These issues of free trade and protectionism are being played out daily in three main formats. The first has to do with trade disputes under the umbrella of the WTO. Second, countries agree and sign free trade agreements. Finally, the WTO is attempting to conduct another “round” of trade agreements that impact nearly all countries of the world.

Industrial Application:  

The Doha Round had a lot of trouble getting started. Wasn’t that a sign of the slowdown of free trade?

The evidence supporting the expansion of free trade can be summarized as follows. First, the WTO and the GATT before it created agreements that reduce trade barriers and reduced protectionism. The WTO now has an enforcement mechanism. This mechanism generally works as evidenced by the great number of cases that come to it. Second, in addition to the WTO, countries are more or less free to reduce trade barriers either unilaterally or in agreements with one or more other countries. These bilateral and regional free trade agreements are evidence of the growing desirability of moving even faster than the WTO to remove trade barriers. Finally, the WTO itself is making progress as evidenced by the most current round of trade – the Doha Round.

This last paragraph sounds pretty optimistic – maybe too much so. But the reader should keep in mind the nature of what we are dealing with. As Krugman points out, the politics of protection are too easy – and the case for free trade is both complicated and controversial. There are some who were disappointed that the Doha Round did not go more quickly and smoothly in 2003 and 2004. But the truth is that getting agreements today is getting harder and harder.

  • For one thing, the WTO is getting larger and that makes achieving consensus much more difficult.
  • The past achievements in free trade mean that the “low-hanging fruit” have been already picked. In the last 50 years, the world has removed the most egregious high tariffs. Many quotas have been eliminated and/or replaced with tariffs.
  • The world is now trying to set the bar a little higher. Every type of trade barrier is included in the discussion despite the fact that few countries are ready to embrace them. Rich countries continue to embrace protection for agriculture, textiles, and other selective sectors. Why? Because these protections not only serve the interests of the few in those industries but they also stand as the few remaining bargaining chips in world negotiations. The poorer countries might see the benefits of more liberal markets but their leaders must face citizens who see the short-run dynamics of competition that spits-out non-competitive businesses and puts their workers out of jobs.
  • As the bar increases, the WTO is asking all nations – rich and poor alike – to make significant transformations and take large economic risks. Countries without a history of market capitalism are being asked to embrace and trust Adam Smith’s invisible hand. They are being asked to tell their governments to meddle less in competition between companies whether they sell consumer goods, capital goods, services, or the national air services. They must allow foreigners to own any business and they must remove inefficient trade procedures and they must transparently and freely give government contracts to any bidder.

These are tall orders for any country. That cooler heads came together after the Cancun meetings to begin the Doha Round anew was a good sign. This is no 100 yard dash. Given the high stakes of these proceedings, it is no wonder that we inch along. But inch along we do and that forms one basis for optimism for a world with a little less protectionism and a little more free trade.

For a good summary of the challenges of a successful conclusion to the Doha Round, see the IMF Publication, “Integrating Poor Countries into the World Trading System,” No37, Economic Issues, 2006.  

Here is the IMF’s summary of this publication, “Efforts to liberalize world trade are increasingly focusing on strengthening the links between low-income countries’ trade policies and their development strategies. However, although greater trade openness promises faster growth for poor countries, it also presents risks to those with small and undiversified economies. This pamphlet explores research by Fund staff into the nature and magnitude of these risks and proposes targeted policy solutions to ease adjustments and encourage developing countries to choose fuller participation in the world trading system.”

Trade Disputes

Each year the WTO participates in resolving trade disputes – or apparent violations of existing agreed upon WTO trade rules. Below is a passage taken from the WTO Annual Report, 2004:

The central work of the WTO’s dispute settlement system continued throughout the year.

During 2003, the DSB received 26 formal requests for consultations. It established panels to deal with 19 new cases, received Notices of Appeal in 5 cases, and adopted panel and/or Appellate Body reports in 15 cases. The year 2003 saw the number of disputes initiated under the dispute settlement system since its creation less than nine years ago pass the 300 mark. This compares to the roughly 300 disputes brought to its predecessor, the General Agreement on Tariffs and Trade (GATT), during its entire existence of almost 50 years. This figure emphasizes two important points: firstly, that Member governments have confidence in the WTO dispute settlement system; and secondly, that the WTO system of agreements, and therefore Members’ rights and obligations, are far more extensive than was the case under the GATT. This has led to a great deal of dispute settlement activity under the new system.

