Chapter 5
The Evolution of the Global Trade
Regime
Chapter by Gilbert R Winham
John Ravenhill
Global Political Economy, 3rd edition
Lecture Plan
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Introduction
Historical Antecedents: 1860 to 1945
The ITO and the GATT: 1947 to 1948
Multilateral Trade Negotiations: 1950s to
1980s
• The Uruguay Round: 1986 to 1994
• The WTO: 1995 and beyond
Introduction (1)
• The world trade regime is today the most
prominent example of cooperation between
countries in the entire international system
– It is rules based where the goal is
• To reduce the protectionism of national regulation
• To reduce the uncertainty and unpredictability of
international trade relations
• To promote stability
Introduction (2)
• Tariffs are a form of trade regulation
– It is a source of government revenue
– Used to protect domestic producers from foreign
competition
– Today, its importance is superseded by non-tariff
measures/barriers
• Trade agreements can serve as an effective
means of trade liberalization
Historical Antecedents (1)
• By second quarter of 19th century, campaign
for free trade had begun as part of a broader
effort of political reform in British society
• In 1848, Corn Laws were repealed in Britain
– The laws had provided high protection to
agricultural products
• In 1860, Cobden-Chevalier Treaty initiated a
period of liberalized trade between the UK
and Europe
Historical Antecedents (2)
• Between 1830s and 1870s, liberal
commercial exchange flourished
– Dominated economically by Great Britain
• Britain was the leading creditor country in the world
• Free trade was a key facet of British commercial policy
• Economic depression emerged after 1870
due to increasing competition and decline in
prices of exports
– Protectionist policies returned and tariffs increased
• This trend was exacerbated by First World War and
continued until after Second World War
Historical Antecedents (3)
• Growing nationalism until Second World War
manifested in mercantilism, bilateralism, and
competitive exchange rate devaluations
– In 1930, Smooth-Hawley Act in United States
• Increased US tariffs to historic levels
• Expanded the scope of tariff coverage
• Foreign countries retaliated with further protectionism
– Global trade declined and broke down after 1930
• World trade fell by about two-thirds by the mid-1930s
Historical Antecedents (4)
• In 1934, Reciprocal Trade Agreements Act
(RTAA) in the United States
– A revolution in US and international trade policy
– RTAA empowered US President to lower/raise
tariffs by up to 50% from Smoot-Hawley levels
when negotiating with other countries
• This transferred tariff-setting policy from Congress to the
Presidency
– Implicitly accepted that tariff rates were a bilateral
matter to be settled through negotiation, and not
unilaterally
Historical Antecedents (5)
• In 1934, RTAA (cont.)
– By 1939, US concluded 21 agreements
• All agreements made on most-favoured nation basis
– Slowed the negotiation process but extended the impact of
the agreements more widely
– Flow of international trade increased
– Public opinion became increasingly more
supportive of free trade
– Experience in trade liberalization would become
useful after the Second World War
The ITO and the GATT (1)
• US was in a preponderant position for the first
two decades of post-WW II period
• American values that were imparted on the
international trade system
– Trade liberalization
– Multilateralism
– Legal approach to international trade relations
• Although US approach prevailed on most
issues, the trade regime has always been
based on a negotiated consensus
The ITO and the GATT (2)
• An agreement to establish an International
Trade Organization (ITO) was concluded in
1948
– ITO was meant to complement the World Bank
and IMF
– But US Congress failed to rectify the agreement
– International community had to fall back on the
General Agreement on Trade and Tariffs (GATT)
The ITO and the GATT (3)
• General Agreement on Trade and Tariffs
(GATT)
– A multilateral contract embodying trade rules
negotiated in 1947
– It provided a structure for the regulation of the
international trade system
– It was partly a mechanism to ensure that countries
do not reintroduce protectionism once tariffs were
lowered
– It was never intended to function as an
international organization
The ITO and the GATT (4)
• GATT principles, rules and norms
– Principle of non-discrimination
• This is a cornerstone of the international trade system
• Article I: most-favoured nation principle
– Addressed external discrimination
• Article III: national-treatment
– Addressed internal discrimination
– Prohibition against quantitative and other non-tariff
restrictions to trade (Article XI)
• No restrictions other than duties/tariffs
• All restrictive measures were to be converted to tariffs
The ITO and the GATT (5)
• GATT principles, rules and norms (cont.)
– Reciprocity
• Derided by economists as countries that unilaterally
reduced tariffs would realize economic benefits
• Exceptions were made for special and differential
treatment for developing countries
– Safeguards (Article XIX)
• Temporary backtracking on commitments to allow for the
orderly adjustment of domestic markets
– Commercial considerations
• Support for the value of the free market over government
interventionism
Multilateral Trade Negotiations (1)
• GATT sponsored rounds of multilateral
negotiations to liberalize trade
– First four rounds addressed some important
institutional matters but did not make significant
progress in liberalizing trade
– In early rounds, negotiations took place bilaterally
and were then multilateralized automatically
through the most-favoured nation principle
Multilateral Trade Negotiations (2)
• Kennedy Round (1963-67)
– First significant round after the initial introduction
of GATT in 1947
– Average tariff reduction of about 35%
• Adopted a linear approach to reducing tariffs
– Introduced an anti-dumping code
– International grain agreement
• established price ranges for wheat
• multilateral sharing of food aid to developing countries
– European Community participated as a single unit
for the first time
Multilateral Trade Negotiations (3)
• Tokyo Round (1973-79)
– Focus was on non-tariff barriers (NTBs) to trade
• Produced six legal codes that dealt with NTBs, covering
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customs valuation procedures
import licensing
technical standards for products
subsidies and countervailing duty measures
government procurement
anti-dumping duty procedures
– Average tariff reductions of about 35% of industrial
nations’ tariffs (comparable to Kennedy Round)
• Tariffs were reduced in proportion to the size of the tariffs
Multilateral Trade Negotiations (4)
• Tokyo Round (1973-79) (cont.)
