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HISTORY OF GATT & THE WTO SYSTEM

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1 HISTORY OF GATT & THE WTO SYSTEM

2 A Brief History of the GATT
Beggar-thy-neighbour tariff policies of 1930s => WWII Bretton Woods Conference at the end of the WWII, finance ministers from the Allied nations gathered to discuss creation of a new monetary system that would support postwar reconstruction, economic stability, and peace. => IBRD & IMF => need for a third institution, ITO. 1940s: Representatives met to design a postwar trading system that would parallel the international monetary system. Draft a Charter for ITO, Negotiate the substance of an ITO agreement (rules governing governing international trade and reductions in tariffs. 1947: 23 Members Today: 153 Members

3 GATT Trade Rounds Year Place / Name Subjects Covered Countries 1947
Geneva Tariffs 23 1949 Annecy 13 1951 Torquay 38 1956 26 1960 – 1961 Dillon Round 1964 – 1967 Kennedy Round Tariffs and Anti-Dumping Measures 62 1973 – 1979 Tokyo Round Tariffs, Non-tariff Measures, Framework Agreements 102 1986 – 1994 Uruguay Round Tariffs, Non-tariff Measures, Rules, Services, Intellectual Property, Dispute Settlement, Textiles, Agriculture, Creation of WTO 123

4 Timeline of GATT & WTO -1-
1944: At the Bretton Woods Conference, which created the IBRD and IMF, there is talk of a third organisation, the ITO. 1947: As support for another international organisation wanes in the U. S. Congress, the General Agreement on Tariffs and Trade is created. The Gatt Treaty Creates a set of rules to govern trade among 23 member countries rather than a formal institution. 1950: Formal U.S. Withdrawal from the ITO concept as the U.S. Administration abandons efforts to seek congressional ratification of the ITO

5 Timeline of GATT & WTO -2-
1951 – 1986: Periodic negotiating rounds occur, with occasional discussions of reforms of GATT. In 1980s, serious problems with dispute resolutions arise. The Uruguay Round, a new round of trade negotiations, is launched. This culminates in Treaty that establishes the WTO. 1995: The WTO is created at the end of the Uruguay Round, replacing GATT. 2009: The GATT consists of 153 members, accounting for approximately 97% of world trade.

6 Success of GATT Regular meetings of GATT members are known as “negotiating rounds Primarily focus on further reductions in the in the maximum tariffs that countries could impose on imports from other GATT members Tariffs on manufactured products fell from a trade- weighted average of roughly 35% before the creation of GATT in 1947, to about 6.4% at the start of the Uruguay round in 1986. The volume of trade among GATT members surged: In 2000 the volume of trade among WTO members stood at 25 times its 1950 volume.

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9 Unsolved Problems of GATT -1-
By the 1980s several problems had surfaced: The dispute resolution mechanism of GATT was not effectively functioning. Longstanding disagreements among members regarding issues like government subsidies, regulations for FDI… A number of commodities (agricultural products and textiles) were widely exempt from GATT disciplines. Certain forms of administered trade protection (anti-dumping duties, VERs, counterveiling duties) were restricting trade and distorting trade patterns in many important sectors.

10 Unsolved Problems of GATT -2-
Trade in services was expanding rapidly and GATT had no rules regarding trade in services. Countries producing intellectual property were becoming increasingly frustrated by the lack of intellectual property protection in many developing nations. Rules regarding trade related investment measures (eg. Domestic purchase requirements for plants built from FDI) were hotly disputed

11 Tokyo Round A first attempt for reforming the system,
Progressive reduction of tariffs, average tariff on industrial products became 4.7%, Discussion of fundamental problems: Agricultural product trade, Safeguards (emergency import measures), A series of agreements and arrangements on non- tariff trade barriers => Small number of GATT members subscribed to them, Several Codes on Plurilateral Commitments (Eg. Government Procurement, Civil Aircraft, Diary Products).

12 URUGUAY ROUND Launched in 1986 to address the problems of GATT
Major reforms introduced: WTO established, A new dispute resolution mechanism built up, GATT’s authority expanded to new areas, agreements regarding trade in textiles, agriculture, services, and intellectual property, New set of rules regarding administered protection came into effect.

13 Fundamental Principles of the gatt/wto System
RECIPROCITY: A practice that occurs in GATT negotiating rounds, whereby one country offers to reduce a barrier to trade and a second country “reciprocates” by offering to reduce one of its own trade barriers. The practice of swapping tariff concessions, facilitates the reduction of trade barriers. NONDISCRIMINATION: (Equal treatment) If one GATT member offers a benefit or a tariff concession to another GATT member, it must offer the same tariff reduction to all GATT members.

