Transcript July 13: Trade and Development II: Economic Reform

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
Article I
(MFN)
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.
Source: World Trade Organization, Legal Texts
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 on Internal Taxation and Regulation
Article III: National Treatment
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.*
Source: World Trade Organization, Legal Texts
(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 nonagricultural market access (NAMA)
• Rich countries are increasingly voicing
demand for services, as per Singapore
agenda
• http://www.youtube.com/watch?v=03GU14
F2Zb0 (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
Dispute Settlement: GATT vs. WTO
•Under GATT, a defendant could block actions.
•Under the WTO, this cannot happen
GATT
WTO
Requestforfor
Request
Consultations
Consultation
Request for
Request
for Panel Panel
Compliance
Retaliation
Panel
Panel
Ruling
Arbitration
Panel
Appellate
Body
Panel Ruling
Concessions and Legal Escalation
80
Probability Defendant Concedes
70
60
50
80

61% of all
instances of
full
concessions
under WTO
occur prior to
ruling
70
Panel Established,
No Ruling
30
50
Ruling for
Complainant
40
Consultations
40
30
20
20
10
Ruling for
Defendant
0
10
0
Stage Dispute Reaches
Source: Busch and Reinhardt 2000
60
Full Concessions Under GATT/WTO
Busch & Reinhardt. Developing Countries and GATT/WTO Dispute
Settlement.” Journal of World Trade 37 (4) 2003: 719-735.
100
90
.63-.78
Prob (Full Concessions)
80
WTO
Developed
.41-.64
70
60
WTO Developing
50
40
GATT Developed
GATT Developing
30
20
.27-.49
.33-.48
10
0
Complainant Status by Period
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
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.
Time 1
H Promise K
(–,1)
Free
(–, 1)
Time 2
H Testify
(0,1)
(T,-10 years)
Under democracy:
• Time 1: Voter elects a government that
offers free trade.
• Time 2: Voter elects a protectionist
government (raise tariffs).
Time 1
G Offer
F
(0,0)
(0,0)
Time 2
Invest
G Tariffs
(1,1)
Suppose that T>1>0
(T,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 StatesKorea 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 trillion
12,000,000,000 / 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-tradeagreements/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???
THANK YOU
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