– GATT Articles, or “framework” agreements, were
revised to clarify and improve GATT language on
matters relating to developing countries
– In contrast to past GATT negotiations, the Tokyo
Round was a rule-making exercise of major
proportions
• Agreements of the Tokyo Round produced legal rules
that reached further into the nation state
The Uruguay Round (1)
• Decision to launch Uruguay Round of
negotiations turned on disagreement over
– Inclusion of new issues (services, investment and
intellectual property), demanded in particular by
United States
• US argued it was necessary to expand the GATT regime
to keep it relevant in a changing world economy
• Developing countries argued that they did not have the
capacity to negotiate on an equal footing on these issues
– Further liberalization in textiles and agricultural
products, which were of particular importance to
developing countries
The Uruguay Round (2)
• Negotiations on services
– Services are “processes in which skills and
knowledge are exchanged in order to meet a
particular consumer need”
• E.g. engineering consulting, financial intermediation,
tourism, legal advice
– By late-1980s, services accounted for over half of
GDP of developed countries
– Services were negotiated separately from goods
The Uruguay Round (3)
• Negotiations on services (cont.)
– Global services market is essentially protectionist
due to different regulatory objectives & standards
• One important obstacle to trade in services is the
reluctance to grant foreign firms the right to establish and
do business in domestic markets
– Key task for negotiators: how to incorporate GATT
principles of transparency, national treatment and
reciprocity in a conceptually new area?
– General Agreement on Trade in Services (GATS)
• Code of principles providing international standard of
treatment
The Uruguay Round (4)
• Other new issues
– Investment
• Investment was seen to be interchangeable with trade
• Investment reinforces the effects of trade liberalization
• There was considerable regulation by national
authorities, in particular in “sensitive” industries
• Negotiation of a multilateral investment agreement failed
but agreement was reached on Trade-Related
Investment Measures (TRIMs)
The Uruguay Round (5)
• Other new issues (cont.)
– Trade-Related Aspects of Intellectual Property
Rights (TRIPs)
• Producers of high-tech products and pharmaceuticals
sought to internationalize the intellectual property
protection that they enjoyed in their home countries
• Developing countries viewed TRIPs as a potential barrier
to trade, e.g. monopolies granted to pharmaceuticals
– Developing countries acquiesced on this issue as they felt
their losses were compensated by gains elsewhere in the
overall accord
The Uruguay Round (6)
• Developing countries
– Developing countries have been marginal players
for most of the history of GATT
– GATT focused mainly on trade (not economic
development) and tariff reduction (which was in
conflict with the policy of import-substitution
industrialization)
– Although initially reluctant to participate in the
Uruguay Round, developing countries became its
greatest supporters from 1991 onwards
• Developing countries put pressure on US and EU to
settle their differences
The Uruguay Round (7)
• Developing countries (cont.)
– Why did developing countries change their
position?
• Developing countries benefitted from two underlying
principles of the Uruguay Round
– Single undertaking: all issues of the negotiation were
treated as a single package, with no exceptions
– Consensus: agreement required the passive support of all
participants
• Economic advantages found in agreements on
agriculture, textiles and clothing
• Benefits from institutional agreements (the strong dispute
settlement mechanism and the creation of the WTO)
The Uruguay Round (8)
• Developing countries (cont.)
– Why did developing countries change their
position? (cont.)
• Market-based economic reforms introduced in many
developing countries in the 1980s encouraged their
governments to look more favourably on the marketbased principles and objectives of the GATT
– The Uruguay Round Agreement represented the most farreaching commitments made by developing countries in
the international trade regime
The Uruguay Round (9)
• The various agreements reached at the
Uruguay Round expanded the rules of the
international system of trade
– New issues (e.g. services) were brought under
multilateral rules for the first time
– The agreements advanced the rules-based, as
opposed to power-based, nature of trade relations
The Uruguay Round (10)
• A formal, integrated dispute settlements
system (DSU) was established
• The DSU was improved under WTO from its
GATT predecessor in a number of ways
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How panels were convened
How panel decisions were adopted
Scope and mechanics of dispute settlement
Introduced obligation on member countries to use
DSU, and not unilateral measures, to resolve
disputes
The Uruguay Round (11)
• The DSU has been frequently used
– In about the first five years of operation, there
were some 193 member complaints on 151
distinct trade issues
• Outcome of DSU process is legally binding
– However, it is usually impossible to oblige a
powerful country to implement an adverse
decision that it is determined to ignore
• The complexity & costs of mounting litigation
at the WTO are onerous for developing
countries
The WTO (1)
• Created in agreements of the Uruguay Round
– Came into existence on 01 January 1995
– The creation of the WTO reinforced the role of
trade in international economic relations
• The WTO represents a contract between its
members, the purpose of which was to
establish trade rules and to back them up
with a powerful dispute settlement system
– But unlike GATT, the WTO is a formally
constituted international organization
The WTO (2)
• The WTO’s continuity with the GATT
– Continued with many of the consensual practices
– Formalized many of the customary practices that
had first emerged under GATT (e.g. dispute
settlement, maintenance of a forum for
negotiations)
• The WTO centralized the governance of the
international trade system far more than
GATT
The WTO (3)
• The WTO is a "member-driven" organization
– Members, not the secretariat, are responsible for
setting the agenda and carrying out the functions
of the organization
– Through negotiations, members establish a rulesbased regime for regulating international trade
– Absence of consensus paralyses the agenda and
stops the WTO from dealing with problems
– Absence of consensus also raises the spectre that
the WTO will be eclipsed as countries turn to other
means to solve problems