Chapter 4 International Trade - Institutions and Regulations

4.1 Introduction

The new era of globalization that we are observing in this “data”-based day and age requires a new generation of researchers in charge of challenging the old frameworks and models.

We need to rethink our understanding of globalization for we face a new paradigm in globalization.

Data and inference will help do that. Some researchers have started doing it. They are gathered in a “club” called “Economic Complexity.”

[The Atlas of Economic Complexity]

Economic complexity:

  • a new look at international trade: the notion of “product space”

    • [NEW] using unstructured data to understand the real impacts of international trade regulations (see the last section!)

[The Growth Lab]

4.2 Economic Complexity: GVC

Regional exports by share of technological intensity, 2014

Source : WTO

To go further:

4.3 International Institutions/Organizations

4.3.1 Why Do Nations Join International Organizations?

  • Provide sets of norms to operate in the landscape
    • Reduces the probability of conflicts
  • Provide an opportunity for involvement in norms elaboration and coordination
    • Formal channels with clear rules of the game
    • Provides legitimate means for governments to influence the landscape
  • Manage substantive operations
  • Pooling of resources


4.5.1 GATT/World Trade Organization (WTO)

  • In 1947, a group of 23 countries began trade negotiations under a provisional set of rules that became known as the General Agreement on Tariffs and Trade - GATT
  • In 1995, the World Trade Organization, or WTO, was established as a formal organization for implementing multilateral trade negotiations (and policing them)
  • WTO negotiations address trade restrictions in at least 3 ways:
    1. Reducing tariff rates through multilateral negotiations
    2. Binding tariff rates: a tariff is “bound” by having the imposing country agree not to raise it in the future
    3. Eliminating nontariff barriers: quotas and export subsidies are changed to tariffs because the costs of tariff protection are more apparent and easier to negotiate.
    • Subsidies for agricultural exports are an exception
    • Exceptions are also allowed for “market disruptions” caused by a surge in imports

4.5.2 Changes from GATT to WTO

  1. Introduction of the ‘negative consensus’:
  • Ruling of the panel (first instance) and the Appellate Body (AB) unless there is a consensus within the Dispute Settlement body (DSB) to overturn them
    • The AB assumed to be totally independent and to focus on the merit of each case regardless of the interests involved (i.e. small country can win)
    • Greater chances of retaliation when the defending party refuses to comply with a guilty verdict
  1. Focus on speed:
  • Welcomed by firms involved in disputes: delaying tactics not as effective (although still used)
  1. Addition of the appellate process:
  • Good for the defending side: can ask a more lenient ruling (if he lost)
    • Good for the complainant side: help show constituency it has fought a good fight
      • E.g. 68% of panel rulings issued from 1995 to October 2003
  1. Participation of non-governmental organizations (NGOs):
  • Not just economic interest but also civil-society interests
    • E.g. Appellate body allowed NGOs to attach a brief to the US government’s submission to the WTO in the shrimp-turtle case (wto, wt/ds58/r (15 May 1998), par.91
  1. Inclusion of new issues: agriculture, services, trade-related investments measures, and intellectual property rights

4.5.3 Key Principles of the WTO

  • Most Favored Nation (MFN):
    • Any preferential treatment offered to one member country must be extended to all other members
    • Members can extend MFN to non-members
  • National Treatment:
    • Equal treatment for for foreign and national enterprises once on a market
  • Generalized System of Preferences (GSP):
    • For Less Developed Countries, to give them a chance to develop their economy
  • Exceptions for regional arrangements (such as EU, NAFTA):
    • Nested within the WTO - given precedence when recognized
Non-discrimination More benefits for the least developed countries Environmental protection
Openness More competitiveness
More predictability and transparency

4.5.4 WTO Regime: Developed World

  • Trade Related Investment Measures (TRIMs):

    • Require member countries to eliminate local content rules and performance requirements:
      • Obligation to compensate imports with exports
      • Obligation for foreign affiliates to buy locally
      • Training requirements
      • Technology transfers
  • Host countries cannot treat local enterprises favorably over foreign enterprises

  • WTO regulations:

    • Curtain the ability of national governments in developing countries to regulate the patterns of FDI inflows and their role in development
      • Yet: Extra time to fulfill commitments, provisions for trading opportunities, provisions to safeguard their interests and provisions for means of help
  • Host country policies for Least-Developed Countries:

    • Protectionist measures: tariff and non-tariff barriers on imports
      • Aim at developing the local industry
    • Investment incentives: imposition of tax incentives, tax rates, and local content regulations (e.g. performance requirements) on foreign affiliates
      • E.g. Transfer of technology, export commitments, and other local content regulations
      • Aim at deepening the commitment of foreign firms to the host country

4.5.5 Members and Observers

164 members since 29 July 2016.

