Week 6 - The World Trade Organization (WTO)

Question 1

What is the genesis of the GATT

Answer 1

○ GATT came into existence in 1947;
○ Resulted in great reductions in tariffs and other barriers to trade and in discriminatory treatment in int’l commerce;
○ 8 rounds during 5 decades of its existence;

Question 2

What are the achievements of the GATT?

Answer 2

§ Tariffs of DC (democratic countries) have damped from 40% after WWII to 5% now (biggest success); almost 40% have 0 tariffs;
§ Allowed economic expansion of the 1950s and 1960s;
§ Important to set the standards for commercial policies to ensure that tariff levels could move in one direction;

Question 3

What are the failures of the GATT?

Answer 3

§ Several gaping holes in the GATT coverage: agriculture and textiles;
§ New protectionist tools: voluntary restraints agreements and AD measures;
§ LDCs remained largely outside of the GATT;

Question 4

What is the WTO?

Answer 4

○ Came into existence in 1995 with the conclusion of the Uruguay Round Multilateral Trade Negotiations at Marakesh of 1994;
○ Geneva = headquarters;
○ 164 countries belong to the WTO;
○ Relatively small compared to other iOS, e.g. a staff of only about 635 people and a budget of roughly 140 million of dollars (The World Bank has a staff of about 9,300 people and a budget close to 1 billion of dollars);

Question 5

What are the main differences between the GATT and WTO in terms of DSM and TRIPs, TRIMs, and GATS

Answer 5

○ DSM;
§ GATT = allowed countries to veto sanctions against themselves (a member state could veto a sanction on themselves), by consensus, removed later on, countries who violate do not have a voice, shadow of the future becomes longer;
§ WTO = veto sanction was not present in the WTO;
○ TRIPS, TRIMs, And GATS
§ GATT = different trade-related barriers, liberalizes service sector (needs different types of manufacturing);
§ With TRIPS = asks countries to defend property rights too, reduces incentives to innovate in the first place;
§ WTO =did not exist before (TRIPs etc.), implements investments abroad, implemented the protection of intellectual property rights to protect multinational company rights;

Question 6

What is market liberalism?

Answer 6

§ Trade is good, we implement trade tariffs;
§ GATT is seated on economic base;
§ Asserts that an open or liberal int’l trade system raises the world’s standard of living (both rich and poor countries enjoy this);
§ Gains from trade are greatest when goods can flow freely across national borders unimpeded by government-imposed barriers;
§ Trade is not perfect, but without it, countries stagnate;

Question 7

What is nondiscrimination?

Answer 7

§ Most-Favoured Nation (MFN) (1st article of the GATT);
□ You apply the same principles for all the countries you trade with (and with your favourite trading partners);
□ E.g. : US lowers tariff to steelmaking materials imported to Brazil, anything that I do with one country reverberates everywhere;
□ MFN prohibits governments from using trade policies to provide special advantage to some countries and not to others;
□ MFN requires each WTO member to treat all WTO members the same way as they treat their favourite trading partner;
□ Example:
® US imports 1.5 billion dollars of steelmaking materials from Brazil;
® US lowers tariff to steelmaking materials imported to Brazil
® Hence, the US is legally forced to lower tariffs to steelmaking materials imported from (say) Mexico as well (since Mexico is a WTO member);
® Note: this is a very powerful instrument to dampen trade barriers worldwide!
□ 2 exceptions:
® Gov’ts are allowed to depart from MFN if they join a regional trade agreement;
◊ US can lower tariffs to steelmaking materials imported to Mexico without doing the same with Brazil, since the US and Mexico are part of the NAFTA;
® Generalized System of Preferences (1960) –> tool of development because it allows the advanced industrialized countries to apply lower tariffs to imports from developing countries, first step where developed countries acknowledge gap, instrument of development, offers larger market to least developed countries;

		§ National treatment (NT) (3rd article in the GATT);
			□ Treating domestic countries in a certain way = treating national countries in the same way;
			□ NT prohibits gov'ts from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. NT requires gov'ts to treat domestic and foreign versions of the same product similarly once they enter the domestic market;
			□ E.g.: EU countries cannot set one fuel efficiency standard for foreign  cars and another for domestic cars;
			□ EU must apply the same standard to domestic and foreign producers;
• Example:
	○ EU countries cannot set one fuel efficiency standard for foreign cars and another for domestic cars;
	○ EU must apply the same standard to domestic and foreign producers;

Question 8

How do the GATT/WTO Rounds work?

