Lecture material week 6

Question 1

What determines international openness?
2 aspects according to Krasner and Keohane:

Answer 1

– Creation of open international trading regimes (Krasner)
– Maintenance of open international trading regimes (Keohane)

Question 2

GATT

Answer 2

• Contract negotiated in 1947;
  signed by 23 industrialized economies in 1948
• Art. 1 establishes MFN (‘most-favored nation’ principle)
  – Nation can decide to have tariff on a product; but same tariff rate applies to all exporters from GATT member countries
  – With conditional exceptions for preferential arrangements (custom unions, colonial legacies, PTAs, etc.)
• Art. 3 establishes ‘national treatment’ rule
  – Foreign and domestically produced products to be treated equally
• Gradual reciprocal reduction of tariff rates through negotiation ‘rounds’
• Gradual extension of membership; accession of developing countries
  – SDT (special and differential treatment) provisions
• Gradual expansion of scope beyond tariffs – NTBs
  – Investment-related issues

Question 3

WTO

Answer 3

• Rooted in ‘Uruguay Round’ (1986-1993)
• Institutionalization of GATT into formal IO
• Better integration of developing countries into
  decision-making (one country one vote)
• Agenda moves further beyond tariffs – services ‘trade’ (GATS)
  – investment protection (TRIMS)
  – intellectual property rights (TRIPS)
• Strong dispute settlement mechanism that can give member countries right to retaliate

Question 4

Example of WTO dispute

Answer 4

• “Banana war”
  – US & Latin American countries vs. EU & ACP (Africa, Caribbean and Pacific)
• EU maintains favorable tariff rates for ex colonies vs.Latin American banana exporters
• US initiates case vs. EU at WTO in 1990s
• WTO rules that EU banana import regime violates rules
• EU fails to comply fully
• Ecuador wants to retaliate against EU
  – But how can the weak punish the strong?
• “Cross-retaliation”!
• WTO allows violation of IP rights os European companies -> EU complies

Question 5

WTO in crisis?

Answer 5

• Achievements
  – One of most democratic international organizations
  – Exceptionally strong international legal mechanism that works
  – Successful at maintaining and monitoring reciprocal reductions in tariff barriers
• Failure
  – Stalemate in attempts to move agenda beyond tariffs
  – No truly significant progresses since controversial meeting in Seattle in 1999
• Despite 2013 Bali agreement on trade facilitation

Question 6

Preferential trade agreements

Answer 6

• Offer members lower tariffs than WTO-standards (reciprocally)
• Violate MFN principle (but allowed due to special provisions)
• Important; almost half of trade flows today covered by PTAs (although often under WTO rates)
• Various forms:
  – Bilateral trade agreements (BTAs)
  – Regional trade agreements (RTAs)
• Free trade area: NAFTA, ASEAN
  – Usually associated with ‘rules of origin’ legislation
• Customs unions: EEC 1957-92, Mercosur
• Common market: EU
• Economic union: nation-states
  – Trans-regional trade agreements – f.e. TPP, TTIP, RCEP, IPEF

Question 7

Why PTAs/RTAs?

Answer 7

• Political economy of preferential trade agreements
  – Easier to negotiate
• Don’t require the consensus of 164 WTO members
  – Allow ‘beyond-trade’ liberalization (‘deep’ integration; FDI)
  – Increase market size (vs. unilateral liberalization)
  – Corporate strategy
• MNCs may have better economies of scale at the regional than global level
  – Can facilitate the protection of domestic industries (rules of origin)
• “regional industrialization behind tariff walls”
  – Political reasons:
• Geopolitical symbolism (confidence building)
• Signalling devices for investors and domestic audiences
• Lock-in domestic reforms
• Bandwagon effects

Question 8

Are PTAs good or bad for free trade?

Answer 8

• They are designed to increase trade (“trade creation”)
• But they discriminate against non-members (“trade diversion”)
  – Can be designed to encourage higher-cost imports from partner countries