POLS2133 Study Guide - Final Guide: World Trade Organization, Marrakesh Agreement, Most Favoured Nation
(WK 11) THE WTO AND FUTURE INTERNATIONAL TRADE
COOPERATION
Introduction: Why Trade Should Matter
Why you should care about trade…theoretically
Trade is a basic manifestation of the prisoners’ dilemma, and thus neatly embodies
the cooperation problem. As you know, the fundamental point of NLI is to show
that institutions can facilitate cooperation
-Trade offers a clear example of how institutions create mechanisms to lower
transaction costs
We’ve already covered the champagne fairs to look at how merchants managed to
solve this problem
If you understand trade, you understand the basic point of the class, and a
foundational of IR theory generally
Basic trade theory suggests free trade is the optimal policy for an economy but there
are two political economy theories for why we trade
Economic theory very clearly establishes two facts:
-Overall, trade creates net gains for economies; but
-Trade also creates stark winners and losers within each economy;
-Economic analysis of traditional gains from trade is no longer an adequate tool in
which to evaluate the impact of trade agreements today
-This makes trade, and trade IOs, politically controversial.
Trading In An Anarchic System: A Recap
Milgrom, North and Weingast (1990): Individuals can ensure honest behaviour by
establishing a “continuing relationship” because the relationship itself is a valuable
asset (longer shadow of the future).
In a community where people meet rarely, an individual’s reputation serves as her
bond for good and honest behaviour.
Puzzle: Why then do we need institutions? Why isn’t reputation sufficient?
Why you should I care?
“In complete information settings, institutions are frequently unnecessary because
decentralized enforcement is sufficient to police deviations.
However, this conclusion fails in environments where information is incomplete or
costly…” (p.21).
The World Trade Organisation
Introducing the WTO
“Main function is to ensure that trade flows as smoothly, predictably and freely as
possible” (website)
Sets rules which “limit the choices of governments with respect to international
trade” (Hurd, p. 110)
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These rules define what is legal and illegal when it comes to a wide range of state
policies that might affect international trade – e.g. import tariffs, industrial subsidies,
and all manner of taxes and regulations
In principle, any government law, regulation or policy that affects firms engaged in
trade across borders may come under the scrutiny of the WTO
In practice however, a lot of categories of goods are excluded, and not all trade-
influencing policies are prohibited
Area of competence:
-Sets limits on what policies members can choose that have an impact on
international trade
-Strives to create a stable regulatory environment for international trade
-Aims for “rule-governed” trade, rather than free trade
-Settle disputes between members regarding violations of these rules, and
authorizes retaliatory tariffs under the Dispute Settlement Understanding
The WTO as an IO
The WTO was founded in 1995 and is the formal organisation responsible for
implementing a set of trade agreements:
-The General Agreement on Tariffs and Trade (GATT)– 1947 treaty - is its main
component and specifies how countries can regulate their imports and exports
of most goods
-The General Agreement on Trade in Services (GATS) – 1995 treaty – treaty
covers trade in services
-The Agreement on Trade-Related Aspects of International Property Rights –
1995 treaty – covering rules on intellectual property
Small org, big role
The organisation itself is small, and states’ obligations are not contained in the
WTO’s founding document (Marrakesh Agreement) but in the separate trade
agreements such as the GATT.
164 members (recently joined were Kazakhstan and Seychelles). Some non-state
members (Hong Kong; EU) who are there because of their control over an area’s
trade policy. Decision making by consensus.
Covers over 97% of world trade covered
99% of the import tariffs of developed countries are bound by the WTO
Makes three main contributions to the international economic system:
(1) it establishes rules that govern how members can set domestic policies that affect
international trade
(2) requires that members maintain public lists of import tariffs for all products
which cannot be altered except through multilateral negotiation
(3) sets up court-like dispute-settlement procedures to hear complaints when one
member believes another is breaking these rules
What does the WTO do?
1. Trade negotiations: Facilitates agreements where states commit to lower trade
barriers and open services markets.
2. Implementation and monitoring: States must make trade policies transparent and
list all tariffs, and the WTO scrutinizes and reports on each government’s policies and
practices.
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3. Dispute settlement: Adjudicates disputes between states over whether a rule is being
broken.
4. Capacity building: Helping developing countries implement agreements and
commitments.
States’ obligations
“In joining the WTO, governments commit to specific limits ontheir domestic economic
policies” (Hurd, p. 44).
All of the rules are subject to exceptions and provisos and so the ultimate effect of the
rules depends on precisely how they are written and interpreted consequentially
much of the action around the WTO consists of lawyerly argument about the meaning
of the words
Tariffs (import taxes) – vary by country and thus hugely complicated, but 99% of rich
country imports and 74% of developing countries imports are covered.
Subsidies for domestic industries
Quotas and other non-tariff barriers
“Dumping” on export markets for less than domestic price.
The key rules of the WTO are:
(1) Bound tariffs
(2) Most favoured nation
(3) National treatment
(1) Bound Tariffs:
Upon joining the WTO, each country is required to agree to a ceiling for the import
tax it charges on each imported good.
This maximum tariff can be different for each item but the country must publish a list
of all its tariff rates and must agree not to unilaterally raise those rates above the
published levels
These become the “bound” tariffs of the country, and the schedule automatically
becomes part of the WTO treaty
The tariff rates are legally binding commitments by the government – sticking to
them is an obligation of the government
(2) “Most Favoured Nation”
This is defined in Article I of the GATT treaty which says in part “any advantage,
favour, privilege, or immunity granted by any contracting party to any product
originating in or destined for any other country shall be accorded immediately and
unconditionally to the like product…of all other contradicting parties”
This rule requires that members maintain a single set of trade tariffs and rules for
their trade with all other WTO members
Members may not treat different WTO members differently, and may not negotiate
bilaterally with other states for special treatment
This rule creates a uniform web of trade rules across the WTO trading zone and
helps to drive down both the rates of tariff applied by countries and the
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