The Evolution of the International Trading System

This article was downloaded by 10397143 On 16 Jun 2023 Access details subscription number Publisher Routledge Informa Ltd Registered in England and Wales Registered Number 1072954 Registered office 5 Howick Place London SW1P 1WG UK The Ashgate Research Companion To International Trade Policy Kenneth Heydon Stephen Woolcock The Evolution of the International Trading System Publication details httpswwwroutledgehandbookscomdoi1043249781315613086ch3 Stephen Woolcock Published online on 19 Jul 2012 How to cite Stephen Woolcock 19 Jul 2012 The Evolution of the International Trading System from The Ashgate Research Companion To International Trade Policy Routledge Accessed on 16 Jun 2023 httpswwwroutledgehandbookscomdoi1043249781315613086ch3 PLEASE SCROLL DOWN FOR DOCUMENT Full terms and conditions of use httpswwwroutledgehandbookscomlegalnoticesterms This Document PDF may be used for research teaching and private study purposes Any substantial or systematic reproductions redistribution reselling loan or sublicensing systematic supply or distribution in any form to anyone is expressly forbidden The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date The publisher shall not be liable for an loss actions claims proceedings demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 3 The Evolution of the International Trading System Stephen Woolcock Introduction Among the various issues in the current debate on the future of the international trading system three stand out can the World Trade Organization WTO function in a progressively more multipolar trading system has the WTO reached the limits of what it can sensibly cover and is the multilateral system being undermined by the rise of predominantly bilateral preferential trade and investment agreements1 Various chapters in this volume address these issues but in seeking an understanding of such current trends it helps to know how the system has evolved This chapter therefore considers the period from the establishment of the General Agreement on Tariffs and Trade GATT in 1947 to the Doha Development Agenda DDA negotiations of the WTO It shows how the trading system has evolved from a USled system through one shaped by a club of developed Organization for Economic Cooperation and Development OECD countries to one with a much more heterogeneous power structure In other words the trading system has had to accommodate shifts in relative economic power before The scope of agreements has also expanded largely in line with the contemporary preferences of major players concerning what constituted trade issues rather than any objective criteria Trade policy like other fields has also been shaped by precedent or path dependency The positions of countries and interest groups today have evolved from those ten or 30 years ago but trade preferences may be the result of capture and often change slowly so that the past can form the basis of current preferences Finally the chapter shows that multilateralism needs some qualification What existed before the rise of bilateralism after the mid1990s was based on multilateral 1 For a discussion of the challenges facing the WTO and various proposals for how it should be reformed see Sutherland Report 2007 Warwick Commission 2007 and Jones 2010 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 48 principles but shaped by a more complex combination of plurilateral regional and bilateral influences on negotiations2 The Founding of the Post1947 International Trading System The postwar trading system was shaped by the experience of protection economic nationalism and trade discrimination in the 1920s and 1930s that contributed to the collapse of the international economy and the political conflict of the interwar period The United States emerged from the Second World War as the dominant economic power and it was the United States that provided leadership in the establishment of the GATT This policy was based on the US domestic consensus and on the position of the US Congress which favoured reciprocal trade liberalization This principle was codified in the 1933 US Reciprocal Trade Agreements Act which reversed the protectionist SmootHawley Tariff of 1930 The USled system therefore differed from the unilateral trade policy pursued by Britain before 1914 The original intention had been to establish an International Trade Organization ITO alongside the Bretton Woods institutions of the International Monetary Fund IMF and the World Bank IBRD Indeed negotiations on trade began before those on international monetary relations but broke down because of an American determination to put an end to preferential trade agreements PTAs and the British reluctance to dismantle the Imperial Preferences established at the Ottawa Conference of 1933 The Havana Charter was negotiated in 1948 but was never presented to the US Congress for ratification The demise of the ITO has been explained by opposition from protectionists who saw the liberal intent as a threat and perfectionists who saw too much scope for government intervention Diebold 1952 Foreign policy also played a role in the sense that the Truman Administration preferred at the onset of the Cold War to expend its political capital getting legislation on the Marshall Plan and NATO through the Congress rather than the ITO The GATT which had been negotiated in 1947 as part of the ITO process also offered much of what the United States wanted and a contractual agreement between states required no congressional approval The GATT as the name implies was an agreement rather than an international organization and a negotiating forum in which initiatives for new trade liberalization or rulemaking came from the Contracting Parties CPs and not from the staff of a large secretariat In actual fact staff and the offices of the old League of Nations were initially used as the secretariat The GATT consisted of a framework of basic principles and rules as well as a series of tariff reductions the first of a series of multilateral tariff reductions that were to follow in the next 70 years 2 For general readings covering the evolution of and current status of the world trading system see Jackson 2000 Trebilcock and Howse 1995 and Hoekman and Kostecki 2001 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 49 Principles of the GATT The GATT 1947 was based on nondiscrimination in international trade The codification of this took two forms the most favoured nation MFN principle Article I GATT and national treatment NT Article III GATT The MFN provision obliged all CPs not to discriminate between countries Any favourable treatment such as a reduced tariff provided to another most favoured nation had to be extended to all CPs National treatment required that all products imported into a customs territory be treated the same as nationally made like products MFN therefore allowed for no PTAs and thus discrimination National treatment precluded discrimination against foreign products but left national governments scope to regulate Jackson 2000 The GATT 1947 was also based on some de facto norms notably reciprocity and flexibility The understanding was that tariff