Answer 8

○ WTO rounds —> like sunset clauses;
○ WTO Round (each with a definite starting date and a target date of conclusion);
§ At the beginning of the round, governments meet for 3-4 days and establishes an agenda detailing the issues that will be the focus on negotiation;
§ Lower-level national officials based at the WTO headquarter conduct detailed negotiations on the topic embodied in the agenda;
§ Officials reach interim agreements;
§ Once, negotiations have produced the outlines of a complete agreement, a final Ministerial Conference is held to conclude the round;
○ Issue linkage is possible –> Nine Rounds, 1947-2015 (main topic of discussion = tariffs);
○ Explosion of membership = may be due to countries/colonies becoming independent;

Question 9

What is the “in the shadow of law” decision-making system?

Answer 9

bargaining power in int’l organizations is derived from substantive and procedural legal endowments, legal procedures were included in the treaty;

Question 10

What is the “in the shadow of power” decision-making system?

Answer 10

legislative bargaining and outcomes in int’l organizations is a function of interests and power;

Question 11

Why is consensus important in the bargaining process of the WTO?

Answer 11

• Bargaining in the WTO:
○ Sovereign equality decision-making at the WTO –> oddly democratic;
○ Every member has the right to attend, intervene, make a motion, take initiative in all plenary meetings;
○ Every member has the right to introduce, withdraw a proposal or amendment;
○ A consensus decision (very particular to the WTO) requires no manifested opposition to a motion by any member present;
○ This bargaining process is oddly democratic;
• Why Consensus?
○ Preserve legitimacy;
§ You give the impression that, it does not matter how powerful insofar as you are part of the WTO, you will be subject to the WTO guidelines;
○ Relative market size as a source of bargaining of power;
§ Developing countries have the incentive to refer to developed countries;
§ Institutional capacity is an important factor that prevents developing countries from being able to set the agenda;
§ Power of agenda setting;
□ Mostly by developed countries;
§ Contextual issue linkage;
□ Mostly with aid and financial assistance;
§ Best alternative to a negotiated agreement (BATNA);
□ Developed countries are more favoured here –> being left out from WTO for developing countries is more consequential than for developed countries;
○ Shadow of power as an example of informal governance;
§ WTO used to not be functioning according to this;
§ Form of governance that is arbitrary (not legalized);

Question 12

How do LDCs view the GATT and what are some failed and successful reforms?

Answer 12

• LDCs & GATT:
○ LDCs are very skeptical that trade could contribute to economic development;
○ GATT was often seen as an instrument of economic imperialism rather than an instrument to achieve economic growth;
○ India, Brazil, Chile, and Australia expressed their concerns that the rule the US and the UK were writing for the GATT failed to address economic problems that LDCs faced;
○ Developed countries reap more benefits from the GATT than developing (distributional effects of the GATT);
• LDCs and New IOs:
○ United Nations Conference on Trade and Development (UNCTAD);
§ Created in 1964 to promote LDCs’ interests in the world trade system;
○ Group of 77:
§ Created in 1964 to promote reform in the int’l trade system;
• 3 failed reforms:
○ LDCs tried to pursue 3 mechanisms to increase economic growth:
○ Commodity Price Stabilization;
§ Setting a floor below which commodity prices would not be allowed to fall;
○ Financial transfers from developed economies;
○ Reduction of tariffs on primary commodities by advanced economies;
• 2 successful reforms:
○ LDCs received two important concession:
§ GATT Part IV: 3 articles focusing on LDCs;
§ Generalized System of Preferences: exception of the MFN principles;
• Developed Economies vs. LDCs:

Question 13

What are the 3 major problems facing developed economies vs. LDCs?

Answer 13

○ 3 major problems:
§ Reduction agricultural products (main one that keeps round going);
§ Partial fulfillment of the multifiber arrangement, i.e. reduction of trade barriers in the textile sector:
§ “Singapore issues”:
□ LDCs refused to deal with these issues at all, believing them an instrument of protectionism and too expensive to be implemented;
□ All abrogated in developed countries;
□ 4 issues were proposed by EU, Japan, Korea;
□ Issues:
® Transparency in government procurement, i.e. procurement of goods and services on behalf of a public authority, such as a government agency;
® Trade facilitation (customs issues), i.e. reduce associated cost burdens and maximize efficiency while safeguarding legitimate regulatory objectives;
® Trade and investment;
® Trade and competition
□ LDCs refused to deal with these issues at all, believing them an instrument of protectionism and too expensive to be implemented;

Question 14

What is the Doha Round?

Answer 14

○ US and EU cannot implement the agenda;
○ Stand-off between China, US, India, and the EU over agricultural issues;
○ Namely, LDCs are demanding more trade liberalization than the US and the EU are ready to accept;
○ LDCs are not willing to accept strict rules on trade-related issues (they see these rules as a form of protectionism;
○ More balanced power relations between developed economies and emerging markets;
○ Countries in the WTO are as powerful as the hegemons in the South and North;

Question 15

What are bound tariffs?

