Trade, WTO & RTAs Flashcards
The puzzle of trade policy
Almost all economists agree that free trade is welfare-enhancing
- We can make ourselves richer (on the whole) by trading freely
- All we have to do it eliminate barriers to trade
- Then why does trade protection persist?
Types of trade protection
Tariffs
- A tax on imported goods
Quotas
- A limit on the amount of goods that can be imported by a nation or globally (rare today because WTO doesn’t allow quotas)
Non-tariff barriers (everything else)
- Industry subsidies
- Consumer and environmental safety standards
- Industry insurance programs
- Laws to protect regional products
– eg Champagne (a lot of these laws originate in EU (cheese and alcohols))
- Industry lobbies (and lawmakers can get very creative)
Why are there still so many barriers to trade?
Economically, free trade is a public good, and countries have economic incentives to free-ride
- All countries could be better off from coordinated liberalization
Other non-economic concerns, especially for non-tariff barriers
- Consumer safety
- Environmental protection
- National security concerns
– Not clear that liberalizing these would enhance welfare
Why is it that few governments liberalize unilaterally?
- Gains from trade are only guaranteed if other states also liberalize
- If you liberalize and another state doesn’t comparative advantage might not be realized and one state may be worse off
– Some states may be better off imposing a tariff if liberalization is not reciprocated (or at least politicians can be better off catering to domestic interests) - While trade is jointly beneficial, sometimes it is more beneficial to exploit others’ open markets
Two questions that arise in bargaining
- Can an agreement be reached at all?
- Where does it fall?
Where does the agreement in bargaining fall?
- An agreement will fall somewhere along the “contract curve”, ie. the set of “efficient agreements acceptable to all parties”
- A state’s bargaining power plays a role in where along the curve it lands
- Not all about providing a public good
- States still want to maximize benefits (either economic or political)
- When the lines on the contract curve are tangential that is the best deal for both parties
Determinants of bargaining power
- Market size/trade volume
– States that have a strong interest in EU markets may accept more demands from the EU than states that gain less from EU markets - Patience
– Are you willing to walk away from a deal and wait for the next negotiation round? - Attractiveness of outside options
– eg. No the UK cannot replace trade with the EU with trade from other countries (EU so close and so large)
Bargaining can break down, what prevents successful bargaining?
- No mutually beneficial gains to be made
– Status quo is already at one country’s ideal point
– Preferences incompatible (can be the case for non-tariff barriers, eg. airbags and seatbelts) - Information problems
– Countries don’t know each others’ ideal points, level or resolve or patienct
– Incentives to misrepresent both of these things - Inability to credibly commit to the agreement
– If you have no way of committing, then countries can just lie
– If countries don’t have faith in the others then they will not even make the agreement - Outside options
What factors can facilitate cooperation?
- Small number of states, or one hegemon to back the system
- Information to monitor compliance
- Repeated interaction (tit for tat)
– Ability to punish defectors
– Reciprocity
– Incorporate long-term gains into decision making - Linkage of policies
– Tie compliance to other issues like security
How do international institutions facilitate cooperation?
- Provide mechanisms to aid trade cooperation
– Set standards of behavior
– Monitor and enforce compliance
– Reduce transaction costs - Often based upon the principle of reciprocity (iteration and tit for tat)
– Concessions granted by one state are matched by others - Can take many forms:
– Global organizations (WTO)
– Regional organizations (NAFTA, CARICOM, EU) - Bilateral
The GATT facts
General Agreement on Tariffs and Trade (1948-1994)
- 23 members by 1948
- Created with other Bretton Woods institutions (IMF, World Bank)
- Lasts until 1994, replace by the WTO
The WTO facts
World Trade Organization (1994-today)
- Include updated GATT
- Uruguay Round added Agreement on New Areas (services, non-tariff barriers, intellectual property rights etc.)