Consider some examples of actions brought to the WTO:

  • Honduras complained that Dominican Republic was unfairly preventing the importation of Honduran cigarettes. Imports from Honduras were being treated less favorably than other imports.
  • South Korea complained about EU and U.S. countervailing duties against Korean D-Rams (computer chips).
  • The U.S. complained about Mexico’s anti-dumping regulations against U.S. beef and rice.
  • The U.S., Canada, and Argentina complained against the E.U. food import and marketing moratorium on biotech products.
  • Antigua and Barbuda complained about U.S. barriers preventing the importation of gambling and betting services into the U.S.
  • Mexico complained about U.S. anti-dumping measures against Mexican cement.
  • Canada complained about U.S. anti-dumping restrictions on Canadian soft-lumber.
  • The EU complained about unfair subsidies given by the government to Korean ships and other commercial carriers.
  • China led the field in number of exporters that had two or more actions against them – 42 between July 2002 and June 2003.  The EU, South Korea, Chinese Taipei, India, the U.S., Thailand and Japan each had 10 or more actions against them.

That’s a lot of complaining. Does it mean that countries are growing more protectionist? Perhaps not. As the WTO explained, these complaints are the evidence of the success of past agreements whose goals were to reduce protectionism. If there are more complaints it is because more countries recognize their rights to stop protectionism and they feel freer to proceed with.

Free trade agreements

Almost all countries have made agreements with at least one other country designed to reduce trade barriers. Generally these are regional in nature and include one other country (bilateral FTA) or involve more than two countries (regional FTA). A FTA is an agreement that essentially reduces tariffs and quotas between the members. Each country is left to decide its own tariffs with respect to other nonmember countries. These FTAs have domestic content regulations that prevent nonmembers from using one member country as a means to get lower tariffs in another member country. For example, countries A, B, and C form a FTA. Suppose country X trades with A, B, and C. Country A has very low tariffs on X’s products, but country C has very high tariffs against X. Without domestic content regulations it would be possible for country X to ship to C by going through A as an entry port. But here is the catch. Domestic content regulations say that the tariff is zero between members A and C only if a threshold domestic production can be proved on the goods. The actual threshold varies from good to good. For example in the NAFTA agreement, automotive goods must have about 60% local content (local costs of production for the item must be about 60% of the total cost) to be eligible for duty-free status. The rule is about 55% for footwear. For insecticides the threshold can be as high as 80%. If domestic content regulations are not met, then the good may not enter tariff free between the members of the FTA.

A customs union is very much like a FTA but differs in one important way – it imposes a common external tariff (CET). A CET means that the agreement among the FTA countries specifies the same tariff for nonmembers. If A, B, and C are members, then each of these countries will have the same tariff against the goods of nonmember country X. In a customs union, the CET obviates the need for domestic content regulations – it is impossible for X to enter C with a lower tariff by coming through A. The European Union (with 25 members) and Mercosur (Paraguay, Uruguay, Brazil, and Argentina) are examples of customs unions.

A final form of trade agreement deals with currencies. There are many examples of countries that share the same currency. Sharing the same currency is a way of reducing the impacts on trade of changes in exchange rates. It creates the image that these countries are part of the same economic space. The adoption of the new euro in Europe is a classic case of currency union for the purpose of further reducing trade barriers among countries. As of 2007, the euro was used by 13 countries in the European Union. Starting in January 2008, the number will be 15.

By May of 2003 there were 265 FTAs reported to the WTO. By December 2006, this number had increased to 368, indicating a continued surge in the number of such arrangements. Most free trade arrangements involve European countries, as the EU has long used such agreements as part of its trade policies with developing countries in the Mediterranean, as well as Africa, the Pacific region and the Carribbean. During the 1990s, free trade agreements were also used frequently to bring the new countries emerging out of the former Soviet Union into the world trading system.

While this might seem to undermine the goals of a multilateral trading system promoted by the WTO, there are benefits in allowing these smaller agreements.

