World Trade Regimes

World Trade
March 6, 2013
Trade Regimes
Before 1947, there was little in the way of a
framework for organizing trade.
Any agreements on trade were generally
bilateral (between two countries).
Sometimes wars were fought over trade and
related issues (the 1812 war between the US and Great
Britain being one), as were the “Opium Wars” between
Great Britain and China in the mid 19th Century.
But aside from treaties and war, states
themselves most often regulated the flow of trade over
their borders insofar as such activities could be
Response to Great Depression
Discussions among the Allies during WWII and
conferences after the war led to a set of conclusions:
1. That individual national responses to the problems
created by the Great Depression served to make
the depression worse for most countries and made
it last longer. These responses generally came in
the form of the unilateral imposition of protectionist
measures meant to shield domestic industries from
foreign competition. As a result, trade volume
dropped dramatically and most countries lost
ground economically.
Great Depression
2. Thus, the attempts by individual countries to
help themselves ended up hurting all
countries, including those that set up barriers.
This was a type of reverse invisible hand– selfinterested moves by individual governments
ended up reducing the utility of everyone
rather than increasing it.
Great Depression
3. The deepening and lengthening of the
Depression was a direct cause of WWII, in part
because it helped bring the Nazis to power in
4. Thus to avoid another world war, international
agreements should be in place to help prevent this
chain of events from happening again.
5. These agreements should be facilitated by an
international organization, in the same way that
the resolution of political problems was to be
facilitated by a similar type of institution.
The result was GATT: the General Agreement on Tariffs
and Trade, an international organization set up in 1947
to facilitate freer trade on a multilateral basis.
Foundation assumptions of GATT:
O Free trade better than regulated trade
O Free trade is best guaranteed through multilateral
O Multilateral agreements facilitated by the presence of
an international organization.
All of these mark GATT as part of a liberal
internationalist approach to international relations.
GATT lasted until 1995:
O Headquarters in Geneva
O Small staff
O Functioned as facilitator and judicial body
rather than an enforcement body:
O Negotiating forum
O Arbitrate trade dispute
O Clarify rules
O Assist states to observe rules
World Trade Organization, created in 1995 as the
successor to GATT.
Similar in:
O Embodying belief that multilateral agreement to
freer trade is good
O Serves as multilateral negotiating platform
O Performs judicial functions
O International institution
O Incorporates GATT agreements unless later
superseded by new agreements.
Differences from GATT:
O Larger staff
O Enforcement powers
O Enlarged free trade agenda to include services
and intellectual property
O Larger membership, now including newly
industrialized countries and countries that had
not been very active participants in capitalist
world trade patterns (Vietnam, PRC, Russia,
countries in Eastern Europe)
Free trade generally means the lowering or
elimination of trade barriers that act as
protectionist measures.
While the WTO works to promote free
trade, it’s immediate goal is not to push for the
elimination of all trade barriers.
Instead, it’s foundational principles are
reciprocity and nondiscrimination– creating a
framework in which it attempts to equalize trade
barriers among countries in a global framework.
O These are achieved by institutionalizing the
principle that Most-Favored Nation Status is
extended to all member states of the WTO.
O MFN status: State A receives the same
trading benefits from State B that State B
extends to its most preferred trading
Trade Negotiations
Besides using MFN status as a tool for
equalizing trade barriers, both the GATT and
WTO have attempt to change the type of trade
barriers nations use by encouraging them to
convert from non-tariff barriers to tariffs, then
to lower tariffs over time.
Trade negotiations under both GATT and WTO
generally occur by means of multi-year rounds
of negotiations that concentrate on particular
issues and economic sectors.
Kennedy Round: problems of European
Tokyo Round: global interdependence
Uruguay Round: agriculture
One difficulty in successfully concluding a round of
negotiations is the requirement of consensus: all
countries must agree, which means one country can
veto an agreement
The larger the group, the more difficult it is to find
consensus. Thus it is to be expected that rounds
conducted under the WTO will be more difficult to
conclude successfully than those conducted under
Specific Difficulties
Why can’t countries just agree to lower or eliminate
all trade barriers:
O Different situations of different countries,
including poor and newly industrializing
countries, which may require more protection
O Existing agreements among countries
O Need for countries to negotiate with domestic
constituencies that would bear the immediate
burden of lowered barriers.
O States in general benefit unevenly even if
lowering of barriers benefits the world economy
as a whole
Current Problematic Areas
O Resistance of newly industrializing countries
to the imposition on them of quality,
environmental and working condition
standards by established industrialized
O Resistance of industrialized countries to
ending agricultural subsidies
O Financial services regulations
O Protection of intellectual property
(copyrights, patents).
Other Free Trade Operations
Bilateral Agreements:
Agreements between two countries that
contain reciprocal arrangements to lower trade
barriers on all or selected trade items.
