International Political Economy Chapter 2 PDF

**Title:** Chapter Two, The World Trade Organization **Chapter objectives** - How does the global distribution of power shapes the creation and evolution of international trade systems. - What are some contemporary challenges to the WTO? \- developing countries block \- NGOs -...

**Title:** Chapter Two, The World Trade Organization **Chapter objectives** - How does the global distribution of power shapes the creation and evolution of international trade systems. - What are some contemporary challenges to the WTO? \- developing countries block \- NGOs - What are regional trade arrangements? considered by many the greatest current challenge to the WTO. A. **What is the World Trade Organization?** I. The WTO a. The WTO - History of the WTO - Between 1947 and 1994 the GATT fulfilled the role now played 51 by the WTO. - In 1995, governments folded the GATT into the newly established WTO, where it continues to provide many of the rules governing international trade relations. - The rules at the center of the world trade system were thus established initially in 1947 and have been revised, amended, and extended ever since. - Definition of the WTO and its services - The WTO is the hub of an international political system under which governments negotiate, enforce, and revise rules to govern their trade policies. - As the center of the world trade system, the WTO provides a forum for trade negotiations, administers the trade agreements that governments conclude, and provides a mechanism through which governments can resolve trade disputes. - As a political system, the WTO can be broken down into three distinct components: a set of principles and rules, an intergovernmental bargaining process, and a dispute settlement mechanism. b. Two Core Principles of the WTO - **Market liberalism** provides the economic rationale for the trade system. - Market liberalism asserts that an open, or liberal, international trade system raises the world's standard of living. - Every country---no matter how poor or how rich---enjoys a higher standard of living with trade than it can achieve without trade. - Moreover, the gains from trade are greatest---for each country and for the world as a whole---when goods can flow freely across national borders unimpeded by government-imposed barriers. - **Nondiscrimination** ensures that each WTO member faces identical opportunities to trade with other WTO members. This principle takes two specific forms within the WTO. - **Most-Favored Nation (MFN**), prohibits governments from using trade policies to provide special advantages to some countries and not to others. - Stripped of this legal terminology, MFN simply requires each WTO member to treat all WTO members the same. For example, the United States cannot apply lower tariffs to goods imported from Brazil (a WTO member) than it applies to goods imported from other WTO member countries. - [Two exceptions to MFN. ] - [The most important exception concerns regional trade arrangements.] - Governments are allowed to depart from MFN if they join a free-trade area or customs union. - In the North American Free Trade Agreement (NAFTA), for example, goods produced in Mexico enter the United States duty free, whereas the United States imposes tariffs on the same goods imported from other countries. - In the European Union, goods produced in France enter Germany with a lower tariff than goods produced in the United States. - [A second exception is provided by the Generalized System of Preferences (GSP), enacted in the late 1960s. ] - The GSP allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than they apply to the same goods coming from other advanced industrialized countries. - **National treatment** is the second form of nondiscrimination found in the WTO. National treatment prohibits governments from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. - In plainer English, national treatment requires governments to treat domestic and foreign versions of the same product ("like products" in GATT terminology) identically once they enter the domestic market. For example, the U.S. government cannot establish one fuel efficiency standard for foreign cars and another for domestic cars. - Together**, MFN** and **national treatment** ensure that firms in every country face the same market opportunities and barriers in the global economy. - Two types of additional rules/ principles in the WTO - In general WTO additional rules to the WTO core principles constrain the policies that governments can use to control the flow of goods, services, and technology into and out of their national economies. - [Some of these rules are proscriptive], such as prohibition against government discrimination. - [Others are prescriptive], such as requirements for governments to protect intellectual property I. The Processes by Which WTO Rules are Created - **Intergovernmental bargaining** is the WTO's primary decision-making process, and it involves negotiating agreements that directly liberalize trade and indirectly support that goal. - To liberalize trade, governments must alter policies that restrict the cross-border flow of goods and services. - Two types of restrictive policies include - tariffs, which are taxes that governments impose on foreign goods entering the country. - They also include a wide range of non-tariff barriers such as health and safety regulations, government purchasing practices, and many other government regulations. - Intergovernmental bargaining focuses on negotiating agreements that reduce and eliminate these government-imposed barriers to market access. - The negotiation process during intergovernmental bargaining: WTO **Ministerial Conference**, the highest level of WTO decision making. - Meeting for 3 or 4 days, governments establish an agenda detailing the issues that will be the focus of negotiation and set a target date for the conclusion of the round. - Once the Ministerial Conference has ended, lower-level national officials conduct detailed negotiations on the topics embodied in the agenda. - Periodic stock takings are held to reach interim agreements. - Once negotiations have produced the outlines of a complete agreement, trade ministers meet at a final