Global trading system: decline of nondiscrimination and rise of preferential trade arrangements and agreements.

AuthorSrinivasan, T.N.
  1. INTRODUCTION II. ORIGINS OF GATT III. PREFERENTIAL TRADE AGREEMENTS AND GATT IV. RECENT EMPIRICAL LITERATURE ON INTERNATIONAL TRADE AGREEMENTS V. EMPIRICAL ANALYSIS OF PTAS USING GRAVITY MODELS VI. EMPIRICAL ANALYSIS OF INCENTIVES OF FIRMS TO SELL IN FOREIGN MARKETS APPENDIX I: LIST OF PTAS COVERED APPENDIX II: DATA AND SPECIFICATION OF ECONOMETRIC MODELS 3.1 Gravity Model 3.1.1 Gravity Model Estimation Results I. INTRODUCTION

    Until World War I brought an end to the first wave of globalization of the late nineteenth and early twentieth centuries, national barriers to international trade and investment were minimal and did not discriminate among trading partner nations. At the end of the war, discriminatory barriers to trade and capital flows went up with disastrous consequences for the world, including the Great Depression and World War II. The conclusion of the General Agreement on Tariffs and Trade (GATT) (1) in 1947 is largely the result of the determination of trading nations to set up a rules-based, nondiscriminatory global trading system in the hope of preventing a repetition of the disastrous experience of the interwar period.

    Part II of this Article narrates the events that led to the conclusion of GATT in October 1947 and the failure to ratify the International Trade Organization (ITO) charter that had been approved at the United Nations conference on Trade and Employment in March 1948 at Havana, Cuba. The articles of GATT were intended to be the rules governing trade policy in the charter of the ITO. The ratification failure led to GATT operating on the Provisional Protocol of Application for almost five decades, until it was subsumed in the newly established World Trade Organization (WTO) in 1995.

    Part III is devoted to the evolution in GATT and WTO of discriminatory Preferential Trade Agreements (PTA). These include Customs Unions (CUs), Free Trade Areas (FTAs), Regional Trade Agreements (RTAs), and Partnership or Association Agreements (AAs). It also analyzes the evolution of Common Markets (CMs) and Currency Arrangements (CAs), which, though not strictly within the jurisdiction of GATT and WTO over trade in goods and services, do influence such trade (see Appendix I for precise definitions of various PTAs).

    Since the mid-1980s, PTAs in GATT and WTO have proliferated. They have grown in complexity, with trade and non-trade provisions and memberships including both developed and developing countries. This trend is surprising: the only rationale of a PTA is to provide preferential access to its members to each others' markets and it flatly violates the founding principle of nondiscrimination incorporated in GATT Article I ("General Most Favoured Nation Treatment," or MFN) and Article III ("National Treatment on Internal Taxation and Regulation," or NT). MFN and NT are also incorporated in the General Agreement on Trade in Services (GATS) of WTO. (2)

    Part III argues that the fairly stringent conditions in GATT for any proposed CU or FTA to be approved, and the procedures for examining whether these conditions are met, have utterly failed. In a seminal contribution, Jacob Viner identified two possible effects on the trade of a country that concludes a CU with some of its trading partners. (3) One, called "trade diversion," shifts a country's imports from sources that are not partners in the CU to more costly (in terms of price paid to the importer) partner countries. The other, called "trade creation," increases a country's exports to its partner countries relative to their pre-CU levels. In general, though not always, the trade diversion effect of a CU or more generally of a PTA would tend to reduce a country's national welfare, and the trade creation effect would tend to increase it. The net effect of the two together is ambiguous, even in theory. Moreover, going beyond the trade effects of PTA membership on an individual member country to the trade effects of the PTA on all its members together is also ambiguous in theory. Even if one is able to define an aggregate welfare function for the PTA, it is impossible to unambiguously rank a PTA by its welfare effect. Ultimately, the trade and welfare effects of a PTA on its members individually, and on all its members collectively, are empirical issues. They depend on various characteristics of a PTA, in particular their inclusion or otherwise of non-trade issues.

    Part IV is the contribution of this Article. It is devoted to an analysis of the impact of PTAs on the trade flows of India. In India, as in almost all major trading nations, only a few firms export. It is therefore of interest to analyze why this is the case by examining the incentives and disincentives of firms to export and sell in foreign markets. Part V analyzes such incentives and disincentives for Indian firms. Part VI summarizes the main findings of the Article.

