Economics of the GATT/WTO

Transcription

1 Economics of the GATT/WTO

2 GATT-Think So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge sontaneously from the unrestricted ursuit of national interest (Krugman, 1997) Why then in trade negotiations does a government require a concession from its trading artner(s) in order to do what is in any event best for the country? (Bagwell and Staiger, 1999) Observation that governments seek recirocity in trade agreements often interreted to mean trade negotiators are adoting a mercantilist ersective inconsistent with economic logic

3 GATT-Think Krugman (1991) observes that there are three simle rules about the objectives of negotiating countries: exorts are good imorts are bad ceteris aribus, an equal increase in imorts and exorts is good GATT-think is enlightened mercantilism, i.e., it is mercantilist in resuming countries unilaterally like to subsidize exorts and tax imorts, and enlightened in recognizing this could be destructive GATT-think sees trade olicy roblem as one where individually countries have an incentive to be rotectionist, yet collectively they gain from free trade

4 GATT-Think What is hidden logic of GATT-think? Based on olitical ressure arguments, government olicy does not necessarily reresent ublic interest, but rather wellorganized grous such as exorters and imort-cometing roducers exlains first two rinciles of GATT-think Desite ignoring gains from trade as economists understand them, in setting exorter interests as a counter-weight to imort-cometing interests, and by bargaining for access to each others markets, trade negotiators do move system closer to free trade Since 1947, through 8 rounds of GATT, average ad valorem tariffs cut from 40 to 4%, and GATT/WTO membershi has risen to 157 countries

5 GATT A Tariff-Cutting Juggernaut Effective Tariff Rates, Source: Baldwin, 2016

6 Where is the WTO at resent? December 2013, WTO agreement on trade facilitation essentially measures to simlify customs rules While lauded in media as a breakthrough in Doha Round, it has not ushed forward tyical agenda of tariff-cutting Raises question(s) of why a multilateral agreement, similar to those concluded under GATT, not reached under its successor Focus here on two themes: Is the WTO subject to a latecomers roblem? Are activities such as offshoring ushing countries to seek dee integration via referential trade agreements (PTAs)?

7 What is the function of the WTO? Standard result is that where country is small, first-best outcome is free trade, i.e., tariffs are not otimal So why would countries ursue recirocal tariff-cutting through the WTO? Countries may be able to influence their terms of trade through tariffs, i.e., they have monosony/monooly ower Johnson (1954) Suorted by emirical evidence for samle of countries rior to their joining the WTO (Broda et al., 2008) This result, along with olitical-economy considerations, has informed modern analysis of WTO as resolution of a terms-oftrade Prisoner s Dilemma (Bagwell and Staiger, 1999)

8 Basic argument Assume home country imorts x on which it levies tariff t, and foreign country imorts y on which it levies tariff t* = x / y and * = x */ y * are domestic relative rices, where x = x *(1+t), and y * = y (1+t*), where δ/δt > 0 > δ*/δt* w = x */ y is world relative rice, where δ w /δt < 0 < δ w /δt* Home and foreign welfare are: W(, w ), and W*(*, w ), where δw(, w )/δ w < 0, and δw*(*, w )/δ w > 0, i.e., imroved terms of trade raise welfare With unilateral olicies, tariffs chosen to maximize: w w w W d / dτ + W d w d / dτ = W + λw = 0 * * * * w * * * W (2) * d / dτ + W w d / dτ = W + λ* W w = 0 where λ = [δ w /δt]/[δ/δt] < 0 and λ* = [δ w /δt*]/[δ*/δt*] < 0 (1)

9 Basic argument (1) and (2) are tariff reaction functions, each government striking balance over effect of tariff on local and world-rices Nash equilibrium inefficient as each country attemts to shift costs of olicy choice onto other country WTO is mechanism by which tariffs are cut recirocally to efficient level If terms-of-trade effects do not matter to either government, olitically otimal tariffs satisfy, W = 0, and W * = 0 Allows for ossibility that tariffs are zero if objective of governments is to maximize national income, i.e., free trade Recirocal tariff-cutting through WTO is Pareto-imroving, terms-of-trade externality being neutralized

10 t Tariff equilibrium W E W' N W W* PO W'* E* 0 t*

11 Pillars of the WTO Terms-of-trade effects translate into negotiation-language: tariffs lead to imort volume effects, i.e., loss of market access Previous GATT rounds essentially about bilateral exchange of market access via commitment to lower tariffs Multilateral nature of WTO due to alication of mostfavored nation (MFN) rincile, i.e., bilateral concessions on tariffs offered to all WTO members In rincile, WTO is self-enforcing, i.e., member can retaliate against another if latter unilaterally modifies tariff concession, thereby reducing former s market access Retaliation may occur if WTO anel finds in favor of harmed member, and offending country fails to offer comensation

