Chapter 5 World Trade Organization

5.1 What is trade?

Comparative Advantage

• Comparative advantage: states should specialize in trading goods they produce with the most efficiency and lowest relative cost

• Economic benefits may come with political cost (e.g. closure of a factory) because the state does not have comparative advantage in that area

• Political drawbacks to economic benefits of trade:

– Long-term benefits may incur short-term costs

– Uneven distribution of benefits and costs within a state

Some industries or communities benefit at the expense of others


5.2 Theories of trade

  1. Trade is not only an economic issue but also a highly political one
a.  Crosses state-defined borders
b.  Regulated by states under pressure from interest groups
c.  Occurs within trade regimes maintained by and negotiated among states
  1. Scholars of international political economy (IPE) study the politics of international economic activities
a.  Most frequently studied of these activities are trade, monetary relations, and multinational corporations

Liberalism and Mercantilism


–   Shares with realism the belief that each state must protect its own interests at the expense of others
–   Emphasizes relative power
–   Importance of economic transactions lies in their implications for military
–   For mercantilists, the goal is to create the most favorable distribution of wealth
–   Mercantilists emphasize that trade should serve political ends, including expanding a state's military power.

Economic liberalism

–   Belief in the possibility of cooperation to realize common gains
–   Emphasizes absolute over relative gains 
–   Commitment to free trade, free capital flows, and an “open” world economy
–   For liberals, the most important goal is to create a maximum of total wealth by achieving optimal efficiency 
–   Maximizing output, minimizing waste

5.3 Key terms

Free trade: flow of goods and services across national boundaries unimpeded by tariffs or other restrictions

Balance of trade: the value of a state’s exports relative to its imports

The textboxes “Balance of Trade” and “Reserves (minus debts)” have two arrows between them. The text on the arrow from balance of trade to reserves reads, “Surplus adds to reserves or reduces debts” and that on the arrow from reserves to balance of trade reads, “Deficit depletes reserves or increases debts.” Also, arrows “Exports” and “Money paid for imports” are pointing away from balance of trade and arrows “Imports” and “Money received for exports” are pointing toward balance of trade. The text below textbox reserves reads, “(Mercantilists’ stockpile of money).”

5.4 GATT and WTO

• World Trade Organization (WTO): global, multilateral IGO that promotes, monitors, and adjudicates international trade

–   Successor to General Agreement on Tariffs and Trade (GATT) created to facilitate freer trade on a multilateral basis 
–   164 member states, with 20 more seeking membership
–   The WTO framework rests on the principle of reciprocity 
–   Uses concept of nondiscrimination—most-favored nation concept

▪ Exception to MFN is Generalized System of Preferences (rich states give trade concessions to poor ones to help their economic development)

• World Trade Organization (WTO): An organization begun in 1995 that replaced the GATT and expanded its traditional focus on manufactured goods. The WTO created monitoring and enforcement mechanisms. See also General Agreement on Tariffs and Trade (GATT) and Uruguay Round.

• General Agreement on Tariffs and Trade (GATT): A world organization established in 1947 to work for freer trade on a multilateral basis; the GATT was more of a negotiating framework than an administrative institution. It became the World Trade Organization (WTO) in 1995.

• Most-favored nation (MFN): A principle by which one state, by granting another state MFN status, promises to give it the same treatment given to the first state’s most-favored trading partner. See also Generalized System of Preferences (GSP).

• Generalized System of Preferences (GSP): A mechanism by which some industrialized states began, in the 1970s, to give tariff concessions to third world states on certain imports; an exception to the most-favored nation (MFN) principle. See also most-favored nation (MFN).

Uruguay Round: A series of negotiations under the General Agreement on Tariffs and Trade (GATT) that began in Uruguay in 1986 and concluded in 1994 with agreement to create the World Trade Organization. The Uruguay Round followed earlier GATT negotiations such as the Kennedy Round and the Tokyo Round. See also World Trade Organization (WTO).

Doha Round: A series of negotiations under the World Trade Organization that began in Doha, Qatar, in 2001. It followed the Uruguay Round and has focused on agricultural subsidies, intellectual property, and other issues. See also Uruguay Round.


–   The world has substantially lowered trade barriers and enjoyed rising prosperity as a result of trade
–   A new WTO agreement is a collective good because all the member states profit from relaxing trade restrictions, regardless of which of them made the concessions needed to reach a deal

Challenge – The Doha Round had been stalled for years and was eventually suspended

• Countries want the overall freer trade that an agreement would bring but are fighting about agricultural subsidies and other issues

• Until the participants find agreement on these remaining issues, nobody can enjoy the economic boost that a new WTO agreement will bring

• SOLUTION – Only reciprocity can solve this dilemma

• The entire structure of world trade relies on the formal equality of all participants

• Dominance does not play a major role

• When a new global trade agreement finally emerges, it will result from breaking the disagreements into many tiny pieces and finding reciprocal compromises on each one

BILATERAL AGREEMENTS • Reciprocal arrangements to lower barriers to trade between two states • Trade treaties involve great complexity and constant monitoring

• Advantages:

–   Reducing the collective goods problem inherent in multilateral negotiations 
–   Facilitating reciprocity as a means to achieve cooperation 

