The Global Trade Regime Today

Lecture 10 – Thursday, 11 October 2011J A Morrison 1

WTO Building (Geneva, Switzerland)

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Last time, we discussed the GATT’s creation and its

emergence as the cornerstone of the postwar trade regime.

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Today, we’ll return to the RTAA and consider six or seven more

explanations of its creation.

(Just kidding.)

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Actually…

Today, we’ll build on this foundation to explain and consider the global trade regime as it exists today.

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Lec 10: Global Trade Regime Today

I. From the GATT to the WTOII. Regionalism vs MultilateralismIII.Doha: The Colonies Strike BackIV.Discussion Points

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Lec 10: Global Trade Regime Today

I. From the GATT to the WTOII. Regionalism vs MultilateralismIII.Doha: The Colonies Strike BackIV.Discussion Points

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I. From the GATT to the WTO

1. Why the move to the WTO?2. Key Features of the WTO3. Decision-making in the WTO

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In the Marrakesh Agreement (1 January 1995), the GATT was

displaced by the newly created World Trade Organization

(WTO).

For all practical purposes, the GATT was dead.

Why?

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On Tuesday, we saw how the “Provisional” framework of the GATT successively deepened,

broadened, and formalized over the last half century that

followed.

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This raises a puzzle:

If the GATT proved so resilient, flexible, and durable, why was

it formally replaced by the WTO? Why wasn’t the GATT

just revised and expanded as it had been in the past?

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The WTO website reports that the GATT was not really killed

by the move to the WTO:

“The WTO replaced GATT as an international organization, but the General Agreement still exists

as the WTO’s umbrella treaty for trade in goods, updated as a result of the Uruguay Round

negotiations. Trade lawyers distinguish between GATT 1994, the updated parts of GATT, and GATT

1947, the original agreement which is still the heart of GATT 1994. Confusing? For most of us, it’s

enough to refer simply to ‘GATT’.”

(http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm)

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The WTO just frames itself as an expanded version of the

GATT.

According to the WTO, the GATT just needed further

expansion which the “umbrella” of the WTO would

provide.

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It’s certainly true that the WTO expanded the trade regime

well beyond the parameters of the GATT.

But the transition from the GATT to the WTO was not

evolutionary like the previous revisions of the GATT…

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The shift to the WTO was revolutionary.

Here’s the story…

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Remember this slide from Tuesday?

It explained why the GATT was appealing.

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Tokyo Troubles

• Tokyo Round (1973-1979)• Brazil, India, & Egypt threaten to

block consensus• Infamous “Side Agreements”– Developing countries want exceptions:

MFN treatment without signing all codes– GATT becomes “plurilateral”

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US Response

• US threatens to walk out• US will sign new agreements as part

of “GATT-Plus” Regime

➔ But the US eventually caved.

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Why?

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Barton, et al: the Cold War. (p 64-66)

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The situation, however, changed with the Uruguay

Round (1986-1994).

The Cold War had ended, and the bargaining position of the

developed countries had increased considerably.

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The Move to the WTO• 1990: US & EC agree to “single

undertaking” in creation of WTO– All agreements must be accepted as 1

package

• WTO is “legally distinct from the General Agreement on Tariffs and Trade, dated 30 October 1947."

• After creating WTO, US & EC withdrew from GATT 1947– Effect: Developing countries need to sign

onto the WTO to get access to the US & EC

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WTO Website: “Trade lawyers distinguish between GATT 1994, the updated parts of GATT, and

GATT 1947, the original agreement which is still the heart of GATT

1994...For most of us, it’s enough to refer simply to ‘GATT’.”

➔ Not if you’re a developing country!!

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So, what set the WTO apart?

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I. From the GATT to the WTO

1. Why the move to the WTO?2. Key Features of the WTO3. Decision-making in the WTO

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General Agreement on Trade in Services (GATS)

Mode ServiceSupplier Presence

Mode 1: Cross-border supply

Services supplied from one country to another (e.g. international phone calls)

Service supplier not present within the territory of the member

Mode 2: Consumption abroad

Consumers or firms making use of services in another country (e.g. tourism)

Mode 3: Commercial presence

Foreign company establishes subsidiaries/branches in foreign country to provide services abroad (e.g. banks opening branches abroad)

Service supplier present within the territory of the MemberMode 4: Presence of

a natural personIndividuals travel to foreign country to provide services in another (e.g. fashion model or consultant)

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Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS)

• Protection of copyrights and patents abroad– standards largely imported from US & EC

• Software as copy-written• Limits on fair-use and other exceptions• National Treatment: Foreigners

accorded same rights/opportunities as nationals

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Agreement on Trade Related Investment Measures

(TRIMs)Prohibited Activity Explanation

Local Content Requirements (Article III:4)

Laws requiring purchase/use of domestic inputs or G&S

Trade Balancing Requirements (Article III: 4; Article XI:1)

Laws requiring certain proportion of domestic/foreign inputs

Foreign Exchange Restrictions (Article XI:1)

Restrictions on the availability of foreign exchange

Export Restrictions (Article XI:1)

Restrictions on export of G&S

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Limits of TRIMS• Mandates self-reporting• Exceptions for developing countries• Transition Period– Developed: 2 Years– Developing: 5 Years– Least Developed: 7 Years

• “Buy American” provision of stimulus– US: we can choose how to spend tax

money– EU, Canada, Brazil: We’ll see you in court!

