foreign government’s subsidy, are similar to anti-dumping duties, • In markets that are imperfectly competitive, a foreign government’s subsidy can reduce the welfare of an importing country, • Consumers in importing country benefit from the subsidy, but the losses to the firm’s in the importing country outweigh the benefits to the consumers.

32. Post II. W.W. InternationalFactors • U.S. led institutional multilateralism, • Bretton Woods, • Establishment of Twin Institutions, and GATT. • Marshall Plan: imposed economic policies on developing countries, • Cold War and U.S., Western European Cooperation against USSR,

33. Marshall Plan • On June 5, 1947, speaking to the graduating class at Harvard University, Secretary of State George C. Marshall laid the foundation, in the aftermath of World War II, for a U.S. program of assistance to the countries of Europe. At a time when great cities lay in ruins and national economies were devastated, Marshall called on America to "do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace."

34. Marshall Plan The official mission statement:To give a boost to the Europe economy, to promote European production, to bolster European currency, and to facilitate international trade, especially with the United States, whose economic interest required Europe to become wealthy enough to import U.S. goods. Unofficial goal: The containment of growing Soviet influence in Europe, evident especially in the growing strength of communist parties in Czechoslovakia, France, and Italy.

35. Marshall Plan • The first substantial aid went to Greece and Turkey in January 1947, which were seen as being on the front lines of the battle against communist expansion and were already being aided under the Truman Doctrine.

36. Marshall Plan • In 1949, in response to a request from Turkish officials for American technical assistance and training, an American expert discusses newly donated agricultural equipment with Turkish farmers at the Ankara Agricultural School. (Courtesy of the George C. Marshall Research Library, Lexington, Virginia)

37. Marshall Plan • Conditions laid down to make use of the plan: • Public entrepreneurship should be constricted • Private entrepreneurship should be encouraged • Heavy industry (iron-steel, heavy chemical etc.) should not be established in Turkey. • Industrialization must be based on processed agricultural products, construction materials, leather, forest products etc. • Increased tractor usage and highway construction.

38. Post WW ImplementedPolicies(1947 – 1950) • 1948 EconomicCongress: • Businessmen, andProfessorsgatheredtodeterminenecessaryconditionsforrapiddevelopment, • FromEtatismtowards a moreinternationaleconomy, • ForeignAidthrough Marshall Plan, andprospects of tradeandforeigninvestment, • IntegrationtotheInternationalEconomicSystem, • Turkeybecamememberto, ILO in 1945, IBRD and IMF in 1947, and IFC (1956) and IDA (1960), GATT and OECD (1961), BIS (1964)