- Both WTO and GATT were successful in reducing barriers to trade
- Still, WTO can’t agree on trade on agricultural and other goods protected by strong interest groups in Western world
Three elements of WTO
- Established common principles and rules
- Repeated intergovernmental bargaining process
- Dispute settlement mechanisms
Most favored Nation (MFN) (Common principles and rules)
All countries are treated as the closest trading partner
- Article 1: If you liberalize trade for one country, you have to liberalize it for all WTO members (exception: RTAs and GSP)
Exceptions to MFN
- Regional Trade Agreements:
– Free-Trade Areas (NAFTA)
– Customs Union (EU)
– Conditions: can’t raise trade barriers on others above prior barriers
- Generalized System of Preferences (since 1960s)
– Developed countries can apply lower tariffs for developing countries
National Treatment (Common principles and rules)
Behind the border, foreign goods have to be treated the same as domestic goods
- Article 3: Prohibits regulations and other policies that give domestic firms an unfair advantage
What reasons can allow you to deviate from WTO rules?
- Protect public morals (religious beliefs)
- Protect human, animal, or plant life or health
- Relating to the importations or exportations of gold or silver
- Protection of national treasures of artistic, historic, or archeological value
- Conservation of exhaustible natural resources if such measures are made in conjunction with restrictions on domestic production or consumption
WTO bargaining process
- Changes in WTO laws require unanimity
– All members have to agree (although in practice biggest countries often heavily influence the smallest ones)
– Until 1990s agreements dominated by big 4 (US, EU, Canada, Japan) - Often a single undertaking: Nothing is agreed until everything is agreed
– Facilitates issue-linkage and trading off concessions
– Can lead to stalemates
WTO agreements, Uruguay
Agreements not just on tariffs but a lot of trade related issues:
- GATS: General Agreement on Trade in Services
- TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights
- TBT: Agreement on Technical Barriers to Trade
- SPS: Agreement on Sanitary and Phyto-Sanitary Measures
- Agriculture Agreement
- Agreement on Subsidies and Countervailing Measures
WTO Doha Round Agenda
Main objective: economic development (2002-)
Ambitious agenda:
- All WTO members participated
- Required consensus for completion
- “Nothing is agreed until everything is agreed”
- Most controversial aspect: Agriculture and removal of developed countries’ subsidies
- Also on the agenda:
– Tightened anti-dumping rules
– Intellectual property rights
– Environmental protections
– Trade facilitation
– “Special and differentiated treatment”
Why did the WTO Doha Round fail?
- Unwillingness of US, EU, and Japan to reduce support for agriculture
- Pits developed vs developing countries for the first time
- Too many cooks spoiling the broth - too many countries willing to derail negotiations
Dispute settlement mechanism
- A standard upon which to adjudicate and punish violations of WTO agreements
- Allow for legal reciprocation of victim states
– Other firms or sectors can set new restrictions
– Can be good for violators (use WTO as scapegoat)
Dispute settlement GATT
Defendant could block actions:
Request for consultation -> Request for panel (request for panel can be vetoed) -> Panel ruling (panel ruling can be vetoed) -> Retaliation formally allowed (retaliation can be vetoed)
Dispute settlement WTO
Defendant could no longer block actions:
Request for consultation -> Request for panel -> Panel ruling -> Appellate body -> Compliance panel (if defendant found guilty by appellate body) (rules if country has become compliant) -> Arbitration panel (compensation) -> Retaliation (if defendant doesn’t agree to compensation or changes its laws) (can impose tariffs on anything you want, as long as it’s proportional to the harm if they are experiencing)
Why do states (sometimes) like the WTO?
- The WTO lets you lose
– This is an easy way to shift blame away from politicians onto the WTO
– Lets politicians avoid scorn and special interest lobbies - States can get creative with retaliation
– US steel tariffs, EU retaliates with tariffs on Bourbon and Harley-Davidons (two fold reason, significant patriotic meaning for US, and manufactured in a swing state) - The WTO makes exceptions, if it requires too much, states may defect from cooperation
– Koremenos et al (2001) - “The Rational Design of International Institutions”
