8 International trade agreements: WTO and PTAs

• After WWII, 44 country-representatives met to discuss rebuilding of Europe & issues w/ high trade barriers & unstable exchange rates

• Outcome: agreement outlining intl. economic system of convertible currencies, fixed exchange rates

• Proposal: International Trade Organization (ITO) to promote free trade

  —> strong opposition, esp. in US, never established

• 1949: General Agreement on Tariffs and Trade (GATT) incl. 23 countries

  • Periodic meetings to negotiate lower trade barriers

  • At Uruguay round (in Uruguay), WTO was established

• WTO greatly expanded GATT by adding rules for global interactions through binding agreements

• Most recent round: Doha round (began Nov. 2001)

• GATT: general agreement on tariffs and trade: covers trade in goods

• GATS: general agreement on tariffs and services: covers trade in services

• TRIMs: trade related investment measures: covers foreign investment

• TRIPs: trade related intellectual property: covers international property rights

• non-discrimination ((reductions in) tariffs must apply to all members)

• elimination of NTOs

• Dispute settlement procedure: formal procedure to resolve trade disputes through ruling by WTO panel. Countries not adhering to decision may be punished through trade restrictions

  • Exception: temporary tariff raise for certain products: safeguard provision / escape clause (Article XIX); if domestic producers are suffering due to import competition

  • Exception: regional trade agreements: permitted under XXIV of GATT

Customs union:

• free trade between members, identical tariffs to rest of world (EU)

  • difficult to negotiate, but reduce trade barriers more than FTA

Free trade are:

• free trade between members, each member sets own tariffs against rest of world

  • Origin of good must be documented at border

• PTAs increase national welfare when new trade is created, but not when existing trade from outside world is diverted to trade w/ member countries

• Trade creation: when high cost domestic production is replaced by low cost imports from other members

• Trade diversion: when low cost imports from non-members are diverted to high cost imports from members

Assumptions:

• 3 countries, home, partner 1 & 2

• trading homogeneous good

• home = small country, taking prices as given, partner 1 & 2 large countries

• home could satisfy entire demand through imports

• w/o PTA: home applies same tariff to both partners —> gets all imports from most efficient country

Trade creation:

• gains & losses:

  • consumer +(a+b+c+d)

  • Producer: -a

  • Gov’t: -c

  • Net effect: +(b+d)

Trade diversion:

• Gains & losses:

  • consumer: +(a+b+c+d)

  • producers: -a

  • Gov’t: -c

  • diversion: -e (trade diverted away from Partner 1; home suffers efficiency loss)

  • Net effect: +(b+d)-e —> gain or loss depending on size of e, b, d. usually net loss