Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule

Abstract. A fundamental difference between multilateral trade agreements like the GATT and WTO and a preferential agreement is the multilateral agreements’ inclusion of a most‐favoured‐nation principle. Though MFN requires that members implement policies that provide equal treatment to all GATT/WTO countries, how far do members actually follow the MFN principle when so required? We empirically investigate a sample of GATT/WTO trade disputes and the effect of successful dispute settlement negotiations on the disputed product trade of third country exporters to the defendant country. We document evidence of trade liberalization consistent with defendant countries successfully applying the equal treatment rule. JEL classification F13     

PREFERENTIAL TRADE AGREEMENTS AND MULTILATERAL TARIFF COOPERATION*

Are preferential trade agreements (PTAs) building or stumbling blocks for multilateral trade liberalization? I address this question in an infinitely repeated tariff game between three countries engaged in intraindustry trade under oligopoly. The central result is that when countries are symmetric, a free trade agreement (FTA) undermines multilateral tariff cooperation by adversely affecting the cooperation incentive of the nonmember whereas a customs union (CU) does so via its effect on the cooperation incentives of members. However, when countries are asymmetric with respect to either market size or cost, there exist circumstances where PTAs facilitate multilateral tariff cooperation.     

Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?

In many preferential trade agreements (PTAs), countries exchange not only reductions in trade barriers but also cooperation in non-trade issues such as labour and environmental standards, intellectual property, etc. We provide a model of PTAs motivated by cooperation in non-trade issues and analyse its implications for global free trade and welfare. We find that such PTAs increase the cost of multilateral tariff reductions and thus cause a stumbling block to global free trade. This occurs because multilateral tariff reductions decrease the threat that can be used in PTAs and thus the surplus that can be extracted from them. By explicitly modelling the interaction between preferential and multilateral negotiations, we derive a testable prediction and provide novel econometric evidence that supports the model's key prediction. The welfare analysis shows that the current World Trade Organization rules allowing this type of PTAs may be optimal for economically large countries, thus the model can predict the rules we observe. We also analyse alternative rules that constitute a Pareto improvement.     

Preferential Liberalization,Antidumping, and Safeguards: Stumbling Block Evidence from MERCOSUR

There is not yet consensus in the trade agreements literature as to whether preferential liberalization leads to more or less multilateral liberalization. However, research thus far has focused mostly on tariff measures of import protection. We develop more comprehensive measures of trade policy that include the temporary trade barrier (TTB) policies of antidumping and safeguards; studies in other contexts have also shown how these policies can erode some of the trade liberalization gains that arise when examining tariffs alone. We examine the experiences of Argentina and Brazil during the formation of the MERCOSUR over 1990–2001, and we find that an exclusive focus on applied tariffs may lead to a mischaracterization of the relationship between preferential liberalization and liberalization toward non‐member countries. First, any “building block” evidence that arises by focusing on tariffs during the period in which MERCOSUR was only a free trade area can disappear once we also include changes in import protection that arise through TTBs. Furthermore, there is also evidence of a “stumbling block” effect of preferential tariff liberalization for the period in which MERCOSUR became a customs union, and this result tends to strengthen upon inclusion of TTBs. Finally, we also provide a first empirical examination of whether market power motives can help explain the patterns of changes to import protection that are observed in these settings.     

Analyzing the System of Preferential Tariffs for Least Developed Countries

This paper analyzes the rents available from non‐reciprocal preferential tariffs for least developed countries (LDCs) on all exports to the quad countries at the tariff line level. Most of the rents come from the European Union (EU) in clothing and textiles, while the USA and Canada offer few rents and charge significant tariffs to LDCs. We develop a dual economy labor market model that generates an income distribution and simulates the distributional effects of preferences. We find that the benefits of the preferences outweigh any adverse distributional effects. Relative inequality may increase with preferences in some cases, but absolute incomes increase in every case. We conclude that in the absence of multilateral liberalization, preferences are beneficial to some LDCs and expansion of preferences is desirable. In the event of multilateral liberalization, an import subsidy scheme that maintains the rents is the most desirable outcome.     

Trade creating free trade areas and the undermining of multilateralism

This paper indicates that the consequences of regional trade agreements for the world trade system may be deceiving—an arrangement's apparent virtue may constitute the source of its drawback. In a model where governments have political, as well as economic, motivations, I show that a free trade area induces its members to reduce protection against the non-members, and to do so sufficiently deeply to generate overall trade creation. Trade creation amplifies the excluded countries’ access to the integrating markets, but also reduces their extra gains from multilateral liberalization. Thus, trade creation can reverse the support of the excluded countries to liberalization on a multilateral basis. This is more likely to happen when governments outside the free trade area are more responsive to special interests.     