These types of agreements (along with free
trade areas) are contrary to the spirit and
purpose of the WTO, which is dedicated to
created a uniform and universal trade
environment through multilateral agreements.
Why bilateral agreements given the existence
O Difficulties of concluding WTO rounds
O Address specific trade topics not included in
WTO negotiations
O Need for, or ease of, agreement with a few
partners with which a country does a large
volume of trade.
Multilateral NonWTO agreements
Not all multilateral trade agreements that create reciprocal
trade arrangement are under the control of the WTO. Regional
groupings of states may create such agreements. Again these
are contrary to the WTO goals of uniformity and universalism.
Indeed, such arrangements are competitive with and
sometimes a substitute for WTO agreements, and insofar as
they proliferate and serve the needs of countries, they could
displace WTO agreements and perhaps the entire WTO
The fear, however, is that without a strong WTO framework:
O World trade will not increase as much as is possible
O The world will be divided among three or four zones, in
which trade is free within each zone, but remains
substantially burdened between zones
Free Trade Areas are regional areas of free
trade that result when a specified group of
countries successfully conclude a multilateral
set of negotiations that remove most or all
trade barriers.
Examples: North American Free Trade Area,
Customs Unions
Customs Unions are the result of negotiations
that not only create a free trade area, but also
result in agreement on a common tariff
towards states that are not part of the
Example: Customs Union of Kazakhstan,
Belarus and Russia, Arab Customs Union
Common Markets
Common Market: FTA plus customs union plus
coordination of other economic policies, such
as monetary exchange.
Examples: EU euro zone, Southern Zone
Common Market (Mercosur)
Other factors in the growth
and facilitation of world trade
Cartel: an association of producers or
consumers of a product that is formed to
manipulate the price of the product on the
world market.
Producers: control the supply of a product on
the world market
Consumers: collaborate to limit or otherwise
coordinate demand for a product on the world
market (or try to affect supply by creating
Perhaps the most famous cartel is the
Organization of Petroleum Exporting Countries:
O Control about 40% of the world’s oil production
O Well organized with an formal institution
complete with headquarters in Vienna
O Uses its position not only to manipulate price to
enrich members, but also to:
O Influence political behaviors and events, reward
friends and punish opponents (oil boycott of the
1970s in aftermath of Arab-Israeli war)
O Influence the world economy
While it is well organized and has institutions in place
that allow all members to participate in decisionmaking,
it is dominated by Saudi Arabia due to the latter’s large
contribution to the world’s oil supply:
O Heavily influence decisions in OPEC
O Can move independently of OPEC because it can
influence world prices by itself
O Conservative and since the late 1970s has generally
been more rather than less cooperative with the West
in terms of political goals and willingness to adjust
supplies to ease global or Western economic
O Tends to think in the long rather than short term
Other cartels
O International Energy Agency: cartel of energy
consumers that attempts to keep world energy
prices low and stable by coordinating energy
policies among nations and maintaining a
reserve supply of oil. Not very successful
O Fair Trade organizations, which are cartels of
suppliers and consumers of such items as
coffee, chocolate. Stabilize prices, provide fair
and guaranteed incomes to farmers, liberate
farmers from control of multi-national
Other Non-State Actors
Not all the important actors in negotiations
over free trade are states or organizations of
states. Private organizations also play a role:
Industry groups: lobby to gain concessions or
to protect existing concessions.
These are particularly important in the areas
of agriculture and intellectual property rights
Non-State Actors
O Labor Unions and Organizations: also
attempt to create or protect concessions
O Advocacy Groups and Non-Governmental
Organizations (NGOs): attempt to influence
negotiations to include protections for the
environment, children, women, workers in
general across national boundaries
Enforcement of Trade Rules
O Bilateral agreements may have their own special
forums or have stipulations that accusations of
violations or other disputes be heard by a third
party arbitrator.
O Customs Unions, FTAs and Common Markets will
have internal organizations that are tasked with
dealing with violations of bilateral rules.
O National: States themselves can have agencies
and legislation that can levy retaliatory tariffs
and other measures when countries violate
either bilateral, multilateral or WTO agreements.
WTO Enforcement
O If the trade in question is within the
framework of the WTO, then the country that
is the subject of another country’s
retaliatory measures can appeal to a “WTO
hearing” to argue that the measures are
wrong or disproportionate.
O If such a hearing finds that the measures
are disproportionate, the WTO can allow the
aggrieved nation to respond in kind
Backlash Against WTO
O Perception that the WTO is the tool of
O Industrialized countries
O Global corporations
O Secret, unaccountable, undemocratic
O Resistance to free trade in general:
O High wage workers in industrialized countries
O Environmental organizations– leads to
environmental damage
O Advocacy groups: leads to exploitation of workers,
particularly children

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