Ministerial Conference to conclude the round. II. The **Doha Round** - Doha agreement on the bargaining agenda: what issues they would address and which they would ignore. - Governments agreed to \(1) negotiate additional tariff reductions (with a specific focus on developing countries' exports) \(2) incorporate existing negotiations in services into the Doha Round, and \(3) pursue meaningful liberalization of trade in agricultural products. - The Singapore Issues of **Doha** - members agreed to defer negotiations on trade and investment, competition policy, government procurement, and trade facilitation - They agreed to treat the agenda as a "single undertaking," meaning that everything must be agreed, or nothing is agreed. The Doha Agenda was just that---an agenda for negotiations. - The **Doha** Agenda for Negotiations - These initial negotiations (conducted for the most part by national delegations staffed by career civil servants or foreign service officers) were not oriented toward making final decisions, but instead explored areas of agreement and disagreement. - Two obstacles to the Doha Agenda - First, developing countries were demanding deeper liberalization of agriculture than the United States and the European Union (EU) were willing to accept. - Second, the EU was insisting that negotiations on the Singapore issues be initiated in 2004, but developing countries were unwilling to negotiate on new issues until they had achieved substantial gains in agriculture. - Two goals of **Doha** - The first was to bridge the gap concerning agriculture and the Singapore issues. Governments hoped this would be possible in Cancún because trade ministers had the political authority that lower-level officials lacked to make substantial concessions. - Second, once they had removed this major obstacle, governments would agree on a broad framework for the final agreement. III. WTO Compliance Mechanisms - The WTO's **dispute settlement mechanism** ensures that governments comply with the rules they establish. Individual compliance with established rules is not guaranteed. - The dispute settlement mechanism ensures compliance by helping governments resolve disputes and by authorizing punishment in the event of noncompliance. - The dispute-settlement mechanism ensures compliance by providing an independent quasi-judicial tribunal. - This tribunal investigates the facts and the relevant WTO rules whenever a dispute is initiated and then reaches a finding. - A government found to be in violation is required to alter the offending policy or to compensate the country or countries that are harmed. B. **Hegemons, Public Goods and the World Trade System?** I. Hegemonic Stability Theory - The stability of the WTO, and of international trade systems more broadly, is a function of the distribution of power in the international system. - In particular, **hegemonic stability** theory is often advanced to explain why the system shifts between periods in which it is open and liberal, and periods in which it is closed and discriminatory. In addition this theory rests on the logic of public goods provision. - **A public good** is defined by two characteristics: non-excludability and non-rivalry. - Non-excludability means that once the good has been supplied, no one can be prevented from enjoying its benefits. A lighthouse, for example, warns captains away from a nearby coast. Once that beacon is lit, no captain can be prevented from observing the light and avoiding the coast. - Non-rivalry means that consumption by one individual does not diminish the quantity of the good available to others. No matter how many captains have already consumed the light, it remains just as visible to the next captain. - **Public goods** tend to be undersupplied relative to the value society places upon them. Undersupply is a result of a phenomenon called free riding. - **Free riding** describes situations in which individuals rely on others to pay for a public good (Sandler 1992, 17). *The local radio example: My local public radio station uses voluntary contributions from its listeners and businesses to finance 87 percent of its budget. Without these voluntary contributions, the station would go off the air. As a regular listener, I benefit immensely from the station's existence, and my life would be greatly diminished were the station shut down. Yet, I have never contributed to* - More broadly, goods that are non-excludable and non-rivalrous tend to be undersupplied. - The **free-riding** problem: it is a function of the size of the group. - In large groups, each individual contribution is very small relative to the total contribution, and as a result each individual has only a small impact on the ability of the group to achieve its objective. Consequently, each individual readily concludes that the group can succeed without his contribution. In large groups, therefore, the incentive to free ride is very strong. - In small groups, sometimes called "privileged groups," each individual contribution is large relative to the total contribution, and therefore each contribution has a greater impact on the group's ability to achieve its common goal. It becomes more difficult for any individual to conclude that the group can succeed without his contribution. As a result, the incentive to free ride is weaker - Free riding and the WTO: The WTO has public goods characteristics which can be frustrated by free riding - International rules and procedures benefit all governments and it is difficult (though not impossible) to deny a government these benefits once an institution has been established. II. Hegemonic Stability Theory and Hegemons a. Hegemon - **Hegemonic stability theory** argues that hegemons act like privileged groups and thus overcome the free-riding problem. - A **hegemon** is a country that produces a disproportionately large share of the world's total output and that leads in the development of new technologies. - Because it is so large and technologically advanced, the benefits that the hegemon gains from trade are so large that it is willing to bear the full cost of creating international trade rules. - Moreover, the hegemon recognizes that the public good will not be provided in the absence of its