  • For one thing, agreements might be easier to fashion with a smaller number of countries.
  • Second, the WTO doesn’t mind when regional FTAs go beyond the WTO in removing trade barriers.
  • Third, in many instances, FTAs pave the way for wider acceptance by the larger WTO membership. The very nature of a regional FTA is that it creates third-party or diversionary negative impacts on nonmembers. Nevertheless, GATT Article 24 allows such agreements if they meet certain criteria. This is the way the WTO explains it,

In particular, the arrangements should help trade flow more freely among the countries in the group without barriers being raised on trade with the outside world. In other words, regional integration should complement the multilateral trading system and not threaten it.

Article 24 says if a free trade area or customs union is created, duties and other trade barriers should be reduced or removed on substantially all sectors of trade in the group. Non-members should not find trade with the group any more restrictive than before the group was set up.

Below is an alphabetical list of the more well-known free trade agreements

AFTA ASEAN Free Trade Area
  
Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam
ASEAN Association of South East Asian Nations Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam
BAFTA Baltic Free-Trade Area Estonia Latvia Lithuania
BANGKOK Bangkok Agreement Bangladesh China India Republic of Korea Laos Sri Lanka
CAN Andean Community Bolivia Colombia Ecuador Peru Venezuela
CARICOM Caribbean Community and Common Market Antigua & Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica Monserrat Trinidad & Tobago St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Surinam
CACM Central American Common Market Costa Rica El Salvador Guatemala Honduras Nicaragua
CEFTA Central European Free Trade Agreement Bulgaria Czech Republic Hungary Poland Romania Slovak Republic Slovenia
CEMAC Economic and Monetary Community of Central Africa Cameroon Central African Republic Chad Congo Equatorial Guinea Gabon
  
CER Closer Trade Relations Trade Agreement Australia New Zealand
CIS Commonwealth of Independent States Azerbaijan Armenia Belarus Georgia Moldova Kazakhstan Russian Federation Ukraine Uzbekistan Tajikistan Kyrgyz Republic
COMESA Common Market for Eastern and Southern Africa Angola Burundi Comoros Democratic Republic of Congo Djibouti Egypt Eritrea Ethiopia Kenya Madagascar Malawi Mauritius Namibia Rwanda Seychelles Sudan Swaziland Uganda Zambia Zimbabwe
EAC East African Cooperation Kenya Tanzania Uganda
EAEC Eurasian Economic Community Belarus Kazakhstan Kyrgyz Republic Russian Federation Tajikistan
EC European Communities Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom
ECO Economic Cooperation Organization Afghanistan Azerbaijan Iran Kazakhstan Kyrgyz Republic Pakistan Tajikistan Turkey Turkmenistan Uzbekistan
EEA European Economic Area EC Iceland Liechtenstein Norway
EFTA European Free Trade Association Iceland Liechtenstein Norway Switzerland
GCC Gulf Cooperation Council Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates
GSTP General System of Trade Preferences among Developing Countries Algeria Argentina Bangladesh Benin Bolivia Brazil Cameroon Chile Colombia Cuba Democratic People’s Republic of Korea Ecuador Egypt Ghana Guinea Guyana India Indonesia Islamic Republic of Iran Iraq Libya Malaysia Mexico Morocco Mozambique Myanmar Nicaragua Nigeria Pakistan Peru Philippines Republic of Korea Romania Singapore Sri Lanka Sudan Thailand Trinidad and Tobago Tunisia United Republic of Tanzania Venezuela Vietnam Yugoslavia Zimbabwe
LAIA Latin American Integration Association Argentina Bolivia Brazil Chile Colombia Cuba Ecuador Mexico Paraguay Peru Uruguay Venezuela
MERCOSUR Southern Common Market Argentina Brazil Paraguay Uruguay
MSG Melanesian Spearhead Group Fiji Papua New Guinea Solomon Islands Vanuatu
NAFTA North American Free Trade Agreement Canada Mexico United States
OCT Overseas Countries and Territories Greenland New Caledonia French Polynesia French Southern and Antarctic Territories Wallis and Futuna Islands Mayotte Saint Pierre and Miquelon Aruba Netherlands Antilles Anguilla Cayman Islands Falkland Islands South Georgia and South Sandwich Islands Montserrat Pitcairn Saint Helena Ascension Island Tristan da Cunha Turks and Caicos Islands British Antarctic Territory British Indian Ocean Territory British Virgin Islands
PATCRA Agreement on Trade and Commercial Relations between the Government of Australia and the Government of Papua New Guinea Australia, Papua New Guinea
PTN Protocol relating to Trade Negotiations among Developing Countries Bangladesh Brazil Chile Egypt Israel Mexico Pakistan Paraguay Peru Philippines Republic of Korea Romania Tunisia Turkey Uruguay Yugoslavia
SAPTA South Asian Preferential Trade Arrangement Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
SPARTECA South Pacific Regional Trade and Economic Cooperation Agreement Australia New Zealand Cook Islands Fiji Kiribati Marshall Islands Micronesia Nauru Niue Papua New Guinea Solomon Islands Tonga Tuvalu Vanuatu Western Samoa
TRIPARTITE Tripartite Agreement Egypt India Yugoslavia
UEMOA
WAEMU
West African Economic and Monetary Union Benin Burkina Faso Côte d’Ivoire Guinea Bissau Mali Niger Senegal Togo