14 NONDISCRIMINATION -1- Most Favoured Nation Treatment: Grant someone a special favour, then have to do the same for all other WTO members. Each member treats all the other members as “most favoured trading partners”. National Treatment: Imported or locally-produced goods should be treated equally – at least after the foreign goods have entered the market. Freer Trade: Lowering trade barriers, gradually and through negotiation. Trade barriers concerned include customs duties and measures such as import bans or quotas, red tape, and exchange rate policies.

15 NONDISCRIMINATION -2- Predictability through binding and transparency:
Once lowered, promising not to raise trade barriers gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created, and consumers can fully enjoy the benefits of competition (variety, and lower prices). Percentages of Tariffs Bound Before and After the 1986 – Talks Before After Developed Countries 78 99 Developing Countries 21 73 Transition Economies 98

16 A Question Why is reciprocity important in reducing barriers to trade? Don’t countries benefit by unilaterally reducing their tariffs because lower tariffs lead to lower domestic prices? Theories of International Economics tell us that, it depends on the size of the country: If the country is small, captures all the benefits from trade => no need for reciprocity

17 Impact of a tariff on a small country
Import tariffs=Tax Raise the price that consumers pay for a good, Provide tax revenue to the government Potential to create inefficiencies in consumption and production decisions, Very small country will benefit by unilaterally lowering its tariffs, Because very small countries are unable to affect the world prices

18 Impact of a tariff on a large country
Reciprocity becomes important when large countries are changing their trading policies, Because import demand will comprise largeshare of world wide demand, prices are affected If a tariff is imposed Quantity of Imports demanded will decrease Wold Price falls Terms of Trade Improves Cost of tariff is pushed on to foreign producers Country is better off Consumers pay higher prices, but gov’t collect revenue, and import competing producers earn higher revenue

19 The use of tariff policy by the large country
Beggar-thy-neighbour policy Importing Country better off Exporting Country worse off Inefficiencies in the world trading system Level of production becomes too high in importing country, and level of production becomes too low in exporting country

20 T-o-T Driven Prisoner’s Dilemma
Two situations: Two parties can improve their situations by acting cooperatively, However, indivudual incentives they face lead them to act non-cooperatively. The problem facing the countries at the end of WWII was that they knew they would collectively be better off under free trade. Though each country benefited from its own import tariff, it also suffered at the hand of its trading partner’s import tariffs.

21 GATT MECHANISM A mechanism was needed by which countries could jointly commit to tariff reductions that would reduce the losses due to production and consumption distortions, and through gains in efficiency, make all countries, better off. Practice of reciprocal tariff reductions provided the necessary mechanism for countries to commit to freer trade In all countries, the reallocation of labour and capital away from protected import competing firms and toward export sectors would generate real efficiency gains => Export Oriented Growth Strategy !

22 Power of Non Discrimination
Convenience and practicality, Setting the same tariff policy on imports from all countries ensures that resources are allocated to their most productive use, On the import side, nondiscrimination ensures that countries purchase imports from the lowest-cost source country, (trade diversion is prevented) Prevents re-reouting in order to circumvent high tariffs, in which exporter ships its goods to a third country repackages it, and then ships it to a final destination where it will qualify for the third country’s preferential tariff, sometimes substantial transformation becomes necessary that leads the firm to move a stage of production to the third country, On export side, nondiscrimination protects exporting countries from bilateral opportunism. If one country were later to offer a lower tariff rate to a third country, this could erode the value of the original tariff concession to the first trading partner.

23 Exceptions to gatt’s nondiscrimination principle
Regional Trade Agreements Free Trade Agreements Customs Unions Administered Protection Special Tariffs that can be used for particular purposes Safeguards, Anti-Damping Duties Countervailing Duties

24 Regional Trade Agreements
Free Trade Area: Members maintain their original external tariff with the rest of the world, but engage in free trade with one another. Customs Union: All members set the same external tariff for imports from non-members and eliminate the tariffs from members. When GATT members form a CU, CET can be no higher than a weighted average of the tariffs of the members countries before the CU was formed.

25 Trade Creation vs. Trade Diversion
Is it controversial that GATT members form a regional trade agreement? Trade Creation vs Trade Diversion Reduction of tariffs among RTA members leads to trade creation, But may also create a diversion of trade away from a non RTA country to a RTA member, If the non RTA country is the lowest cost producer, there may be no worldwide efficiency gains Argument: Since the Tariff Preference (the difference btw. the tariff for RTA members and others), is very small it cannot impose huge trade diversion. Tariff preference associated with anti-damping duties create substantial “trade deflection” effect (exports are diverted to countries with lower import tariffs)

26 Administered Trade Protection
Administered Protection refers to trade restrictions that provide protection from imports above and beyond the protection afforded by the tariffs that were negotiated as part of GATT. Deviation from GATT’s principle of nondiscrimination: Permits; Anti-Damping Duties, Countervailing Duties, Safeguard Measures, and Tariffs to assist with BoP problems. VERs are no longer allowed.