contribution. - Hence, the free-riding problem largely disappears, and stable regimes are established, during periods of hegemonic leadership. - As a hegemon declines in power, it becomes less willing to bear the cost of maintaining trade rules, and world trade becomes less open. b. Hegemonic Leadership: Hegemonic Leadership vs. Hegemonic transition - As portrayed by historical events hegemonic Leadership is equivalent to rapid growth of world trade - The two periods of rapid growth of world trade occurred under periods of clear hegemony. - Great Britain was by far the world's largest and most innovative economy throughout the nineteenth century. - Trade within Europe and between Europe and the rest of the world grew at what were then unprecedented rates. - British hegemony, therefore, created and sustained an open, liberal, and highly stable global economy in which goods, capital, and labor flowed freely across borders. - When the United States exited World War II as an undisputed hegemon. - It played the leading role in creating the GATT, and it led the 61 push for negotiations that progressively eliminated barriers to trade. - The result was the most rapid increase in world trade in history. - Hegemonic transition characterized by a lack of hegemonic leadership is associated with the collapse of the world trade system. - The transition from British to American hegemony occurred in the early twentieth century. - By the end of World War II, the United States produced almost half of the world's manufactured goods - During this transition, each looked to the other to bear the cost of reconstructing the global economy after World War I. - The British tried to reconstruct the world economy in the 1920s, but lacked the resources to do so - The United States had the ability to re-establish a liberal world economy, but wasn't willing to expend the necessary resources. - Consequently, the Great Depression sparked the profusion of discriminatory and protectionist trade blocs. - As protectionism rose, world trade fell sharply C. **The Evolving World Trade Organization** Two such changes are most important: the emergence of developing countries as a powerful bloc within the organization, and the emergence of NGOs as a powerful force outside the organization. Together these developments have complicated decision making within the WTO and raised fundamental questions about the ability of governments to continue to achieve their goals through the system. I. Developing countries as a trading bloc - Brazil, China, and India, developing-country members have constructed a 65 powerful bloc within the WTO - Developing countries stymied the first effort to launch the current round of negotiations in Seattle in 1999 because the proposed agenda dedicated too much attention to issues of interest to the United States and the EU and insufficient attention to the issues developing countries believed important. - The current round launched once developing countries were satisfied that the agenda focused sufficient attention on the topics of importance to them, especially liberalization of agriculture and maintaining sufficient policy space to promote development. - The impact of developing countries in the WTO bargaining process - With developing countries on the sidelines (a cushion for agriculture) the United States, the EU, and Japan defined the negotiating agenda - governments liberalized industries in which they all enjoyed relative competitiveness generally capital-intensive manufactured good - They continued to protect industries in which they were uncompetitive. - Labor-intensive industries and farming thus remained protected in most industrialized countries. - The United States, the EU, and Japan agreed to allow GM, Toyota, and Volkswagen to compete against each other in all three markets. - Reducing these barriers challenged national producers in each country by exposing them to global competition, but because all countries were roughly similar in structure, liberalization did not impose substantial adjustment costs. II. NGOs represent changes outside - Of particular importance here is the growing number of nongovernmental organizations (NGOs) striving to influence the organization - Since the late 1990s, however, hundreds of groups have mobilized in opposition to what they view as the unwelcome constraints imposed by new WTO rules. - In many instances, NGOs worry about how WTO rules affect the ability of governments to safeguard consumer and environmental interests. - Civil society groups argue that the balance struck by current WTO rules is too favorable to business and insufficiently protective of consumer and environmental interests. - Moreover, they argue that the bias toward producer interests is a consequence of the nature of the WTO decision making, a process in which producer interests are heavily represented and consumer interests are almost entirely excluded. - The mobilization of NGOs around the WTO has thus sought to bring greater attention to consumer interests in order to redress this perceived imbalance. D. **The Greatest Challenge? Regional Trade Arrangements and the World Trade Organization** I. RTAs - **Regional trade arrangements** pose a challenge to the WTO because they offer an alternative, and often more discriminatory, way to organize world trade. - **A regional trade arrangement (RTA**) is a trade agreement between two or more countries, usually located in the same region of the world, in which each country offers preferential market access to the other. - RTAs come in two basic forms: **free-trade areas** and **customs unions**. - In a **free trade area**, like the North American Free Trade Agreement, governments eliminate tariffs on other members' goods, but each member retains independent tariffs on goods entering their market from non-members. - In **a customs union**, like the EU, member governments eliminate all tariffs on trade between customs union members and impose a common tariff on goods entering the union from non-members. - Because RTAs provide tariff-free market access to some countries, but not to others, they are inherently discriminatory. - the discriminatory aspect of RTAs makes many worry about the impact they will have on the nondiscriminatory