Chapter 4 International Trade - Institutions and Regulations
4.1 Agenda
- International Institutions/Organizations
- Trade-Related International Organizations
- Is the WTO Effective?
- Case discussion: the US-China Wind Power Dispute
- Current Challenges
4.2 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
4.3 Trade Agreements, Int. Org., and the United States
- In 1930, the United States passed a tariff law: The Smoot-Hawley Act:
- Tariff rates rose steeply for over 20,000 imported goods and U.S. trade fell sharply
- Initial attempts to reduce tariff rates were undertaken through bilateral trade negotiations (Reciprocal Trade Agreements Act of 1934):
- U.S. offered to lower tariffs on some imports if another country would lower its tariffs on some U.S. exports
Bilateral negotiations, however, do not take full advantage of international coordination: Benefits can “spill over” to countries that have not made any concessions
4.4 Idea behind GATT/WTO, IMF, and IBRD/World Bank
- Following the end of WWII, the United States and allies decided that a prosperous and lasting peace depends on a stable international order based on principles embedded in the United Nations (UN) charter, but also on the creation of a stable liberal international order
- Pillars of the liberal economic order:
- The ‘Sisters’: The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBDR) (to become the World Bank)
- An international trading system built on free trade principles to replace protectionism and nationalism
4.5 Tariff Liberalization Since 1947: RTAs, MTNs and Unilateralism
4.6 Evolution of Trade and Tariffs in the US Since 1890
4.7 More Recently, and By Region
4.7.0.1 Tariff rate, applied, simple mean, all products (%)
4.8 Changes in Average Tariff and Annual GDP Growth
4.9 Average Tariffs by Type of Economy
4.10 Non Tariff Barriers
- The proportion of imports subject to non-tariff measures (NTM) is higher in developed economies than in emerging economies. This testifies to their more elaborate regulatory system.
- Barriers to quantity and price control are more common in developing economies.
- In general, non-tariff barriers apply mainly to trade in agricultural goods.
4.11 Unilateral Tariff Cutting by Emerging Markets
Source: Baldwin (2016)
4.13 GATT and the WTO
4.14 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:
- Reducing tariff rates through multilateral negotiations
- Binding tariff rates: a tariff is “bound” by having the imposing country agree not to raise it in the future
- 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
4.15 Changes from GATT to WTO
- 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
- Focus on speed:
- Welcomed by firms involved in disputes: delaying tactics not as effective (although still used)
- 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
- 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
- Inclusion of new issues: agriculture, services, trade-related investments measures, and intellectual property rights
4.16 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
4.17 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
- Require member countries to eliminate local content rules and performance requirements:
- Host countries cannot treat local enterprises favorably over foreign enterprises
4.18 WTO Regime: Developing world
- 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
- Curtain the ability of national governments in developing countries to regulate the patterns of FDI inflows and their role in development
- 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
- Protectionist measures: tariff and non-tariff barriers on imports
class: center, middle
4.18.1 Is the WTO an effective international organization when it comes to fulfilling its mission?
4.19 Goldstein Rivers and Tomz (2007)
- GATT/WTO
- Preferential Trade Agreements (PTAs) that grant a limited group of nations privileged access to each others’ markets
- Non reciprocal agreements such as Generalized System of Preferences (GSP), which give preferential access into market of one but not both trading partners
- 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?
4.20 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
4.21 Mansfield and Reinhardt (2008)
- GATT/WTO
- 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?
4.22 On Volatility of Trade
Source: WTO http://www.wto.org/english/news_e/pres14_e/pr722_e.htm
4.23 The US-China Wind Power Dispute
- What was the source of the dispute
- Why did the Chinese Government back down? Do you think the WTO would have ruled in favor of China or the US?
- How would you explain the Obama administration’s stance on the issue?
- Do you think GE, Gamesa, and other foreign firms were correct in not bringing a dispute to the relevant trade authorities?
4.24 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
- Goal was to favor JV between Chinese and foreign firms to construct wind turbines
- Let to Ride the Wind program
- 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
4.25 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
4.26 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
4.27 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: https://www.wto.org/english/forums_e/ngo_e/pospap_ e.htm
4.28 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
Source: https://international-arbitration-attorney.com/investment-arbitration/
4.29 Data Challenge
4.29.1 Risque politique
Is there a link between the evolution of the employment rate and the change in government?