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Dispute Settlement Understanding (DSU)

• Dispute Settlement Body (DSB)–WTO “Court” -- Decides trade disputes– DSB = Entire body of WTO– Appellate Body: Select 7 on 4-year Terms

• Dispute Settlement Process– Consultation: states attempt to resolve

dispute– Panel & Expert Reviews ➔ Panel Report:

Decision– Loser has option for Appellate Review– Implementation– Retaliation for Non-implementation

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How does the WTO make decisions? How does the WTO

vote?

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I. From the GATT to the WTO

1. Why the move to the WTO?2. Key Features of the WTO3. Decision-making in the WTO

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Formally, the WTO makes all decisions by consensus

(unanimous decision). (Article IX)

Dispute Decisions can be overturned only by reverse-

consensus--meaning all states (including the winner of the

dispute) vote to overturn the decision.

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What is the implication of this?

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What is the implication of this?

=

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Well, actually, not so much.

This is what really happens...

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The “Green Room” -- Director

General’s Private Conference Room

WTO Policy

Ghana Cameroon Fiji Haiti

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The developing countries don’t get invited up into the “Green

Room.”

They have to stay downstairs, in the corridor, waiting for the

“big” countries to set the agenda.

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Remember the Canadians’ two-step plan in which a “nucleus”

agrees on policy and generalizes it to the other

members?

We’re still doing that...

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“Power-Based Bargaining”

• Quad Countries: US, EU, Japan, & Canada– Set agenda– Dominate Green Room Caucus

• Unequal resources for handling disputes• Strong countries intimidate weak

countries• Developed countries threaten to

abandon and remake regime– E.g. “GATT-Plus”– E.g. WTO “Single Undertaking”

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Lec 10: Global Trade Regime Today

I. From the GATT to the WTOII. Regionalism vs MultilateralismIII.Doha: The Colonies Strike BackIV.Discussion Points

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On Tuesday, we discussed the essential disagreement

between GB and the US over the matter of Imperial

Preference.

The US wanted a multilateral trade regime; and GB wanted

to preserve its right to organize Preferential/Regional Trade Agreements (PTAs/RTAs).

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GB was ultimately pressed to phase out Imperial Preference.

But the pattern of allowing PTAs persisted.

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Despite the MFN principle, Article XXIV allows for PTAs.

These are sometimes called “Article XXIV exceptions.”

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This raises two key questions:

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(1) Effect on Trade

• Do PTAs increase or divert trade?– Increase: PTAs foster trade that would

not otherwise exist– Divert: PTAs capture trade that would

otherwise take place with nonmembers of the PTA

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(2) Effect on Trade Policy

• Do PTAs encourage additional liberalization?– PTAs as Stepping Stones: Once states

experience the benefits of liberalization, they are more likely to liberalize multilaterally

– PTAs as Alternatives: Why would Canada need to trade with the US when it has a great thing going with the British Empire?

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Lec 10: Global Trade Regime Today

I. From the GATT to the WTOII. Regionalism vs MultilateralismIII.Doha: The Colonies Strike BackIV.Discussion Points

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So the WTO radically expanded liberalization to include

services, investment, and intellectual property.

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Who does that serve? Who has a comparative advantage in

the production of those domains?

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The Developed World--“The North.”

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November 2001 brought the start of the latest round of

trade negotiation.

This round was launched in Doha, Qatar at the insistence of the developing countries.

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It brings us the Doha Development Agenda.

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Of course, Doha has brought further expansion and

deepening of the GATS, TRIPS, and TRIMS agreements.

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But the major focus has been on agriculture.

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Since GATT 1947, agriculture has always been the exception

to the rule of trade liberalization.

Agriculture has been heavily managed in both developed and developing countries.

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Developing countries conjecture, however, that

agricultural liberalization would play to their comparative

advantage--particularly since they have been exposed to

increased competition in other sectors as a result of the WTO.

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But talks have stalled repeatedly.

And there is talk that “Doha has failed.”

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What gives?

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First, recognize that food is different.

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Food is Different

• Food is a real necessity, a security issue

• Undifferentiated product ➔ fierce competition

• Considerable health & safety concerns• Sustainability & carbon footprint• Plausible cultural arguments for

management• Well-entrenched interest groups

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So, what is going to happen?

Will Europe ease the Common Agricultural Policy (CAP)? Will

the US stop subsidizing farmers?

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Here are two potential alternative stories...

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(1) 1846 All Over Again

• Developed world will realize its comparative advantage

• Developed world will seek resolution with developing world

• Leaders in developed countries will find creative ways to “sell” the policy to agro-business

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(2) 1994 All Over Again

• Developed world will realize its powerful advantage

• Developed world will choose to dominate developing world

• Leaders will find a way to conclude Doha with moderate “liberalization” on agriculture and increased liberalization on services, IP, &c.

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Lec 10: Global Trade Regime Today

I. From the GATT to the WTOII. Regionalism vs MultilateralismIII.Doha: The Colonies Strike BackIV.Discussion Points

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Positive Questions

• What do we expect will be the results of the Doha Round?

• Does the WTO matter? Is the WTO itself trade-creating or trade-diverting?

• Will PTAs undermine the Multilateral Regime?

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Normative Questions• Should we press for liberalization at all?• What should be our preference hierarchy in

the global trade regime?– Development– Equality– Stability– “Sustainability” -- short-term versus long-term

benefits and our discount rate

• Should the WTO be the cornerstone of the global trade regime?

• Should we remedy the “democratic gap”? If so, how?

• How else should we reform the WTO?