International Trade Theory and Policy - Term Paper Example

Sur Supervisor International Trade Theory and Policy Part A Q: Discuss the motives, nature and purpose of the original GATT (General Agreement on Tariffs and Trade), and the extent to which this purpose was achieved in the first six rounds of negotiations (through the mid-60s). Answer The preamble of GATT describes about the motives and purpose of forming it. Full employment, increased standards of living through steady growth of income and to make full use of world resources to expand the production base and exchange of goods were the motives behind formation of the GATT (World Trade Organization). Before the end of World War II, countries had their own protectionist measures in place in terms of tariffs to safeguard their domestic manufacturers and businesses since a long time. The high tariffs were becoming a great hindrance to global trade. The General Agreement on Tariffs and Trade (GATT) in first six rounds from 1948 through 1967 provided the basic framework for tariff reductions. All first six rounds were mainly devoted on reducing tariffs and other barriers to trade and eliminate or lessen discriminatory treatment to promote global growth in trade (World Trade Organization). While there were only 23 participating countries in the first round of discussion, this numbers increased to 62 during the sixth Kennedy Round of negotiation. The 23 founding members of the GATT were also part of a group who were negotiating the ITO Charter as a specialized body of the United Nations. The ITO Charter was quite ambitious as it covered rules on employment, international investment, restrictive business practices, and commodity agreements. Early provisions of GATT did mention about accepting some of the trade rules of the ITO draft; however, the ITO Charter could not be ratified due to serious opposition within the US Congress. This resulted into the early death of the ITO charter and GATT remained only instrument that governed international trade (World Trade Organization). Through intensive talk and deliberations right from the first to the sixth round of negotiations, the participating countries could arrive at the consensus to reduce effective tariff rates from 38% in 1947 to just 9 percent by year 1972. Apart tariff reduction, the major turnaround came in the sixth round of negotiation when anti-dumping agreement came into effect. It should be noted that first five rounds were focused on item-by-item negotiation for the reduction of tariffs while the sixth round took some bold approach reducing tariff across the board; however, it is important to keep in mind that these rounds had little success in achieving non-tariff trade relations among the nation. The sixth round also called the Kennedy Round lasted over 3 years and provided tariff concessions to the tune of $40 billion. In view of the strong global protectionism prevailed at that time, achievements in the Kennedy Round were noteworthy. The Kennedy Round was the first of its kind that went beyond tariff reduction discussions and advanced the idea of non-tariff barriers besides highlighting the concerns of the developing world; however, trade in services, intellectual property rights were never discussed in the first six rounds of negotiation (World Trade Organization). Q: Discuss the global economic conditions in the mid-70s, and the anti-trade policies that became common despite the GATT. Motivate by worry about these policies, the 7th (Tokyo) Round was called to start in 1973. How can this Round be simultaneously considered a “success” (by the GATT Secretariat) and a “failure” by most international economists. Answer Those were the tumultuous years in mid-‘70s when Bretton Woods system based on fixed exchange rate collapsed. The system failed because the US dollar came under tremendous pressure to devalue. In the process of financing the Vietnam War and implementing public welfare programs during those years, the US government had increased its spending substantially that eventually resulted into increased money supply in the market. Over and above, the 1971 oil crisis also added fuel to the fire increasing inflation in the US. Average inflation rates during 1973-75 were over 9 percent in the US (US Inflation Rates). Moreover, due to increased levels of imports, the US trade balance had also turned negative. Since other countries were not ready to revalue their currencies against the dollar on the fear that their exports would get reduced, the President Nixon was forced to declare that dollar would not be convertible to gold and exchange rates against major currencies will be decided by the market forces. Adverse economic conditions and oil shocks increased the protectionism measures during '70s; many of the GATT agreements were ignored by developed economies and they blocked fabrics, autos, steel, consumer electronics that were produced by newly industrialized nations. It is pertinent to note that while world trade from 1963-72 grew at an average rate of 8.7%, the growth rate between 1973 and 1988 came down falling to 3.8 percent per year (Narlikar, Daunton and Stern). Tokyo Round lasted over 74 months and the results of the Tokyo Round were significant when seen in the plight of the economic climate when the period experienced two oil crises as well as the collapse of the dollar. Most part of the globe plunged into economic recession. Nevertheless, it is noteworthy that Tokyo Round could achieve over $300 billion in tariff cut-offs. The highest-ever 102 countries participated in the Eighth Round of negotiation. During the Tokyo Round, average tariffs came down to 4.7 percent (Narlikar, Daunton and Stern). The Round had some mixed results. It did not yield any solution to the farm trade but countries did arrive at some kind of agreement and arrangement