REGULATORY COOPERATION, AID FOR TRADE AND THE GATS

Abstract.   This paper discusses what could be done to expand services trade and investment through a multilateral agreement in the WTO. A distinction is made between market access liberalization and the regulatory preconditions for benefiting from market opening. We argue that prospects for multilateral services liberalization would be enhanced by making national treatment the objective of WTO services negotiations. Moreover, if complemented by assistance to strengthen regulatory capacity in developing countries, the WTO could become more relevant in promoting not just services liberalization but, more importantly, domestic reforms of services policies.     

Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade

We studied how the pursuit of bilateral free‐trade agreements (FTAs) affects the likelihood of achieving multilateral free trade. We derive and compare the stable Nash equilibria of two games of trade liberalization: in the FTA game, each country can either form an FTA with one of its trading partners or both of them or none of them, whereas in the (restricted) No FTA game, purely bilateral FTAs are not permitted. The major result is that there exist circumstances under which the freedom to pursue (discriminatory) bilateral FTAs is necessary for achieving multilateral free trade.     

Free Trade Agreements and the Prospects for Regional Integration in East Asia

Trade policy in East Asia has switched from non-discriminatory unilateral liberalization, reinforced by General Agreements on Tariffs and Trade/World Trade Organization (GATT/WTO) commitments, to discriminatory free trade agreements (FTA). The paper surveys the FTA activity of the major regional players: China, the ASEAN countries, Japan, and South Korea. It concludes that emerging FTAs are weak and partial. A hub-and-spoke pattern of dirty FTAs will not drive regional economic integration or further integration with the global economy. Rather, it could be a force of regional economic disintegration – especially if the multilateral trading system weakens further. At the same time, FTA activity is distracting attention from the WTO, and, more fundamentally, from unilateral liberalization and domestic structural reforms. Hence, East Asian trade policies need to be rebalanced, with better-quality FTAs and more focus on the WTO. However, more important than the WTO and FTAs is a fresh spurt of unilateral liberalization and structural reform outside trade negotiations.     

How deep is your love? A quantitative spatial analysis of the transatlantic trade partnership

This paper explores the quantitative effects of trade liberalization envisioned in a transatlantic trade and investment partnership (TTIP) between the United States and the European Union. We use a quantitative trade model that, in contrast to other works, features consumptive and productive uses of land and we allow for labor mobility and a spatial equilibrium. Our calibration draws mainly on the world input–output database (WIOD). The eventual outcome of the negotiations is uncertain. Tariffs in E.U.–U.S. trade are already very low, however, so that an agreement will have a major impact only by eliminating nontariff barriers. These are extremely hard to quantify. We address these uncertainties by considering a corridor of trade‐liberalization paths and by providing numerous robustness checks. Even with ambitious liberalization, real income gains within a TTIP are in the range of up to 0.46 percent for most countries. The effect on outside countries is typically negative, yet even smaller. Taking land into account scales down the welfare effects strongly. Interestingly, we find that all German counties derive unambiguous welfare gains even though the model allows for negative terms‐of‐trade effects. Our analysis also implies that in order to arrive at the same welfare gains as under a TTIP, a multilateral liberalization would have to be much more ambitious for the U.S. than for the E.U.     

区域经济一体化对多边自由贸易体制的影响——一个简单的制度经济学解释

区域经济一体化组织的出现是否有利于推动多边自由贸易的实现,这一问题已经引起了学者们的广泛关注.从制度经济学的角度看,先走区域经济一体化的道路,然后再进行区域经济组织的自由贸易合作,从而最终实现全球贸易的自由化,能够比"一味地"等待世界所有国家同时实现贸易的自由化给各利益主体带来更大的现期净收益.因此,相比WTO所推行的多边贸易自由化而言,区域经济一体化具有更多的现实性和可行性,它将为世界自由贸易的实现做阶段性准备.当然在此过程中,还应该注意加强WTO对区域经济一体化组织的监督和协调,以引导它向更有利于提高世界福利和贸易自由化的方向发展.     

GRADUAL TRADE LIBERALIZATION WITH SLUGGISH CAPITAL MOVEMENT

Abstract.  This paper analyses how domestic sluggish capital movement can affect multilateral trade negotiations between countries. In multilateral trade talks, including the current Doha Round of trade talks organized by the World Trade Organization, countries take steps to liberalize even though they seem to be moving towards the ultimate free trade equilibrium. This paper argues that when capital moves sluggishly between sectors in an economy, there are cases in which countries do not want to move to the ultimate free trade equilibrium immediately. Instead, they find it more beneficial if they simultaneously move gradually, with their tariffs lowered step by step.     