trade encouraged by the WTO. - Such worries arise because of the rapid proliferation of RTAs. According to the WTO, there are currently 279 RTAs in operation. - Agreements between countries in Western, Eastern, and Central Europe, and in the Mediterranean account for almost 50 percent of RTAs in operation. North and South America take second place, accounting for about 12 percent. II. RTAs Emerged in Three different Waves - The first wave began early in the 1950s and extended to the mid-1970s. - This wave began with the construction of the original European Economic Community in 1958 and the Latin American Free Trade Area in 1960, and concluded with the formation of the Economic Community of West African States in 1975. - This wave was motivated in part by a desire to promote deeper economic cooperation within particular regions in an attempt to promote peace and achieve more rapid economic development. - In this regard, the contribution of the EEC to Franco-German political reconciliation after World War II and to rapid postwar economic recovery encouraged governments in other regions to emulate the approach. - The second wave began in the context of far-reaching trade policy reforms in Eastern and Central Europe, the former Soviet Union, and other developing countries. - Governments in former members of the Soviet Bloc, for instance, sought new ways to organize their trade, and sought access to Western European markets. - Consequently, a large number of agreements were reached between countries within the region and between these 70 countries and the EU - Moldova, for example, entered RTAs with eight other newly independent countries formed from the former Soviet Union between 1992 and 1996. - Russia entered at least nine RTAs with this same set of countries. - Ten Eastern and Central European countries reached bilateral RTAs with the European Union between 1991 and 1997. - There were also substantial changes in developing-country trade policies in the late 1980s and early 1990s, which led to a greater willingness to enter RTAs - Mexico, for example, negotiated RTAs not only with the United States and Canada (NAFTA), but also with Chile, Costa Rica, and Nicaragua. Chile negotiated RTAs with Colombia, Ecuador, and Peru, in addition to completing the agreement it reached with Mexico. - The third wave began in 2008 or so and has been closely associated with the so-called **mega-regional agreements**. - The two most prominent of these mega-regional agreements are the Trans-Pacific Partnership (TPP), negotiated between the U.S. and the EU, and the Transatlantic Trade and Investment Partnership (TTIP), which was negotiated by 13 states in Asia and North and South America. - A third mega-regional, the Regional Comprehensive Economic Partnership, ties China to 15 other economies throughout Asia and the Pacific. - In contrast to previous waves, which tended to focus most heavily on trade liberalization, the mega-regional agreements seek deeper economic integration among their members. - To achieve this goal, these agreements are both broader in scope and reach more deeply into domestic arrangements than prior agreements. - The TTIP and the TPP were intended to promote cooperation and harmonization on technical barriers to trade, which are domestic rules, regulations, and administrative procedures that can limit trade flows. - In addition, these agreements included trade in services, more ambitious rules regarding the protection of intellectual property than are present in the WTO and agreement on the treatment and protection of foreign investment. - The TPP included most of these issues as well as an elaborate and enforceable code on labor standards. III. Why RTAs proliferated - Some emphasize a country's desire to gain more secure access to the market of a particularly important trading partner. In the U.S.--Canada Free Trade Agreement concluded in the late 1980s, for example, Canada sought secure access to the U.S. market---the most important destination for Canada's exports. - Other scholars emphasize a government's need to signal a strong commitment to economic reform. Governments use RTAs to convince foreign partners that they will maintain open markets and investor-friendly policies. This argument has been applied most commonly to Mexico's decision to seek a free-trade agreement with the United States. Mexico shifted from a highly protectionist to a more liberal trade policy in the mid-1980s. The success of that strategy hinged in part on Mexico's ability to attract foreign investment from the United States. The Mexican government feared, however, that American investors would not believe that the Mexican government was committed to its new strategy. - Other scholars argue that countries enter RTAs to increase their bargaining power in multilateral trade negotiations. A small country bargaining individually in the WTO lacks power because it does not have a large market to offer. By pooling a group of small countries, the market that can be offered to trade partners in WTO negotiations increases substantially. Consequently, each member might gain larger tariff 72 concessions in WTO negotiations IV. Ways RTA's Complement and Challenge the WTO - On the one hand, RTAs liberalize trade, a mission they share with the WTO. In this regard, RTAs complement the WTO. On the other hand, RTAs institutionalize discrimination within world trade. In this regard, RTAs challenge the WTO. - Economists conceptualize these competing consequences of RTAs as trade creation and trade diversion. - Consider an RTA between France and Germany. Because the RTA eliminates tariffs on trade between France and Germany, more Franco-German trade takes place. This is a **trade creation**. - Because the RTA does not eliminate tariffs on trade between France and Germany on the one hand, and the United States on the other, some trade between the United States and Germany is replaced by trade between France and Germany. This is **trade diversion**. - An RTA's net impact on trade is the difference between the trade it creates and the trade it diverts. - If more trade is created than diverted, the RTA has liberalized trade. - If more trade is diverted than created, the RTA has pushed the world toward protectionism.