  2. ORIGINS OF GATT

    This Part traces the origins of GATT through the successive attempts to establish a definitive application of GATT, as explicated by the author in Developing Countries and the Multilateral Trading System. (4)

    The origins of GATT can be traced to the memorandum that the United States sent to all countries of the world in 1945 with Proposals for the Expansion of World Trade and Employment. Realizing that it was vital to reduce barriers to trade in order to address the enormous recovery and reconstruction problems present after World War II, the United States took the initiative by sending a memorandum to all countries on Proposals for the Expansion of World Trade and Employment in 1945. At the same time, the United States also invited a few countries (initially fifteen, including the Soviet Union) to negotiate reductions in tariffs. Fourteen (except the Soviet Union) accepted.

    In 1946, the United States introduced a resolution in the Economic and Social Council (ECOSOC) of the newly established United Nations to convene an international Conference on Trade and Employment. The resolution was unanimously adopted. ECOSOC appointed the Preparatory Committee, which included the United States, the fifteen countries invited by the United States, and three additional countries. Again, the Soviet Union declined to participate. The United States also circulated a Suggested Charter for an International Trade Organization (ITO) to the Preparatory Committee, which accepted it as a basis for its deliberation. At its first meeting, the committee added a chapter on economic development to the United States' suggested charter and left further consideration of the issue to a committee at U.N. Headquarters in New York. The latter committee published its draft in January 1947. The Preparatory Committee also adopted, on a motion by the United States, a memorandum proposing procedures to be followed in the U.S.-initiated negotiations on tariff reductions.

    The tariff negotiations among eighteen of the Preparatory Committee countries and four others were included with an agreement called the General Agreement on Tariffs and Trade (GATT) on November 18, 1947, signed by twenty-three contracting parties of GATT. The ECOSOC Conference on Trade and Employment opened in Havana, Cuba on November 21, 1947, with GATT having set the stage, so to speak, for it. Fifty-six countries participated in the conference, with fifty-three, including the United States, signing its Final Act, embodying the charter of the ITO (basically, the draft submitted by the United States) on March 24, 1948.

    GATT was an international agreement, not an organization, and it was designed to operate under the umbrella of the ITO. However, the ITO never came into being, primarily because the United States did not ratify it. President Truman, having submitted the draft charter to the U.S. Senate for approval, later withdrew it when the U.S. appetite for setting up international organizations to resolve conflicts waned.

    The fears of some, that GATT tariff reductions might unravel if its implementation was delayed until the ITO was ratified, the desire of others to put GATT and ITO charters through the domestic approval processes simultaneously, and the fact that the negotiating authority on tariffs delegated by the U.S. Congress to the executive was due to expire in mid-1948, led the contracting parties of GATT to adopt a compromise. The Protocol of Provisional Application called for the immediate application of Part I on most favored nation treatment and tariff reductions, and Part II on procedural issues, and left implementation of the substantive obligations to the contracting parties themselves to the fullest extent, not inconsistent with their existing legislation.

    Subsequent attempts to secure definitive rather than provisional application of GATT did not succeed. A proposal in 1955 for an Organization for Trade Cooperation, less ambitious than the ITO, failed to win the approval of the U.S. Congress. Only in 1995 did the World Trade Organization (WTO) come into being after an agreement among GATT contracting parties established it in the Final Act of the Uruguay Round of Multilateral Negotiations, signed in 1994. (5) In eminent legal scholar John Jackson's words, "GATT has limped along for nearly forty years with almost no 'basic constitution' designed to negotiate its organizational activities and procedures." (6) Still, GATT contracting parties succeeded in reducing trade barriers substantially through eight successful rounds of multilateral negotiations and in raising world trade rates of growth to historically unprecedented levels.

  3. PREFERENTIAL TRADE AGREEMENTS AND GATT

    The foundation of the architecture of GATT and its successor, the WTO, is the principle of nondiscrimination as enunciated in Article I ("General Most-Favored-Nation Treatment," or MFN) and Article III ("National Treatment on Internal Taxation and Regulation," or NT of GATT). (7) Indeed, MFN and NT are incorporated in two of the major components of the Uruguay Round of...

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