Trade, WTO & RTAs

Question 1

The puzzle of trade policy

Answer 1

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?

Question 2

Types of trade protection

Answer 2

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)

Question 3

Why are there still so many barriers to trade?

Answer 3

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

Question 4

Why is it that few governments liberalize unilaterally?

Answer 4

• 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

Question 5

Two questions that arise in bargaining

Answer 5

• Can an agreement be reached at all?
• Where does it fall?

Question 6

Where does the agreement in bargaining fall?

Answer 6

• 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

Question 7

Determinants of bargaining power

Answer 7

• 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)

Question 8

Bargaining can break down, what prevents successful bargaining?

Answer 8

• 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

Question 9

What factors can facilitate cooperation?

Answer 9

• 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

Question 10

How do international institutions facilitate cooperation?

Answer 10

• 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

Question 11

The GATT facts

Answer 11

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

Question 12

The WTO facts

Answer 12

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

Question 13

Three elements of WTO

Answer 13

• Established common principles and rules
• Repeated intergovernmental bargaining process
• Dispute settlement mechanisms

Question 14

Most favored Nation (MFN) (Common principles and rules)

Answer 14

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

Question 15

National Treatment (Common principles and rules)

Answer 15

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

Question 16

What reasons can allow you to deviate from WTO rules?

Answer 16

• 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

Question 17

WTO bargaining process

Answer 17

• 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

Question 18

WTO agreements, Uruguay

Answer 18

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

Question 19

WTO Doha Round Agenda

Answer 19

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”

Question 20

Why did the WTO Doha Round fail?

Answer 20

• 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

Question 21

Dispute settlement mechanism

Answer 21

• 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)

Question 22

Dispute settlement GATT

Answer 22

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)

Question 23

Dispute settlement WTO

Answer 23

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)

Question 24

Why do states (sometimes) like the WTO?

Answer 24

• 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”

Question 25

Does the WTO work?

Answer 25

Did it increase trade?
- Maybe, the jury is still out
- WTO members do engage in more international trade
- It is unclear if states that joined would have liberalized unilaterally and traded just as much
States bring few cases to the WTO
- Still it might act as a deterrent to imposing trade barriers

Question 26

Does the WTO eliminate power politics?

Answer 26

• No
• Hasan Minjah on Turkey Tails
  – Small Samoan states wanting to join WTO were banned by the US from limiting importations of turkey tails (scrap parts from the US as they are very unhealthy)
• Further WTO negotiations are at a standstill (for decades…) because of US/EU reluctance to remove agricultural subsidies

Question 27

Will the WTO last? (Appellate Body)

Answer 27

• Appellate Body necessary to conclude dispute settlement cases
• Usually has 7 members, appointed by WTO countries, 3 judges necessary for appeal
• US has been blocking appointments since 2018, it is now down to 0 members, essentially defunct
  – Members therefore cannot retaliate against violations
• Long-standing issues between US and Appellate Body:
  – Especially controversial: AB’s interpretation of the antidumping/countervailing duties agreement

Question 28

WTO take aways

Answer 28

• Cooperation is hard because of the anarchy of the international system
• The WTO aids trade cooperation by providing a forum for bargaining, monitoring behavior, and an enforcement mechanism through institutional reciprocity
• WTO progress has been stalled because of diverse interests and domestic politics

Question 29

Regional Trade Agreements facts

Answer 29

• Global bodies are limited and require cooperation and consent of many members
• States may seek regional trade agreements with more important trade partners instead
  – Most trade concentrated with a few partners
• In the past two decades, we’ve seen an explosion of regional trade agreements
• Can be as few as two members (bilateral), but trend towards mega-regional deals (eg. TPP, RCEP)
• Easier to implement because they require fewer members
  – The more actors, the harder cooperation
  – Powerful states can shop around for the best deals
  – Makes it easier to ease into free-trade policy

Question 30

Two types of Regional Trade Agreements

Answer 30

Free Trade Agreements (NAFTA, CPTPP):
- Eliminate tariffs among members
- Separate trade policies with non-members
- Most RTAs are Free Trade Agreements
Customs Union
- Eliminate tariffs among members
- Common trade policy with non-members

Question 31

Are RTA’s a problem for global trade? (pros and cons)

Answer 31

Problem: Trade diversion
- Could shift trade away from non-RTA members eg. from China-US to Mexico-US
– Thereby preventing full realization of comparative advantage
- Favors states with a strong bargaining position
- Biases trade rule in favor of states with large markets (the EU/US)
– States can exercise “outside options”

Benefit: Trade creation
- Create new trade that wouldn’t have occurred before
- Might be “stepping stonges” to multilateral agreements

Nobody knows which of these effects dominates - very hard to measure

Question 32

Why did the TTIP and TPP not come into force?

Answer 32

TTIP = Transatlantic Trade and Investment Partnership
TPP = Trans-Pacific Partnership
- TPP eventually turned into the CPTPP without the US, UK recently joined
Simple answer: Trump happened
However their rejection goes much deeper:
- Protests all over the world
- TTIP was already on ice before Trump entered office
- Sister agreement CETA, had to be renegotiated, because of a referendum in Wallonia

Question 33

How are agreements now often created? Due to the problem that liberalization often goes beyond tariffs

Answer 33

• Try to harmonize standards and regulations
• Introduce controversial rules to further investment (esp. investor-state-dispute settlement mechanisms)
• Introduce stricter intellectual property rights protections (good for pharmaceutical industry, but probably not for consumers)

Question 34

Hegemonic Stability Theory

Answer 34

Idea that one dominant actor can shoulder the burden of enforcement for all
- Either benevolently
- Or selfishly
In our most recent case it is the US (previously the UK)
- US benefits tremendously from trade liberalization (especially after WW2)
- US was willing to incur the costs of mobilizing and monitoring enforcement of the rules
Now the US power has decline, perhaps no one state is willing to provide the public good of trade liberalization
- Collective Action Problem
However, it is not clear whether Hegemonic Stability Theory is correct, but trade may increasingly fragment/become regionalized in a multipolar world