Answer 15

§ Bound tariffs could be higher than those that were pre-WTO;
§ Bound tariffs = flexibility;
§ Safeguard measures = you need to prove and show that you are facing certain problems;
§ Bound tariffs = you can change the tariffs when you want;
○ Bound tariffs = tells you what the max amount of tariffs that WTO can set for agreements;
§ Countries that use these tariffs are not in violation of WTO rules, cannot face a dispute in the WTO;
§ Bound tariffs = higher than WTO tariffs, individual countries set their own tariffs high;
§ Bound tariffs = MFN minus accession;
§ Applied (MFN) tariffs are usually lower than bound tariffs;
§ Why would higher tariffs be allowed to be imposed?
□ Flexibility (gives countries some leeway to give some accommodations in case they face threats from external trade);
□ MFN tariffs are usually used, but the applied tariffs may also be applied too but it is rarer;
□ You can increase tariffs without consequences or penalties with applied/bound tariffs;
□ There is a battle among exporters to keep the tariffs low;

Question 16

What is De Jure Depth?

Answer 16

□ No reciprocity;
□ Entrants have no means of altering the market access;
□ The more valuable a country appears to be to export-oriented interests, the more likely these groups are to mobilize and exert pressure on their governments to make sure bound tariffs can actually go lower (Pelc);
® They ask the country seeking accession to have a large De Jure Depth (e.g which is why China got a very bad deal in the WTO, because it has a very valuable market, bound tariffs needed to be lower so that multinational companies exporters could actually export in China)
□ The greater will be the requirements that governments will impose on entrants (for valuable markets);
□ Exporters tend to target valuable markets;

Question 17

What is De Facto Depth?

Answer 17

□ This is decided by entrants after having bargained bound tariffs;
□ Import-competing industries in acceding countries can push their governments to raise their MFN duties relative to the bound rates;
□ Democratic institutions leave governments more vulnerable to such domestic industry pressure;
□ Countries will put pressure on the government to keep the tariffs as high as possible like they were before;
They will target democratized countries, will add domestic pressure

Question 18

What is Pelc’s hypotheses and research design?

Answer 18

• Hypotheses:
○ HP1: If an industry/country is a valuable export market prior
to accession, then it will face higher de jure liberalization
○ HP2: More democratic countries exhibit lower de facto
liberalization in those industries that are most valuable as
export markets;
De facto liberalization is smaller for industries that face more competition from abroad;
• Research Design:
○ Dependent variables:
§ 1 . de jure: MFN-pre - Bound tariff (difference)
§ 2 . de facto: MFN-pre - MFN-post (difference)
§ 3 . binding overhang: Bound tariff- MFN-post (difference)
○ Independent variables:
§ 1 . log of import in an industry/country (size of market)
§ 2 . democratic regimes (regime type)
§ 3 . interaction between log of import and democratic regimes

Question 19

What are Pelc’s main findings?

Answer 19

• Results:
○ Developed countries would tend to use MFN tariffs, not bound tariffs because of domestic costs;

-  Sample: 13 countries, 1995-2008
	○ Typically developing countries;
	○ Positive correlation between both variables;
	○ The more a market is valuable, the bigger is the trade liberalization;
	○ Lower bound tariffs, lower MFN tariffs --> e.g. China;
		§ Idea that if all countries lower their tariffs, this will jeopardize big markets like China;
		§ Interest groups are more powerful in democracies --> thus the more valuable a market is in a democracy, the more there is a desire to liberalize ---> China = non-democracy and big market, thus large de facto and de jure (interest groups are not powerful enough to influence enough);
		§ Liberalization = large when there is big gap between tariffs before and tariffs after;
		§ Founding countries were open to trade to begin with ---> there will be more desire to liberalize;
		§ We tend to see countries setting applied tariffs;
	○ The more democratic I am, the more I will likely to be liberalizing more --> winning coalition (McGillivray et al.);
	○ In democracies + places where interest groups absorb --> interest groups are more likely to affect government less --> explains why China got a less good deal in the WTO;
	○ Interest groups are more powerful in democracies than autocracies;

Question 20

What are the pros of the WTO?

Answer 20

○ Predictability and stability of the int’l trade system;
○ Promoting fair competition;
○ Encouraging developing and economic reforms;

Question 21

What are the cons of the WTO?

Answer 21

○ Difficulty of reaching an agreement due to:
§ Too many members;
§ Conflicting interest between high-income, middle-income, and low-income countries;
○ Few interest groups are represented in the WTO (what about human rights or environment or public health issues?)

Question 22

What is the gravity model?