Free Trade Areas

• The most important free trade area is in Europe

• North American Free Trade Agreement (NAFTA): free trade zone encompassing the U.S., Canada, and Mexico since 1994

• Free Trade Area of the Americas (FTAA): proposed free trade area for North and South Americas; currently on hold

• ASEAN-China FTA: world’s third-largest free trade area, after the EU and NAFTA

• Transatlantic Trade and Investment Partnership (T-TIP), Trans-Pacific Partnership (TPP)

• Commonwealth of Independent States (CIS)

• The Southern Cone Common Market (MERCOSUR)

• If reginal FTAs gain strength and new ones arise, it may weaken the WTO

• Regional FTAs might create competing trading blocs that could practice liberalism inwardly and mercantilism outwardly

5.4.1 Obligations

  1. “Bound” tariffs

Article II (1a) of the GATT says “each contracting party shall accord to the commerce of the other contracting parties treatment no less favorable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.”

Harmonized Tariff Schedule (HTS)- World Customs Organization (WCO based in Brussels): determines goods categories.

  1. Most-favored nation (MFN)

It requires that countries not discriminate among their trading partners. Article I of the GATT says “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 contracting 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 (except in free-trade areas)

  1. National treatment

It requires that they not discriminate between imported goods and domestically produced goods. Article III (4) of the GATT defines national treatment: “the products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to the like products of national origin…” The aim is to prevent countries from favoring their domestic producers over their international competitors.

“like product”

5.4.2 Compliance

There are two main incentives of governments for violating the trade-policy rules of the WTO:

  1. To protect a politically important sector or company,

  2. And to unilaterally increase trade barriers or export subsidies while your partners refrain from retaliating.

The WTO agreement includes a series of exemptions that aim to allow governments to respond to the political pressures of their citizens while remaining faithful to WTO rules.

There are exemptions for national security concerns, for relief against unexpected surges in imports, for some cultural products such as films, and for a range of public policy goals including health and safety standards, public morals, and protecting endangered species.

Compliance remains a self-motivated and self-interested practice; the grand design of the system assumes that there are collective benefits from this self-interested behavior.

5.4.3 Enforcement

The formal dispute settlement mechanism in the WTO is activated when a member complains to the WTO that it believes another member has failed to meet its obligations under the treaty. The initiative for the complaint must come from a member that has suffered some economic harm from the misbehavior of another, and complaints can only be brought to the WTO after the sides have tried to settle the matter by consultations among themselves.

Dispute settlement body (DSB)

the dispute-settlement process in the WTO includes the possibility of economic sanctions against countries that refuse to comply with DSB decisions. These must be authorized by the DSB itself, and they can come only after the target state has been given opportunities to change its policies or to negotiate compensation to harmed states. In authorizing sanctions, the DSB judges the size of the harm done by the violations and permits states to impose trade measures that compensate equally for that harm. States are supposed to impose these sanctions the same area of trade where possible, but in practice retaliation is usually carefully crafted so as to maximize their political impact.

For instance, in the US steel “safeguards” case, the Appellate Body report authorized the EU to impose sanctions on $2.2 billion of US exports to Europe, which would have begun once the report was adopted by the DSB. The EU publicized in advance that it would target citrus exports from Florida and textile exports from North Carolina, among other goods, and that these choices were designed to add pressure in politically sensitive regions ahead of the 2004 presidential election. This was, in a sense, a response in kind to the fact that the American steel tariffs were widely seen as being motivated by the political needs of the Bush administration in steel-producing regions.

This system works well in disputes between the EU and the US because they are more-or-less equally balanced in political power and economic diversity. It works less well when a small or poor country wishes to complain against a large or rich country: to the small or poor country, imposing retaliatory tariffs on the goods it imports from the large or rich country might well cause more harm to its own domestic economy than it does to the large country it seeks to punish.

Enforcement of Trade Rules

• Economic agreements between states depend strongly on the reciprocity principle for enforcement

• Enforcement of equal terms of trade is complicated by differing interpretations of what is “fair” – Reciprocal retaliatory actions can lead to a downward spiral of noncooperation known as a trade war

• WTO hears complaints and sets levels of acceptable retaliation – Some regional trade agreements also establish mechanisms to hear and resolve complaints; Enforcement of Trade Rules continued

• Retaliation for unfair trade practices

–   Tries to match violation in type and extent
–   WTO rules allow retaliatory tariffs equivalent to losses
–   In cases of dumping, retaliatory tariffs raise the prices back to market levels
–   International Trade Commission (U.S. agency) decides whether low-priced imports hurt U.S. industry

• Trade cooperation easier to achieve under hegemony

• States have found it beneficial to expand trade steadily using a variety of regimes and institutions

5.5 Case study

1996, 01/30

US - import prohibition of certain shrimp and shrimp products

India, Malaysia, Pakistan and Thailand brought a joint complaint against a ban imposed by the US on the importation of certain shrimp and shrimp products. The protection of sea turtles was at the heart of the ban.

Under the Endangered Species Act, the US required that us SHRIMP TRAWLERS USE “TURTLE EXCLUDER DEVICES” in their nets when fishing in areas where there is a significant likelihood of encountering sea turtles.