on non-tariff barriers. It is worth noting that non-tariff barriers were not subscribed by all members of GATT but only limited, mainly industrialized countries agreed to it and that is why they came to be known as ‘codes’. These codes were related to product standards, subsidies and dumping, government procurement and dumping, import licensing and customs valuation. First time, it came out that subsidies were trade barriers. The point was that the countries would be free to impose countervailing duties if imported stuffs enjoyed subsidy from their host countries. Such subsidies were considered damaging to the manufacturers of importing countries. Only export subsidies given on agricultural produce were considered free from any codes (Narlikar, Daunton and Stern). The important achievement of the Tokyo Round was non-tariff barrier codes that paved the way for WTO in later years. Further, third world countries were given exemption from rules of reciprocity and non-discrimination. Tokyo Round was at least a good beginning to reform the trade system. So in that sense the Tokyo Round can be called a ‘success’; however, international economists called it a ‘failure’ because governments the world over devised some other means of protection when competition began impacting their own produce. In the wake of unemployment woes and factory closures due to international competition the governments in Western Europe and North America resorted to a subsidy route to safeguard their domestic producers. Such measures largely raised skepticism about GATT'S effectiveness as well as credibility (World Trade Organization). Part B Q. Ever since the signing of the GATT agreement, less-developed-countries (LDCs) have been encouraged to focus on trade as their route to economic growth and development. What has been the history of the controversy surrounding this advice, and where are we now in terms of acceptance of and adherence to this free-market-oriented strategy. Answer Theoretically, it seems perfect that any country including less-developed-countries who is a member of the WTO can take advantage of a tariff-free trade regime and can spearhead its economic growth and development. But in reality it is not so. Developed countries comprised of EU and the US have created many ways to thwart the entry of LDCs in the world trade albeit, in a disguised way. Developed countries provide subsidies of tens of billions of dollars to their farmers every year. The EU grants over ?40 billion of farm subsidy each year. It must be remembered that this constitutes over one-third of the entire EU spending (Economicsonline). The subsidies influence world prices and assure their farmers of the remunerative price without bothering about world demand-supply scenario. It is worth remembering that huge populations in less-developed-countries (LDCs) are dependent on agriculture for their subsistence and in turn, they suffer because subsidy lowers the price of agricultural produce in world markets. Their overproduction harms the interests of poor farmers in less-developed-countries. WTO members have failed to arrive at common decision on how to reduce the quantum of subsidies paid to farmers in developed countries. According to Fairtrade Foundation, rich country paid $47 billion subsidies to their cotton growers in the past 10 years. This prevented 15 million cotton farmers across West Africa selling their cotton to these countries. The foundation estimated that at least 5 million of those cotton growing families have been forced to leave their farming activities pushing them into poverty because of the subsidy paid by rich countries to their farmers. It is worth mentioning here that world cotton prices are not an outcome of demand and supply only but they also depend upon the subsidies granted by rich countries. Because of the subsidy facility, production of the many agricultural commodities increases to a great extent surpassing demand. The end result is slump in the global prices harming poor farmers in the less-developed-countries (Fairtrade Foundation). It is interesting to note that the European Union by virtue of the subsidy facility is the second largest exporter of agricultural commodity. Sugarcane growers in African countries do not get remunerative price in the world market while the EU grants over 3 billion dollars per year on sugar exports (Sugarcane-subsidies and fair trade). Finally, in 2008 at Doha Round, members agreed to discuss about the modalities for cutting tariffs and subsidies. The emphasis was placed to devise a formula that could set the process of cutting subsidies and differential treatment for LSDs; however, not much of a progress has been made so far (The Doha Round). Works-Cited The Doha Round. World Trade Organization. wto.org . Web.17 Mar. 2013 http://www.wto.org/english/tratop_e/dda_e/texts_intro_e.htm Economicsonline. Common Agricultural Policy. economicsonline.co.uk. Web.17 Mar. 2013. http://www.economicsonline.co.uk/Global_economics/Common_Agricultural_Policy.html Fairtrade Foundation. The Great Cotton Stitch-up. fairtrade.org. Web. 17 Mar. 2013. http://www.fairtrade.org.uk/includes/documents/ cm_docs/2010/f/2_ft_cotton_policy_report_2010_loresv2.pdf Narlikar, Amrita; Daunton, Martin; Stern, Robert M. The Oxford Handbook on the World Trade Organization. The Expanding Mandate of the GATT. Oxford University Press. Oxford. Sugarcane-subsidies and fair trade. Web. 17 Mar. 2013. http://www.kew.org/plant- cultures/plants/sugar_cane_production__trade_sugar_subsidies_and_fair_trade.html US Inflation rate (2013). tradingeconomics.com. Web. 17 Mar. 2013. http://www.tradingeconomics.com/united-states/inflation-cpi “World Trade Organization”. The GATT years: from Havana to Marrakesh. wto.org. Web. 17 Mar. 2013. http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm Read More