 

Industry Application: Peru pushes for FTA with the U.S.

Peru’s president, Alejandro Toledo met with George W. Bush in the summer of 2004. His goal was to accelerate negotiations for a free trade agreement. During Toledo’s term of office, foreign investment in Peru grew by 5-6% per year and reached 12% of its GDP. He wants to bring Columbia and Ecuador into the agreement as well. Why? Because he wants Peru to be less dependent on exports of natural resources (gold, silver, copper and natural gas) by finding larger markets for textiles and farm products. President Toledo believed that increased sales of these products would lead to more employment in Peru. When asked about competition from China he acknowledged the challenge but was optimistic about rectifying through the WTO what he considered to be unfair trade practices

The Doha Round

The so-called “Development” round was supposed to favor or focus on the needs of developing countries. The key issue of this round was the improvement of the access for developing countries to markets in the industrialized countries. In practice this means first and foremost a cutting of agricultural subsidies – both internal and export subsidies – governments in the industrialized countries pay to their farmers to protect them against competition from outside. Furthermore, it means cutting subsidies and removing import quotas for low-tech industries such as textiles.

While many developing countiries today have bought into the message from the industrialized world that competitive markets and international trade are far better for economic development than the traditional approaches of state planning and intervention, they rightfully complain that industrialized countries both in Europe and North America do not give producers in developing countries access to their markets. The Doha Round first faltered in Cancun in September 2003 as the G20 – a group of 20 developing countries – essentially walked out of the Cancun meetings, protesting what they considered to be a lack of flexibility on the part of the industrial countries.  After Cancun there was considerable disappointment and some possibility that progress would not be possible. But saner heads prevailed and the July 31st progress raised the probability that the agenda of free trade will be pushed forward.

The text below was taken from the WTO and quotes the Dr. Supachi of the WTO – and the considerable optimism shown in mid-year 2004 about the Doha Round:

Although these frameworks are not final agreements they do include significant commitments, which Dr Supachai was able to describe as a “truly historic” achievement. These commitments were negotiated intensively day and night for two weeks, culminating in a gruelling, non-stop session involving key ministers and ambassadors, that began at 5pm on Friday 30 July and lasted almost 24 hours. During the fortnight, there were several meetings of heads of delegations, intensive consultations and countless gatherings of various groups, with a number of trade ministers participating. During the General Council meeting many delegates commented that the deadlock of the Cancún Ministerial Conference has now been broken. Dr Supachai shared that view. Afterwards, Dr Supachai listed the achievements:

“For the first time, member governments have agreed to abolish all forms of agricultural export subsidies by a date certain. They have agreed to substantial reductions in trade distorting domestic support in agriculture.”

“As part of this agreement we have achieved a significant breakthrough in cotton trade which offers great opportunity for cotton farmers in West Africa and throughout the developing world.”

“Governments have agreed to launch negotiations to set new rules streamlining trade and customs procedures. We have assigned ourselves ambitious guidelines for opening trade in manufactured products and we have set ourselves a clear agenda for improving rules that are of great benefit to developing countries.”

“As importantly, WTO governments have sharpened the focus of the Doha round and provided a foundation which will enable negotiators to continue these talks from significantly higher level; greatly enhancing our chances for successful completion of these important talks,” he said.

Dr Supachai predicted that the progress now made in agriculture, non-agricultural market access, development issues and trade facilitation would provide substantial momentum to WTO members’ work in other important areas such as rules, services, environment, reform of dispute procedures and intellectual property protection.

