WORLD TRADE ORGANIZATION RULES Robert Z Lawrence ITF 225 / EC th September 2015

All international organizations must decide Who should belong? What issues should be covered? How should the rules be made? Should the same rules apply to all? How should they be enforced?

History: From GATT to WTO Originally, there were three Bretton Woods Institutions: World Bank, IMF, International Trade Organization But, the ITO Agreement (Havana Charter) never ratified. GATT: The General Agreement on Tariffs and Trade, was signed in 1947 and was the chapter of the charter that covered tariffs This GATT treaty served as the center of the multilateral trade system until the World Trade Organization was launched after the Uruguay Round in 1995

robert z lawrence World Trade Organization today Based in Geneva, Switzerland 161 members (not countries -- customs territories) Forum for Negotiation Administering Trade Rules Settling Disputes

Agreement Establishing the WTO General Agreement on Tariffs and Trade (GATT) General Agreement on Trade in Services (GATS) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Understanding on Settlement of Disputes Trade Policy Review Mechanism (TPRM) Core Agreements of the WTO include GATT but much more

I) GATT basic principles Consensus MFN National Treatment Bound tariffs Reciprocity II) GATT exceptions Fair trade Emergencies Developing Countries Preferential Arrangements III) From GATT to WTO Outline for today

Benefits Inclusive Maximize ability to find beneficial trades Comparison of money versus barter Efficient: Maximizes choices Problems Complexity Diversity Why multilateral agreements?

Decision-making by consensus Benefits All members are equal Every member has agreed to every agreement (legitimacy) Every agreement makes everyone better off (a Pareto improvement) Costs Lowest common denominator Hard to obtain agreement I) GATT Basic Principles

The parties seek to achieve their goals… “by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction in tariffs and other barriers to trade and to eliminate discriminatory treatment in international trade.” (Agreement Establishing the WTO) Note key words: Substantial reductions in tariffs and other barriers i.e. not free trade Reciprocal Eliminate discriminatory treatment in international trade – i.e. not necessarily harmonize, and its about trade Goals: Freer not Free Trade Source: Agreement Establishing the WTO,

Like all the children in Lake Wobegon, who are all above average, all the members of the WTO are most favored

Most-Favoured-Nation treatment: Treating all trading partners equally GATT Article 1: General Most-Favoured-Nation (MFN) Treatment “Each member treats all the other members equally as ‘most-favoured’ trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same ‘best’ treatment to all the other WTO members so that they all remain ‘most-favoured.’” (WTO, Principles of the trading system) Benefits Buy from most efficient suppliers Leveraging the power of the strong to provide benefits for all Problems Free Riders Source:

National treatment: Treating locals and foreigners equally GATT Article 3: National Treatment “Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.” (WTO, Principles of the trading system) Non-discrimination between domestic and international goods Taxes and regulations must be same on imports and domestic products Source:

Settling disputes is a key WTO function Before 1994, members could challenge each other before neutral panels of three judges claiming “nullification and impairment of benefits.” But it required consensus for cases to brought and findings to be adopted. Violation Representations Investigation “Authorize suspension of concessions” See discussion in Lawrence, Robert “The United States and the WTO Dispute Settlement System.” Council on Foreign Relations.

Members eliminate quotas and establish “schedules” of their tariffs. They negotiate with each other in Rounds in order to reduce the maximum tariffs rates each is allowed (“bound rates”). In principle, in each Round, they make concessions and receive reciprocal benefits. GATT defines the rules for negotiations and concessions to reduce tariffs

US: 2011 Tariff Schedule Summary Bound and applied rates very similar

Reciprocity for concessions to reduce tariffs – not in the sense of tariffs at the same absolute levels, instead: “First difference reciprocity” – reciprocal changes to existing trade restrictions to achieve “a balance of concessions” Reciprocity: balanced concessions that allow for mutual gains

The problem Mercantilists: Exports good, imports bad. Negotiators: Don’t give more than you get. Domestic politics: Trade hurts some domestic firms. Reciprocity is the answer Import increases are compensated by exports. You get as much as you give. Your exporters gain. Why Reciprocity?