12 Develoing countries and the WTO Develoing countries get free ass to tariff cuts negotiated in GATT/WTO under MFN clause but do not have to recirocate, i.e., secial and differential treatment (SDT) Objective to ensure develoing countries benefit from gaining market access to develoed country markets Evidence suggests GATT/WTO membershi has resulted in significant increase in trade volumes for develoed countries but less so for develoing countries (Subramanian and Wei, 2007) Bagwell and Staiger (2013) argue that SDT will not deliver benefits of recirocity simle maxim for trade negotiations: what you get is what you give

13 Structure of trade and olicies y t 2 Country 2 x Country 1 t 1 x y t 3 Country 3

14 Relative rices with tariff-cuts World rices if t 1 and t 2 are cut: W X y y t 2 x Country 2 Prices in Country 2 if t 1 and t 2 are cut: 2 x y Country 1 t 1 x Prices in Country 1 if t 1 and t 2 are cut: 1 x y y t 3 Country 3 Prices in Country 3 if t 1 and t 2 are cut: 3 x y

15 Is there a latecomers roblem? Even if relaxing SDT ushes Doha Round back towards its original urose, develoing countries may be latecomers 50 years of recirocity among develoed countries has left tariffs on manufactures very low Local rice distortions in develoed countries already eliminated, making it difficult for them to identify new tariff bargains with develoing countries globalization fatigue In theory, roblem could be solved by develoed countries renegotiating tariffs (uward) to make room for tariff negotiations (downward) with develoing countries Is reduction in farm subsidies key to making room at the table for develoing countries?

16 Farm subsidies and latecomers roblem Cut in exort subsidies on x and y a bargaining chi for US and EU in negotiations with develoing countries Increase in local relative rice of say x in EU laces higher value on recirocal tariff cuts between EU and develoing country, EU cutting tariff on x, and develoing country cutting tariff on z This tye of bargain requires relaxation of SDT and clear focus on recirocal exchange of market access However only likely to be effective for large agricultural exorters such as Brazil Also requires olitical will in US and EU to reduce farm subsidies commitments already made to get rid of exort subsidies

17 Structure of trade and olicies t Brazil x DC y EU z y t EU s US t US t Brazil s EU x z US t US

18 The rise of offshoring Phenomenon of offshoring has seen significant increase in trade in differentiated inuts (Antras and Staiger, 2012) In a world where home country roduces final good using customized inuts sulied by foreign country, incomlete contracts may result in a hold-u roblem As a result, inut rices determined by ex ost bargaining as oosed to international market clearing Otimal olicy choice is free trade in final good and an imort subsidy to increase inut trade Nash olicies: home country targets inut and final good sectors, while foreign country targets inut sector objective is to extract surlus

19 The WTO and offshoring Emhasis on shallow integration via market access may not hel in resolving inefficiency that arises in resence of offshoring In simle set u, home and foreign countries bargain over olicies that affect market access of inut, but home country will be unconstrained in its use of behind the border olicies In resence of offshoring, trade agreement must achieve dee integration requiring discilines on olicies beyond market access commitments This imlies shift from rules-based agreement of the WTO towards individualized agreements that take account of idiosyncratic needs of members

20 Proliferation of PTAs Emirical analysis suggests causal relationshi runs from offshoring to PTAs, i.e. deth correlated with imortance of roduction networks (Orefice and Rocha, 2014) PTAs such as roosed Trans-Atlantic and Trade and Investment Partnershi (TTIP) between US and EU are almost exclusively going behind the border to focus on asects such as regulatory convergence Poses significant challenge to WTO growth in PTAs lies outside its urview, due to GATT Article XXIV allowing excetion to rincile of non-discrimination Fear of concession erosion may have been relaced by fear of reference erosion, and thereby becoming a stumbling block to further MFN tariff reductions (Limão, 2007)

21 Proliferation of PTAs Baldwin (2006) suggests though that saghetti bowl effect of PTAs may have been somewhat exaggerated Growth in PTAs involving EU in early-1990s resulted in comlex rules-of-origin for inuts across different bilateral country-airs Subsequent unbundling of roduction rocesses and growth of offshoring by EU-based firms resulted in olitical ressure to harmonize trade in inuts across PTAs in Euroe by 1997 Through simlifying rules of origin, regionalism relaced by multilateralism in inut trade within Euroe WTO was a bystander in all of this though, and there is emirical evidence that it hurt exort interests of WTO members outside the club Augier et al. (2007)

22 Source: WTO Proliferation of PTAs

23 Whither the WTO? In ost-war eriod, recirocal exchange of market access has driven significant reduction in manufacturing tariffs and increased trade among develoed countries As successor to GATT, WTO has not delivered a new agreement beyond simlifying customs rules How to bring develoing countries to the table or how to deal with environmental standards, are not the key challenges to the future of WTO as an institution Desire for dee integration, and associated growth in PTAs, does not fit into WTO s focus on shallow integration WTO still relevant in terms of disute resolution, but at resent it is on the sidelines as countries ursue trade liberalization via regionalism rather than multilateralism