Answer 22

Gravity Model:

• Workhorse in a number of empirical trade studies;
• Comes from gravity law by Newton;
• High explanatory power;
• Data easily available; 
• Gravity models begin with Newton's Law for the gravitational force (Gfij) between two objects I and j;
• Shows relationship between GDP and trade relations;
• Gfij = MiMj/Dij with I is not equal to j;
	○ The gravitational force is directly proportional to the masses of the objects and indirectly proportional to the distance between them;
	○ GDP = size of markets, we would expect that GDP is always positively correlated with trade;
	○ The closer two countries  are, the more they trade;
		§ Natural treatments;
•  Standard Control Variables:

• Adjacency;
	○ Physical proximity of trade partners (US, Canada);
• Common language;
• Colonial links;
	○ e.g. France maintains good trading relations with former French colonies;
• Common currency;
• Island, Landlocked;
• Institutions, infrastructures, migration flows…

Question 23

What is the effect of the GATT on De Jure members?

Answer 23

• Rose (2004) looks at the effect of the GATT/WTO on de jure members;
  
  • However, here is where informal governance comes to play a role;
  • Many countries were not de jure members, but they were able to enjoy MFN market access, i.e. de facto members;
  • Moreover, the GATT/WTO is only one of the many trade agreements;

Question 24

What is the effect of the GATT on De Facto members?

Answer 24

• Colonial territory;
  
  • Newly independent countries;
  • Countries waiting to access the GATT, e.g. Japan was de facto member in 1953 (only formal member in 1955);

Question 25

Why is the international system complex?

Answer 25

• The GATT/WTO is not the only trade agreement;
○ Colonial preferences e.g. Commonwealth;
○ PTAs;
○ Unidirectional (asymmetric) trade agreement (GSP –> Generalized System of Preferences);

Question 26

What are the findings using the Gravity model?

Answer 26

Findings: GATT/WTO and Trade:

* A large increase in trade happened in de jure rather than de facto members of the WTO;
* Countries that are de jure members saw a major increase in tariffs;

Findings: PTAs and Trade;

• Membership in PTAs increases trade by 35%;
• Evidence that int'l trade agreements have complemented, rather than undercut, each other;
	○ Strongest increase of trade for countries that are both members of the GATT/WTO and of PTAs;
• Take-home message: the GATT/WTO is an effective institution if effectiveness = increasing trade;

* De facto = not formally de jure because they did not go through the process of becoming de jure, this status is for those who had some problems before entering accession in WTO, like a trial ;
* New members = countries that do not even both to go to accession;
* Case = knowing when to apply tariff reductions;
* De facto example = China;

Question 27

How do Developing countries view the DSM of the GATT/WTO?

Answer 27

• Low and middle income countries tend to participate a lot, not true that the least developed will not participate;
  
  • Developing countries = as participatory as developed;
  • Gap between low and high developed countries is closing;
  • Biggest problem that developing countries have is institutional capacity (there is a gap);

Question 28

What are some issues faced by developing countries in the DSM?

Answer 28

• Retaliation does not seem like an issue –> wealthy defendants worry about the normative condemnation;
  
  • Wealthier countries tend to resolve their disputes through negotiation, either in consultations or at the panel stage before a verdict;
  • Developing countries are far less likely than richer ones to induce a settlement before a ruling issued;
  • This is a big problem because concessions are more likely before ruling;
  • Explanation: institutional capacity gap;

Question 29

What is Davis & Bermeo’s idea of “Learning by Doing”?

Answer 29

• Gov’ts and industry must invest a considerable amount of resources in learning how to use the dispute process the first time;
  
  • Experience gathered in the first case can be applied to future cases
  • Punch line: Fixed costs related to institutional capacity and knowledge result in economies of scale for dispute initiation;

Examples:

- Pakistan;
	○ Dispute on a transitional safeguard measure applied by the US on textile;
	○ Had to create a 13-member WTO Council;
	○ Had to appoint the first ambassador at the WTO;
	○ Used them for other disputes later on;
- Costa Rica;
	○ Dispute on a transitional safeguard provisions for cotton underwear;
	○ Had to create a legal team;
	○ Used this expertise for the disputes later on;
	○ They lost the dispute at the beginning but they used the dispute to defend themselves at the beginning;

Question 30

What was Davis & Bermeo’s research design?

Answer 30

• DV = count of the number of cases initiated by a country in a given year;
  
  • Two main IVs capturing the level of experience of countries;
    ○ Count of initiations in the previous ten years;
    ○ Count of cases in which a country was a defendant in the previous ten years;
  • Sample = 75 developing countries, 1975-2003;

Question 31

How effective is the WTO?

Answer 31

· WTO increased trade for both de jure and de facto members;
· Other trade agreements seem to complement the effect of the WTO on trade (e.g. if you are part of a PTA in addition);
· Ambiguous effect of the DSM on developing countries;
○ Power matters in trade dispute less than expected;
○ Limited institutional capacity reduces the probability of early settlement;
○ Evidence of learning effect;