“I fully expect that when negotiators return in September negotiations in these areas and all others will recommence with a high degree of enthusiasm,” he said.

WTO members can now put behind them the deadlock 10 months earlier at the Cancún ministerial conference, he said.

“Although we were disappointed with that outcome, we have seen here today that with political courage, commitment and sheer hard work, governments of the WTO are capable of achieving great things,” he said.

Jeffrey Schott of the Institute for International Economics analyzed the failure at the Cancun meeting and speculated in early 2004 about what was needed to produce progress.

Schott first pointed out several reasons for why it is a lot tougher to get a WTO agreement since 1995, when the WTO replaced the General Agreement on Tariffs and Trade. These changes suggest that the WTO may need to change its own operating procedures if it is to gain agreements in the future. (Note: as of late 2011 there were 153 members of the WTO, one more than when Schott was writing.)

  • There are now 147 countries party to agreements, most of whom are developing countries that very much want to “bring home” a prize. They cannot simply bow to the wills of other countries and not receive something important in return.
  • The U.S. and Europe already have made concessions and have less to give-up at these meetings. What is wanted from them is very hard to achieve – an end to years of very significant protection for agriculture and textiles.
  • With so many countries taking part now, a new coalition politics has made the negotiations trickier. The new G20 group, representing many developing nations, created a new wrinkle in negotiations in Cancun.
  • Preparations for these negotiations require large resource inputs – something that some poorer countries have difficulty affording. This means that some countries come in ill-prepared and have to react to what seem like surprise options. This can prevent passage or at least promote foot-dragging.

Schott then enumerated the main stumbling blocks to agreement at Cancun:

  • Negotiations relating to agriculture failed miserably. The U.S. and the EU could not agree on a proposal until they fashioned a last-minute compromise. The compromise was not what the G20 was hoping for. Given such little time, the G20 countries could not agree on their own contributions to the reforms. Time ran out and they all agreed to disagree.
  • The G20 countries seemed very firm that they wanted to focus on a limited set of issues – and wanted to postpone progress on investment issues – that is, freeing up foreign ownership provisions. The EU, Japan, and South Korea wanted to open up these discussions.
  • Many of the developing countries misunderstood what could be achieved and how quickly through the WTO process. They made unrealistic demands for change that the WTO and the industrial countries simply could not accommodate. For example, some countries asked for advance payments and monetary compensation based on agreements that had not even been made.

Schott concluded with his opinions about necessary steps to resuscitate the round:

  • Industrial countries must make substantial cuts in domestic subsidies to agricultural sectors from the levels that prevailed during the 2000 to 2002 time period.
  • Industrial countries should eliminate agricultural export subsidies with accelerated phase-out plans for those products deemed most important to the developing countries.
  • Sharp reductions in high tariff farm levels
  • Industrial countries should allow increased market access for products of developing countries
  • Eliminate all industrial tariffs (nonagricultural goods) by 2015
  • Progress on Trade facilitation: Trade Facilitation is often defined by the WTO as “the simplification and harmonization of international trade procedures” with trade procedures being the “activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade”. Steadily growing volumes of trade, the fall in tariff levels to an all-time low after the conclusion of the Uruguay Round and the availability of modern technology to significantly improve the management of cross-border trade and distribution of goods, have all combined to create a strong interest in trade facilitation. The losses that business suffers through delays at borders, complicated and unnecessary documentation requirements and lack of automation of government-mandated trade procedures are estimated to exceed in many cases the costs of tariffs.
  • Increased transparency in government procurement is likely to be put on a back burner but would help developing countries reduce corruption and waste.
  • Likewise, investment policy and competition policy would be on the back burner.
  • Developing countries should be allowed some flexibility and longer duration to incorporate some of the changes

In July 2006, after five years of negotiations, the Doha Round was officially suspended at a meeting in Geneva. Lack of agreement and political will to move forward among the representatives of the US and the EU were the principal reason for the suspension. This is not the first WTO Round to fail, but the suspension is significant not least because it came shortly after the expiration of the US Trade Promotion Act that gave the US President special authority to conclude international trade agreements. Since then, a January 2007 meeting of the trade ministers from 30 of the most important countries of the global economy agreed to restart the negotiations.