Endogenous Free Trade Agreements and Foreign Lobbying

This paper assesses the political viability of free trade agreements (FTAs) in the presence of lobbying by organized foreign interest groups. The assessment is based on a model in which external tariffs and the decision to form an FTA are endogenously determined. The findings demonstrate that, in the presence of an organized lobby group in a prospective partner country, an FTA may initiate an increase in the level of protection against imports from third countries and impede trade with non‐member countries. Further, this study finds that a foreign lobby may encourage the local government to enter a welfare‐reducing trade‐diverting FTA. Finally, this paper shows that an FTA increases the lobbying power of the organized lobby groups of the member countries, which can potentially obstruct the viability of welfare‐improving multilateral trade liberalization.     

The “Emulator Effect” of the Uruguay Round on US Regionalism

Using a detailed data set at the tariff line level, we find an emulator effect of multilateralism on subsequent regional trade agreements (RTAs) involving the USA. We exploit the variation in the frequency with which the US grants immediate duty free access (IDA) to its RTA partners across tariff lines. A key finding is that the US grants IDA status especially on goods for which it has cut the multilateral most favored nation (MFN) tariff during the Uruguay Round the most. Our results suggest that the Uruguay Round multilateral “concessions” have elicited subsequent preferential trade liberalization.     

On the emergence of an MFN club: equal treatment in an unequal world

Abstract .  Motivated by GATT, we endogenize the formation of a club whose members have to abide by the MFN principle of non-discrimination. The underlying model is that of oligopolistic intraindustry trade. While an MFN club does not alter average tariff levels across countries, it increases aggregate world welfare; makes non-members worse off; and can immiserize its high cost members. These results imply that (i) core WTO rules such as MFN are valuable even if multilateral negotiations deliver limited trade liberalization and (ii) the distributional effects of MFN maybe one reason why developing countries have been granted Special and Differential treatment at the WTO.     

GATT,Preferential/Regional Trading Blocs and Agricultural Trade*

Agricultural trade impasses have again frustrated the GATT process. Interest in preferential/regional trading blocs is increasing. the paper probes the theoretical and empirical consequences of preferential arrangements instead of multilateral liberalization. It concludes that in a second-best world preferential arrangements could either improve or decrease global welfare. For agricultural trade, previous experience suggests that in regional groupings such as the EC trade diversion exceeded trade creation. This results from trade distorting domestic policies. Prospects for liberalization of agricultural trade under either GATT or preferential arrangements are limited. the consequences for small agricultural exporters are not positive.     

Trade liberalization in environmental goods

Trade negotiations have started to pay attention to liberalization in environmental goods (EGs), whose production may require dirty intermediate goods. We construct a two-country trade model to explore the effects of trade liberalization in EGs on the local pollution, the global environment and welfare in the presence of such an environmental conundrum. We find that countries do not necessarily benefit from trade liberalization in EGs in the absence of an environmental policy. With the assistance of an upstream pollution tax, trade liberalization in EGs improves each country's welfare. This result holds independent of whether the upstream market is competitive or not, or whether we have upstream trade across countries. For asymmetric countries, trade liberalization in EGs improves the world welfare and the welfare for the country if it has a smaller demand for EGs; or experiences less damage from the production of dirty inputs; or values environment improvement more.     

Regionalism and Multilateral Trade Liberalization with Asymmetric Countries

The paper examines the impact of regionalism on the process of multilateral trade liberalization when countries are asymmetric. The author uses a three‐country, three‐good, competing exporters model, with countries being symmetric in everything but their discount factors. The equilibrium regional agreement is found to be a customs union between a patient and an impatient country and that the impact of regionalism depends on the discount factors. The impact of regionalism on multilateral trade liberalization depends critically on which countries engage in regionalism.     

Multilateral trade and export-led growth in the world economy: some post-war evidence

In this paper, we address an empirical question: is there evidence to substantiate the assumption that the post-war liberalization of world trade has actually led to a significant increase in the world GDP? In our attempt to answer that question, time series data in the Penn World Table 6.1 are aggregated across countries to obtain a measure of world trade and output, and the total number of GATT/WTO member countries is employed as an explanatory variable to account for the impact of multilateral trade agreements, such as the Kennedy Round, Tokyo Round, and the Uruguay Round, on the trade-growth nexus. We then examine the relationship between world trade and the post-war GDP per worker across the world through the multivariate cointegration and error correction modeling and the Granger causality test. The results suggest that, at the global level, the post-war liberalization of multilateral trade has promoted both GDP and trade activities. There is also evidence that supports the export-led growth hypothesis in the world economy.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.