27 Pro Arguments: Temporary Tariff that are usually discriminatory was allowed for a variety of reasons: Administered Protection improves worldwide welfare. Protection may make some countries better off, some worse off, but if we add up gains and losses, the sum total is positive, Administered Protection improves the welfare of politically powerful importing countries, and, especially, their import competing sectors. Some group profits from the use of administered protection. Eventhough protection may reduce worldwide welfare, those who benefit are politically powerful enough to see that it remains within the agreement.

28 SAFEGUARDS A safeguard measure is a temporary tariff or quota that is used to protect a domestic industry from “fair” foreign competition, In 1940s, US gov’t insisted that a safeguard provision be part of every trade treaty that it signed, To encourage countries to make greater concessions, GATT included two provisions under which countries could reintroduce protective trade policies, Article XIX Safeguard Provision, Countries remained free to temporarily raise a tariff above the maximum level or introduce a temporary quantitative restriction Article XXVIII: allows to permanantly raise tariffs

29 Safeguards - rules Measures should be nondiscriminatory,
Eg. US Global Steel Safeguard raised the import tariff on steel for many countries, but granted exemptions for steel imports from many of free trade partners, such as Canada, Mexico,.. => Violation of GATT rules! Safeguards should only be used when imports increase unexpectedly, or as a result of unforeseen developments, If a country imposed a safeguard on a product its trading partners that were hurt by the safeguard could retaliate with their own tariff increases on other products => Uruguay Round Reforms: No retaliation for the first three years. Safeguards may provide an incentive for protected firms to innovate quickly, if the cost of new technology is falling

30 Anti-Damping Duties Anti-Damping Duty is a tariff that an importing country imposes on imports of a product that have been dumped into its domestic market by some exporting country’s firms Evidence that foreign firms sold their products at less than normal value and this has injured the domestic industry. Anti-Damping Code: Allows countries to violate nondiscrimination rule and impose an additional tariff on imports from a firm that is dumping. Allows price undertakings, Predatory Dumping Sporadic Dumping Persistent Dumping

31 Countervailing Duties
Tariffs used to offset the effects of a foreign government’s subsidy, are similar to anti- dumping duties, In markets that are imperfectly competitive, a foreign government’s subsidy can reduce the welfare of an importing country, Consumers in importing country benefit from the subsidy, but the losses to the firm’s in the importing country outweigh the benefits to the consumers.

32 Post II. W.W. International Factors
U.S. led institutional multilateralism, Bretton Woods, Establishment of Twin Institutions, and GATT. Marshall Plan: imposed economic policies on developing countries, Cold War and U.S., Western European Cooperation against USSR,

33 Marshall Plan On June 5, 1947, speaking to the graduating class at Harvard University, Secretary of State George C. Marshall laid the foundation, in the aftermath of World War II, for a U.S. program of assistance to the countries of Europe. At a time when great cities lay in ruins and national economies were devastated, Marshall called on America to "do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace."

34 Marshall Plan The official mission statement: To give a boost to the Europe economy, to promote European production, to bolster European currency, and to facilitate international trade, especially with the United States, whose economic interest required Europe to become wealthy enough to import U.S. goods. Unofficial goal: The containment of growing Soviet influence in Europe, evident especially in the growing strength of communist parties in Czechoslovakia, France, and Italy.

35 Marshall Plan The first substantial aid went to Greece and Turkey in January 1947, which were seen as being on the front lines of the battle against communist expansion and were already being aided under the Truman Doctrine.

36 Marshall Plan In 1949, in response to a request from Turkish officials for American technical assistance and training, an American expert discusses newly donated agricultural equipment with Turkish farmers at the Ankara Agricultural School. (Courtesy of the George C. Marshall Research Library, Lexington, Virginia)

37 Marshall Plan Conditions laid down to make use of the plan:
Public entrepreneurship should be constricted Private entrepreneurship should be encouraged Heavy industry (iron-steel, heavy chemical etc.) should not be established in Turkey. Industrialization must be based on processed agricultural products, construction materials, leather, forest products etc. Increased tractor usage and highway construction.

38 Post WW Implemented Policies (1947 – 1950)
1948 Economic Congress: Businessmen, and Professors gathered to determine necessary conditions for rapid development, From Etatism towards a more international economy, Foreign Aid through Marshall Plan, and prospects of trade and foreign investment, Integration to the International Economic System, Turkey became member to, ILO in 1945, IBRD and IMF in 1947, and IFC (1956) and IDA (1960), GATT and OECD (1961), BIS (1964)


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