4.5.6 Governance of the WTO

  • The WTO is run by governments that are members.
  • All major decisions are taken by all members:
  • either by ministers (who meet at least every two years)
  • either by ambassadors and delegates (who meet regularly in Geneva).
  • Decisions are normally taken by consensus.

In this regard, the WTO is different from some other international organizations like the World Bank and the International Monetary Fund.

In the WTO, there is no delegation of powers to a board of directors or the head of the organization.

The disciplines imposed on countries by the WTO are the result of negotiations among its members.

The members themselves enforce the rules in accordance with the agreed procedures they have negotiated, including the use of trade sanctions. But those sanctions are imposed by countries and are authorized by all the members, which differs distinctly from the practice of other organizations which may, for example, influence the policy of a country by threatening to suspend the granting of credits.

It is sometimes difficult to adopt decisions by consensus among some 150 members.

The main advantage of consensus is that decisions are more likely to be accepted by all members, and despite this difficulty, some very important agreements were concluded.

Outside formal meetings there are informal meetings, such as the heads of delegation, where, again, all WTO members are represented.

The most difficult issues require indepth considerations within smaller groups. It is common recently that the president of a negotiating group attempt to find a compromise by holding consultations with delegations individually, or two or three, or group of 20 or 30 delegations among the most interested in the question.

These smaller meetings have to be handled sensitively. The key is to ensure that each delegation is kept informed of what is happening (the process must be “transparent”), even if it is not directly consulted and should have the opportunity to participate or contribute (the process must be “inclusive”)

One term has become controversial, but more among some outside observers than among delegations. The “Green Room” is a phrase taken from the informal name of the director-general’s conference room.

It is used to refer to meetings of 20–40 delegations, usually at the level of heads of delegations. These meetings can take place elsewhere, such as at Ministerial Conferences, and can be called by the minister chairing the conference as well as the director- general. Similar smaller group consultations can be organized by the chairs of committees negotiating individual subjects, although the term Green Room is not usually used for these.

In the past delegations have sometimes felt that Green Room meetings could lead to compromises being struck behind their backs.

So, extra efforts are made to ensure that the process is handled correctly, with regular reports back to the full membership.

The way countries now negotiate has helped somewhat. In order to increase their bargaining power, countries have formed coalitions.

In some subjects such as agriculture virtually all countries are members of at least one coalition — and in many cases, several coalitions. This means that all countries can be represented in the process if the coordinators and other key players are present. The coordinators also take responsibility for both “transparency” and “inclusiveness” by keeping their coalitions informed and by taking the positions negotiated within their alliances.

The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly.

A dispute arises when a member government believes another member government is violating an agreement or a commitment that it has made in the WTO. The authors of these agreements are the member governments themselves — the agreements are the outcome of negotiations among members. Ultimate responsibility for settling disputes also lies with member governments, through the Dispute Settlement Body.

The DSB is made up of all member governments, usually represented by ambassadors or equivalent.

4.5.7 Is the WTO an effective international organization when it comes to fulfilling its mission? Goldstein Rivers and Tomz (2007)

  2. Preferential Trade Agreements (PTAs) that grant a limited group of nations privileged access to each others’ markets
  3. Non reciprocal agreements such as Generalized System of Preferences (GSP), which give preferential access into market of one but not both trading partners
  4. Colonial networks of trade

Key findings:

  • Does not increase trade in between GATT/WTO members specifically
  • Increases trade compared to non participants
  • The impact of participation declined over time
  • Participant nations in WTO gained more than members of PTAs

When and how do international institutions promote cooperation? Gravity Model

  • Most basic form consists of factors such as geography and spatiality
  • Takes into account ‘natural’ trade linkages:
    • Level of development
    • Size of market
    • Geography Mansfield and Reinhardt (2008)

  2. Preferential Trade Agreements (PTAs) that grant a limited group of nations privileged access to each others’ markets

Key dependent variable * Stability of trade

Key findings: * PTAs and the GATT/WTO reduce trade volatility * Effect comes from the dampening effect of trade agreements rather than expansion of market access

When and how do international institutions promote cooperation?