Unfair trade General Exceptions Preferential trade arrangements (Customs unions) Developing countries Emergencies II) Important “exceptions”

Anti-dumping and Countervailing duties (Art VI): unfair trade by firms and governments Dumping: Sales at less than “normal value” that cause injury can be offset by duty. Subsidies: Subsidized imports that cause injury can be offset by an equivalent duty. Exception: Rules for Fair Trade

Developing Countries Balance of Payments (Article XV) Infant Industry for Developing Countries (Article XVIII) All Countries Safeguards (Article XIX): If imports cause serious injury temporary protection is allowed Exceptions: Emergencies

Exceptions: General (Articles XX and XXI) Provided that there is No arbitrary or unjustifiable discrimination between countries where the same conditions prevail Or a disguised restriction on trade Nothing prevents countries adopting measures Protecting public morals Protecting human, animal or plant life Relating to trade in gold or silver Necessary to secure compliance with laws or regulation Relating to the products of prison labor Protecting national treasures of artistic, historic value Relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption

Article 24 of the GATT: Permits Customs Unions and Free-Trade Areas Must cover substantially all trade Must not raise external barriers Exceptions: Preferential Trade Agreements

(Art 36.8) “The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.” Calls for developed countries to help developing countries, but there are no legally binding obligations GATT Waiver for Generalized System of Preferences (GSP) Tokyo Round: Enabling Clause adopted makes GSP waiver permanent. Most abstain from Tokyo Codes. All developing countries join WTO, adopting results as a single undertaking Exceptions: Developing Countries need not reciprocate; developed countries can give them Special and Differential Treatment

“Least Developed Country” definition has criteria But "Developing Country" is self defined! How does WTO define a developing country?

The results of differential treatment India: 2010 Tariff Schedule Bound and applied rates very different

GATT: an example of shallow integration Sovereignty Set own tariff schedules Have own regulations Sovereignty Set own tariff schedules Have own regulations Openness Shallow integration Reduce tariffs Avoid quotas National treatment Weak enforcement Openness Shallow integration Reduce tariffs Avoid quotas National treatment Weak enforcement Achievement of Public Purpose Gains from trade between countries Achievement of Public Purpose Gains from trade between countries

Note: Data are for the world average (estimate, ), France ( ) and the EC/EU (from 1968) Source: Wolf (2004), table 8.7; OECD (1998) Tariff barriers have fallen in successive “rounds” of GATT negotiations

The Rounds under GATT: Increasing scope of rules

The Results: Trade Grows Faster than GDP

New rules (codes) Standards Technical barriers to trade Anti-dumping Subsidies Government procurement Customs valuation But variable commitments Not all GATT members subscribe Tokyo Round ( ) From shallow to deeper integration

Established WTO Expanded scope: Included services, agriculture, intellectual property (TRIPS), Trade-Related Investment Measures (TRIMS) Fair trade: SCM agreement disciplines the use of subsidies Trade review mechanism: Country policies regularly monitored by WTO New dispute settlement understanding with Reverse consensus rule (cases cannot be stopped) An Appellate Body – like a Supreme Court Single undertaking All members besides Least Developed accept all obligations Uruguay Round ( ) A substantial expansion in scope and depth

Scope has increased Requirements have become much greater Developed and developing countries requirements more often are symmetrical Enforcement has become more certain Trade Agreements over time

Functional explanations Governance requirements of trade; as goods and services become more complex so too do requirements for rules Political explanations Pressures for “level playing field” -- business, labor and greens More Developing Countries agree to stronger rules Shift away from import-substitution to export led growth Some developing countries want to attract foreign firms Why deeper integration?

Sovereignty Openness Achievement of Public Purpose “complaints against the WTO are hugely exaggerated, where not misconceived” “Corporate Globalization” “Erosion of Democracy” WTO & Deeper Integration