1. The World Trade Organization
and Trade

2. Outline
• Historical background
• Overview
• The Basic Principles
– Trade without discrimination
– Predictable, growing access to market
– Undistorted, fair competition
– Transparency
• Do trade agreement work?

3. Why trade agreements?
•
•
•
•
•
•
•
•
•
•
Why trade agreements exist?
Barriers to trade generate profit opportunities: it pays off to lower
barriers.
It is not only the theory of comparative advantage. Someone will
always potentially profit from free trade.
The benefits of international trade are nothing else than the benefits
of exploiting arbitrage opportunities (price differences)
If this is true, why free trade is not pervasive in the world?
Second-best arguments for protection: Market failures are
compensated by trade policy
The government has a stake: Electoral and tax earnings.
Redistribution
Infant industry argument
Also:

4. • Interest groups and protection-Political
Economy arguments
• Those who benefit from trade most
(consumers) are poorly organised, but
those who loose are efficiently organised
and lobby harder for protection (Olson).
• However, exporters can lobby too!
(Rodrik)

5. Preferential trade agreements
• Balance of these forces result in preferential trade
agreements (PTA’s) of different degrees.
• Fee trade agreement: groups of countries reduce or
eliminate tariffs or impediments to imports from other
countries in the group.
• Custom unions: In addition to the previous case,
countries co-ordinate to set a common external tariff to
imports from the rest of the world.
• Economic zone: Free movement of resources, not only
merchandises and services.
• Problem: Too many small groups…. Coordination failure

6. Preferential trade agreements
• Two waves:
• First: Treaty of Rome 1957. Andean Pact,
CARICOM, Etc… Non US participation
• Second: NAFTA, Mercosur, Andean Community,
FTAA, ASEAN.
• There is the possibility that a third wave is in the
making, after the collapse of the Doha (Cancún)
negotiations.
• This has lead to a constellation of agreements
and very complicated rules of origin generating
multitude of disputes and potential agreements.

7. Multilateral agreements
• Multilateralism
• GATT WTO
• Coordination mechanism for achieving
mutually beneficial trade outcomes
(response to a coordination failure, ie. to
successive retaliations).

8. History
•
1947 GATT is drawn to record the results of trade negotiations between 23
countries. Enters (provisionally) in force on January 1 1948
•
1950 US administration abandons efforts to seek congressional support for
the International Trade Organization
•
1949-1956 First four rounds of tariff negotiations
•
1957 Creation of the EEC
•
1962 Derogations to the GATT rules in the areas of cotton and fibers were
negotiated. Later to evolve in to the Multifibre agreements
•
1964-67 Kennedy Round. UNCTAD is created to press for trade measures
to favor the developing countries

9. History cont.
•
1973-1979 The Tokyo round. Multifibre agreement negotiated in1974 to
restrict export growth, and extended several times thereafter
•
1986-1994 Uruguay Round of negotiations. April 15 1994: The Marrakech
protocol signed, establishing the creation of the World Trade Organization
•
2001- Doha Round of negotiations, TRIPS and Agriculture

10. The World Trade Organization (WTO/GATT)
Duration of GATT rounds and number of countries involved.
100
Tokyo
80
Uruguay
40
20
0
1945
Fourth
60
Second
Third
Kennedy
First
number of countries at start
120
1955
Dillon
1965
1975
year
1985
1995

11. Overview
• International Organization begins to operate on
January 1, 1995
• Membership: 159 countries
• Secretariat: 550 staff members, headed by a
Director General, based in Geneva
• More info: www.wto.org

12. Overview
The Mission of the WTO
• Raise standards of living
• Ensure full employment
• Growing volume of real income and effective demand
through trade
• Seeking to protect and preserve the environment
• Secure for developing countries (especially LDC‘s) a
share in the growth of international trade that is
commensurate with the needs of their development

13. Functions
• Administring and implementing the
multilateral and plurilateral trade
agreements
• Forum for multilateral trade negotiations
• Dispute settlement
• Overseeing national trade policy
• Cooperation with IMF and World Bank

14. WTO: Basic Principles
(1) Trade without discrimination
(2) Predictable and growing access to
market
(3) Undistorted, fair competition
(4) Transparency

15. (1) Trade without discrimination
• MFN clause (art 1)
– Members are bound to grant the products of other
members treatment not less favorable than that
accorded to the products of any other country
• National Treatment (art 3)
– Once goods have cleared customs, imported goods
must be treated no less favourably than the
equivalent domestically-produced goods.

16. (1) Trade without discrimination
• Exception: Special and Differential Treatment of
Developing countries
• Two components:
– Protection component: Longer period to implement
tariff commitments
– Market access: Preferential access to developed
countries market under the generalized system of
preferences
• Both measures are intended to be temporary,
and are supposed to promote trade liberalization
in developing countries

17. (1) Trade without discrimination
• In reality, the provisions have been criticized
because they do not produce incentives for
trade liberalization
• Examples:
– Korea cut nominal tariffs by 6% after being dropped
by the US
– Samoa, after being dropped announced a drastic
liberalization to led to complete trade liberalization by
2010
• More generally: Change of focus on the issue
after the Uruguay Round of negotiations,
reflecting broader change of view on the role of
trade in promoting development and growth

18. WTO
GATT
GATS
TRIPS
DSU
•
•
•
•
•
•
•
•
•
•
Agriculture
Sanitary and Phytosanitary Measures
Technical Barriers to Trade
Trade-related Investment Measures
Anti-Dumping
Rules of Origin
Valuation
Import Licensing
Subsidies and Countervailing Measures
Safeguards
18

19. Outline
• An economic evaluation of the GATTWTO
– Rose AER (2004)
– Rose JIE (2004)

20. Source: Subramanian and Wei (2003)

21. Source: Subramanian and Wei (2003)

22. GATT-WTO Evaluation
• Rose (AER 2004): We don‘t really know
that the WTO increases (or the GATT
increased) trade
• Rose (JIE 2004): There is no evidence
that GATT/WTO members actually have
more liberal trade policies

23. Data
• Began in 1948 (covered 32 entities)
–
–
–
–
1960: 50 “contracting parties”
1970: 90c
1990: 112
Now: 159 with a few “observers”
• GSP bilateral preferences from UN’s
Operation and Effects of the Generalized
System of Preferences

24. Rose JIE (2004)
• Basic question: Do WTO members have more
liberal trade policies?
• No. Most measures of trade policy are not
correlated with GATT-WTO membership
• When trade liberalization occurs, it normally lags
behind GATT entry by many years
• GATT/WTO often admits countries that are
closed and remain closed for years after
membership