4.5.8 Volatility of Trade Export volume index (2000 = 100) Import volume index (2000 = 100) Export value index (2000 = 100) Import value index (2000 = 100)

4.6 The US-China Wind Power Dispute

  1. What was the source of the dispute
  2. Why did the Chinese Government back down? Do you think the WTO would have ruled in favor of China or the US?
  3. How would you explain the Obama administration’s stance on the issue?
  4. Do you think GE, Gamesa, and other foreign firms were correct in not bringing a dispute to the relevant trade authorities?

4.6.1 History of Programs

  • Low-cost financing for wind farms (mid 90s)
  • Agreement to purchase a certain amount of energy at a fixed price that would cover the cost + profit (Mid 90s)
  • Requirement that developers use at least 40% of locally produced equipment (1996-2000)
    • Let to Ride the Wind program
      • Goal was to favor JV between Chinese and foreign firms to construct wind turbines
        • JVs required to use 20% local content, a percentage required to increase over time
  • Wind concession program (2003-2007):
    • Successful bids receive benefits such as rights to develop a wind farm, tax breaks, guaranteed agreements to purchase energy
    • In return, by 2005, had to use at least 70% locally produced wind power equipment (dropped in 2009)
  • China’s Renewable Energy Law (2005 effective January 1st 2006):
    • State-owned energy company had to buy 100% of wind power produced by wind farms in China
  • Creation by the Ministry of Finance of a Special Fund for Wind Power (2008)
    • Subsidies of 6.7 up to 22 millions as long as they are at least 51% chinese owned

4.6.2 Is WTO Dispute Settlement (DS) Effective?

  • Complaints divided according to the year initially filed
  • In comparison, GATT had:
    • 207 cases from 1948 to 1989
    • 88 rulings under GATT: 20 no-violations and 68 violations findings
    • 64 cases settled or conceded without GATT
    • GATT success rate: 102 of 207 (49%)
  • From 2005 to 2015: half the number of cases brought to the WTO than for the period from 1995-2005

Source: Lida, K. (2004) “Is WTO Dispute Settlement Effective?” Global Governance, 10, no. 2, pp. 207-225

4.6.3 Is WTO DS Effective in Assuring a Level Playing Field?

WTO not cheap:

  • Encourages bilateral negotiations

Developing countries:

  • Under GATT:
    • Accounted for 19% of complaints and 27% of defending cases (Hudec, 1993)
  • Under WTO:
    • 1995-2000: 27% of complaints
    • 2000: 51% of dispute filed
    • 2001: 71% of disputes filed
    • One exception: Africa

Violations more likely when the complainant includes a developing country

4.6.4 Is WTO DS Effective in Reconciling Trade and Nontrade Concerns?

  • Firms and industries give priorities to economic concerns:
    • Human rights, environmental concerns, safety concerns, cultural values rarely figure in their demands and pressures
    • Most disputes concern trade
    • Incentives for retaliation driven by corporate interests
  • Cases of NGOs remain scarce:
    • The reformulated gasoline case
    • The shrimp-turtle case
    • The asbestos case
  • Precautionary principle yet to be embedded in WTO law

Can, but room for improvement

Source: e.htm

4.6.5 An Alternative Option: Investor-State DS

  • System though which individual companies can sue countries for alleged discriminatory practices
  • Provisions contained in a number of bilateral investment treaties


4.7 International trade and data science

What researchers conclude about the proliferation of RTAs:

The increase in RTAs, coupled with the preference shown for concluding bilateral free-trade agreements, has produced the phenomenon of overlapping membership. As their scope broadens to include policy areas not regulated multilaterally, these overlaps increase the risks of inconsistencies in the rules and procedures among RTAs themselves, and between RTAs and the multilateral framework. This gives rise to:

  • regulatory confusion,

  • distortion of regional markets, and

  • severe implementation problems.

What can we do with Data Science?

=> A new way of considering Economic Complexity


What lessons for a business analyst?

  • New ways of looking at global transformations

  • New data to measure the actual dynamics

  • Beware of Plato’s cave bias: the proxy becomes the story.

4.8 Data Challenge

4.8.1 Political Risk

Is there a link between the evolution of the employment rate and the change in government? Employment in agriculture (% of total employment) Employment in industry (% of total employment) Employment in services (% of total employment)