The World Trading System

It is no understatement to say that trade is essential to the prosperity of the world economy and remains one of the main avenues open to us to increase productivity and growth. The history of trade liberalisation has demonstrated this clearly. By opening markets, the most efficient suppliers get a chance to sell while the less efficient are stimulated to be more competitive. Increased specialisation leads to economies of scale and other efficiencies. Some of the figures in Table 1.1 demonstrate this.

The old doctrine of free trade was based on David Ricardo’s nineteenth century theory of comparative advantage, whereby countries produced what they were best at producing, and by trading with others they were better off than if all countries sought to produce everything they needed. For example a country with abundant land and a good climate produced agricultural goods, and a capital-rich country with abundant coal and steel produced industrial goods. By trading with each other both stood to gain, and this should occur even if one country was better at both activities: specialisation brought benefits.

The theories described in Chapter 2 have had an influence on policy making, and some of the main types of policy approach are set out here.

The opening up of trade during the last forty years has been mainly due to the efforts made in the GATT. There have been seven GATT trade liberalisation rounds in all, including the Dillon, Kennedy and Tokyo Rounds and most recently the Uruguay Round. While this process has been slow and its development rather patchy, the results have nonetheless been impressive. The Uruguay Round was a culmination of all these efforts. The step-by-step approach that has evolved through the GATT has led to the point where the rules and disciplines of the new World Trade Organisation, established by the Uruguay Round, are much more complete and cover nearly everything that is traded.

The GATT agreement was the offspring of a much more ambitious attempt in the late 1940s to establish an international trade organisation (ITO) with more substantial powers. This organisation, based on the Havana Charter, was to be the third pillar of the Bretton Woods institutions along with the IMF and the World Bank, but the implementing bill failed to be passed by the United States Senate. The GATT itself was in fact only a treaty or agreement, as its name implies, serviced by a secretariat. It was not a full-blown international organisation in the traditional sense.

The share of developing countries in world trade or world exports in 1994 was in the region of 40 per cent (including economies in transition),¹ and in the case of manufactured exports about 17 percent. Manufactured exports in particular have been increasing rapidly, and indeed exports from developing countries have continued to grow by about 12 per cent a year compared with the 4–7 per cent growth of industrial country exports.²

An issue that is of increasing importance in the development of the trading system is the existence of regional trade arrangements. These have often been criticised as distorting the world trading system because of the preferences they create for those inside them. The European Union is of course the prime example of such a regional arrangement. Others are the North American Free Trade Area (NAFTA - the United States, Canada and Mexico); the free trade area between Australia and New Zealand; Mercosur (Brazil, Argentina, Paraguay and Uruguay); the Andean Group (Colombia, Chile, Ecuador, Peru and Venezuela); and in Asia the ASEAN free trade area and APEC (18 countries in the Pacific Basin).

GATT’s primary focus in the early years was on the reduction of tariffs, as tariffs were probably the most common or at least the most visible form of protection in use. A tariff is an import tax that is levied at the border. Unlike many other types of protection, tariffs have the advantage of providing revenue as well as protection. Indeed in many developing countries it is one of the few secure sources of tax revenue.

Tariff concessions can be undermined by a series of other obstacles erected behind a tariff wall. Even if tariffs were to be reduced from 10 per cent to 5 per cent, this would be to no avail if a border tax were to be introduced under another name, for example an import charge, a stamp duty and so on. This type of charge is subject to a ‘standstill’ under the WTO, provided the tariff on the product is bound.¹ The Uruguay Round has improved transparency and control over them by requiring that they be included in the schedules when tariffs on the same products are listed and bound at certain levels, and can give rise to claims for compensation if they are raised or new ones are introduced.

There has been much discussion in recent years of the rationale and need for antidumping rules, and there has also been much criticism, whether justified or not, of the rules used to implement antidumping actions with regard both to the rules of measurement of dumping or injury and to the rules of procedure.¹ This chapter will focus on both these aspects.

Almost all countries subsidise various sectors of the economy, be these in agriculture, industry or services. They do this through a variety of measures, including direct grants, loans and equity participation through tax expenditure or relief. Many firms that are involved in both military and civilian production receive substantial subsidies on the military side, which then spill over on to the civilian side. Another important source of subsidy can be procurement, in particular in the military field.

The GATT agreement has as its main objective the liberalisation of trade, and for that purpose it contains a set of rules and disciplines designed to lower barriers to trade, be these tariffs or nontariff barriers, and to eliminate them progressively. However the agreement recognises that sudden surges in imports may be very disruptive and create serious injury to a particular industry, or threaten to do so. Consequently Article XIX of GATT allows an importing country to impose border controls of a temporary nature. These controls can be imposed irrespective of whether the imports in question are being dumped, subsidised or are in some other way unfair. The imports might in fact not be being dumped, subsidised or in any sense falling foul of the other provisions of GATT against unfair trade practices. It is simply that a sudden surge of imports, whether legitimate or not, and injury to a domestic industry entitles the importing country to introduce temporary controls.

The agreement on technical barriers to trade, reached in the Uruguay Round, is a revised and improved version of the agreement established by the Tokyo Round. The WTO agreement on this subject uses the word ‘standard’ to refer to voluntary standards. Mandatory standards imposed by law are referred to as ‘technical regulations’. For simplicity’s sake this text will refer to standards throughout as a generic term covering both.

