Economic Environment of Business

International Trade.

GATT and the WTO.

Why is free trade so important?

The

Law of Comparative Advantage

– extends Adam Smith’s

Division of Labour

to the global scale: Recognises countries have different Resources. So trade acts as:  Competitive force for efficiency, and  Enables growth etc.

Barriers to trade include quotas, tariffs and bureaucratic regulations

Criticisms of free trade?

 May lead to domestic unemployment welfare losses may outweigh welfare benefits  Gains may not be distributed fairly  May lead to formation of domestic monopoly Thus, governments impose barriers to trade to protect domestic interests.

GATT (The General Agreement on Tariffs and Trade) and the WTO (World Trade Organisation):

GATT is to promote economic well-being by “enabling its members to enter into reciprocal and mutually advantageous arrangements” It aims for the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment of international trade. Emphasis is on: MFN (Most Favoured Nation) Principle.

What is meant by Most Favoured Nation?

This requires a country to apply its lowest tariff for any particular product to all of its suppliers.

(Article One: GATT 1947)

The Three Principles Behind GATT 

Non-discrimination - includes avoiding internal protection



Market compatibility - liberal trade increasing economic welfare



Predictability - transparency

What has GATT achieved over the years?

GATT Talks Since 1947:

Significant developments:



By late 1990s the average tariff had fallen from 40% in 1947 to about 5%



Uruguay Round 1993 extended free trade in agriculture, services, textiles, intellectual property and foreign investment and abolished tariffs altogether in 11 sectors



Doha (the latest round: since 2001) has faced problems from the EU in agricultural reform. Focus on anti-dumping and subsidies, investment and competition policy and government procurement/services

The WTO (World Trade Organisation)

This was created in January 1993 to police and enforce GATT rules in the future. It aims to foster economic growth and development by developing trade. GATT now comes under the umbrella of the WTO.

WTO has established dispute procedure, with provision for appeals and binding arbitration.

Services and intellectual property rights are also covered by WTO

Is it still possible for a country to impose trade barriers?

YES - in certain circumstances:  Article 6 if there is proof of dumping  Article 18 to assist infant industry  Article 19 to assist domestic production  Articles 21-25 to protect national interests These might give us some idea as to why trade talks have broken down in the 21 st Century.

The Collapse of Trade Talks

In what has been referred to as the Battle of Seattle, trade talks collapsed in December 1999. Indeed, in that month, there were riots, rallies and marches in twenty countries across the world.

The Economist of 13 th January 2007 referred to the Doha round as three dimensional chess!!!

Why has there been a rise in protectionism?



The world trade crisis of the 1970s

. 

The entry of new and successful competitors

. 

Loopholes – e.g. VERs (Voluntary Export Restraints)



Range of other non-tariff barriers.

How can imports be restricted?

      Tariffs - a tax on imports raising their price Quotas - a physical limit on a particular good/service Subsidy - to domestic suppliers Exchange controls - restrict access to foreign currency Safety, technology and environmental standards Public sector contracts

The Case for Protection    To prevent dumping (sales in an overseas market below the real cost of production) retaliation. World Bank suggests that this accounts for about a 17% hike in tariffs of manufactured goods in the USA.

To protect infant industries - high initial costs may make it difficult to achieve scale economies early on.

To protect strategically important industries

Who are against trade liberalization?

  Environmentalists Trade Unions   Charities Third World Activists WTO/IMF demonstrations in Seattle and Prague recently.

Summary

We established:



Principles of free trade



The objectives and principles of GATT/WTO



Key stages of the GATT/WTO trade talks



The resurgence of protectionism



The case for and against protectionism