Government procurement was not covered by the original GATT agreement. Indeed Article III, which contained the national treatment principle, explicitly stated that procurement was an exception to that principle. In other words a government could discriminate in favour of domestic suppliers against foreign suppliers.

The textile sector in most countries is a major employer. In the United States alone it employs about two million people, in the EU it employs 1.33 million and in Japan it employs 1.44 million. The sector is highly competitive and works on relatively low margins. It is probably more vulnerable to fads and fashions than any other sector. It is also sensitive because employment tends to be concentrated in certain regions.

The Tokyo Round concluded an agreement on trade in civil aircraft in response to a bilateral initiative by the United States and the EU, egged on by Boeing and Airbus.¹ The objective for both the EU and the United States was to bring about duty free treatment for trade in aircraft, and the United States was keen to tackle some non-tariff issues as well.

In the margins of the Uruguay Round there was a serious attempt to bring about a sectoral agreement on steel, known as the multilateral steel agreement, or MSA. Somewhat in the spirit of the aircraft agreement, it was hoped to address the multiplicity of problems associated with this sector in a balanced and comprehensive manner covering both tariff and non-tariff matters. The prize of free trade in a sector like this, which is an important part of most countries’ trade balances, was an added inducement. This agreement was not concluded, but the negotiations nonetheless led to some results in the tariff field among most of the developed countries. The second section of this chapter gives an account of the negotiation.

The main achievement of the Singapore ministerial meeting in 1996 was to set out the framework for an agreement on liberalising trade in the information technology (IT) sector. This information technology agreement (ITA) was finalised on 26 March 1997.

Intellectual property rights are those which accrue to writers or the creators of inventions, trademarks, designs, and so on who have applied for these rights. The rights are given in order to ensure that inventors and authors can benefit from the fruits of their research, invention or brand name, and that it will not be used or copied by people who have put no effort and spent no money developing the products or brands. These rights are intended to encourage creativity, investment in research and marketing, and risk taking.

Governments use a number of instruments to control both foreign and domestic investment. These regulations can be precautionary (for example banks, insurance companies) and may apply equally to domestic investment, or they may be downright protectionist (for example by refusing to issue investment permits to foreign competitors). Governments can also discourage investment by confining foreign ownership within certain shareholding limits or activities, or by curtailing the repatriation of capital, profits and so on. At the other extreme governments provide substantial incentives for investment, whether in the form of direct subsidies, tax reductions, free greenfield sites, help with training and so on.

Most economists recognise that this sector has specific characteristics that set it apart from others. The sector suffers from being both cyclical and close to the traditional concept of a perfectly competitive market. There is a tendency for both oversupply and undersupply arising from crop and animal production cycles and from farmers’ lack of information or ignorance about what the market will actually bear in a particular season. At the consumer end, overproduction can be a good thing in that it can lead to lower prices. However overproduction can also lead to underproduction in the next season as farmers adjust their efforts, with consequences for prices that are not so attractive.

From its inception, the GATT only covered trade in goods. It did not cover services, which comprise a very wide range of activities of increasing importance in modern economies. In the United States in 1994 for example, the service sector accounted for 79 per cent of the workforce and 72 per cent of GDP.¹ It also accounted for 20 per cent of exports and a balance of payments surplus of $57.5 billion (compare this with the $176.7 billion deficit in trade in goods).² The figures for the EU are similar, the service sector accounting for 64 per cent of the total workforce (but with variations between member states) and 66 per cent of GDP.³ (These figures do not include government services.) In the case of Japan it is 60 per cent of the workforce and 57 per cent of GDP.⁴ In the OECD as a whole services account for 60 per cent of GDP, 72 per cent if government services are included.⁵

The WTO had a series of negotiations to complete after the end of the Uruguay Round. These included three service sectors where resolution of the outstanding problems had proved too intractable: financial services was subject to a temporary agreement due to expire at the end of 1997; the telecommunications negotiations were only concluded in February 1997; and the negotiations on maritime transport were abandoned and will be resumed in 1999.

The debate on trade and the environment is partly based on fact and partly on assumptions that do not stand up to rigorous scrutiny. The perception held by the environment lobby is loosely as follows. The rate of growth and development of the world’s economy has put increasing pressure on the world’s environment. This pressure has come from industrialisation and intensive agricultural production, which has involved degradation and pollution of our surroundings. Industrialisation and agricultural productivity have also increased pressure on raw materials.

Until relatively recently there was a fair amount of suspicion of foreign investment. One only has to think of the sensitivity in Europe in the 1960s after the initial wave of US investment, which gave rise to J.J. Servan-Schreiber’s book The American Challenge.¹ As a young student at the time, to me there seemed little difference between the Cold War and the economic war; both appeared to be life and death struggles.

The NAFTA discussions brought to the fore the question of low social conditions and standards in most developing countries. The fear was that with complete free trade between the United States and Mexico, US industry would invest heavily south of the border to take advantage of lower social costs, and that this would cost many US jobs and force a lowering of labour standards in the United States.

For years the world’s governments have been battling against obvious barriers to trade such as tariffs, non-tariff barriers and so on, which for the most part are government, or government-inspired actions. As the tide of these measures has receded, other issues have made their appearance and stand out like rocks around which wary (and weary!) trade mariners have to navigate.