liberalization would be achieved through mutual tariff concessions that ensured global or acrosstheboard reciprocity Global reciprocity meant a broad balance of benefits for CPs and differed from the more protectionist idea of reciprocity within narrow sectors Tariff negotiations were conducted bilaterally between an importer and the principal suppliers of a product but then multilateralized through the MFN obligation Provided there was global reciprocity CPs could therefore decide how fast they wished to liberalize Multilateral rounds of negotiations offered a means of ensuring concessions in areas of defensive interests could be traded against lower tariffs in sectors of offensive interests The GATT 1947 was flexible in that it did not require national governments to deregulate or adopt any specific standards but merely not to use regulation to discriminate or as a disguised form of protection There was also flexibility in that governments could decide how they wished to liberalize but free riding aside limited concessions meant limited satisfaction of offensive interests The GATT also provided and continues to provide flexibility in the form of various exceptions to the rules Article VI GATT 1947 provides for the application of antidumping duties on imports that cause or threaten injury to a national industry and are sold unfairly or at a price below the cost of production see Chapter 6 Relatively loose wording in the GATT rules and the fact that such duties could be applied selectively against certain exports meant that this provision found and continues to find wide application as a means of easing import competition Article XVIII allows restrictions on imports when a CP is suffering balance of payments BoP difficulties This provision found application among developing countries in particular and was for example used by India on a regular basis well into the 1990s Article XIX provides for nonselective safeguard measures for example tariffs or quotas when there is substantial injury to an industry due to an unforeseen surge in imports A country applying safeguards is however required to compensate the exporting countries affected by reducing tariffs on other products Article XX provides a general exemption from GATT rules for measures taken to protect human animal and plant life Such measures have to be proportionate This article found use during the 1980s with increased awareness of environmental Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 50 concerns see Chapter 13 Finally Article XXIV offers an exemption from MFN for customs unions and free trade areas The motives behind the inclusion of Article XXIV in 1947 are not fully clear but it was not drafted with major preferential agreements like the European Union in mind and was probably intended to provide for smaller customs unions that existed when the GATT 1947 was drafted Subsequently Article XXIV has found very wide application as a legal basis for free trade agreements FTAs see Chapter 22 Rather than a charter for free trade the GATT could therefore be best described as a system of managed trade liberalization The Kennedy Round 19637 The First Major Multilateral Following the original tariff reductions of 1947 further but limited liberalization was agreed in a number of early multilateral trade rounds between 1949 and 1961 These rounds brought in the Federal Republic of Germany in 1950 and Japan in 1955 In early November 1961 the United States proposed a new comprehensive round of trade negotiations that was to become the Kennedy Round The principal US motivation was to limit the effects of the common external tariff CET of the European Economic Community EEC and to establish GATT discipline over the EECs Common Agricultural Policy CAP The CET replaced the bound MFN tariffs of the individual EEC members so the US wanted to ensure the CET bindings were as low or lower than the bound tariffs of the individual EEC member states it replaced in order to minimize trade diversion3 There was no discipline of agricultural trade following the 1953 waiver of GATT rules for US agricultural support programmes The CAP was based on a price support scheme which implied export subsidies to dispose of any surpluses when world prices were lower than the prices guaranteed under the CAP Such subsidies were seen as unfair competition for US agricultural exports on third markets4 The Kennedy Round was also motivated by a strategic interest in strengthening the western capitalist system in the face of Soviet competition at what was the height of the Cold War following the Cuban missile crisis Evans 1971 The enhanced market power of the EEC thanks to the CET facilitated significant mutual linear tariff reductions averaging 30 per cent in manufactures This necessitated concessions from the US Congress which viewed tariff reductions of more than 20 per cent as going beyond the peril point at which US industries would be injured The Trade Expansion Act of 1962 in fact provided for up 3 Trade diversion is the reduction of more competitive imports from a third country as a result of a tariff preference established between members of a customs union or free trade area Less competitive products are imported from within the preferential area because of the lower tariff Generally speaking trade diversion always accompanies the trade creation resulting from a preference 4 For agricultural trade in general see Chapter 8 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 51 to 50 per cent reductions5 In terms of nontariff rules there was agreement on antidumping measures that sought to codify practice in this field but neither this nor the abolition of the American Selling Price ASP tariff system for chemicals was implemented by the US Congress Such selective approval of agreements by the US Congress led ultimately to the introduction of the socalled fasttrack procedure in 1974 that would provide only for approval or rejection of a trade agreement and not of selected parts EEC opposition blocked the reintroduction of GATT discipline over agriculture but in May 1967 the foreign policy considerations of the State Department prevailed in the face of opposition from the US Department of Agriculture and the US Executive opted for an agreement without agriculture rather than no agreement The Kennedy Round was more transatlantic than multilateral Other developed economies such as Australia had ambiguous positions on liberalization and although the 1960s saw many developing countries DCs join the GATT on independence these were accommodated by the introduction of Part IV of the GATT see also Chapter 18 Part IV facilitated the exemption of DCs from the obligation of making reciprocal liberalization commitments whilst guaranteeing them MFN treatment under Article I Developing countries favoured this because it allowed them to follow the development paradigm of the time which was the promotion of infant industry policies as a means of ensuring economic as well as political independence see Chapter 2 For the developed countries Part IV simplified negotiations by removing many smaller economies from the equation but the adoption of Part IV in 1964 and the subsequent enabling clause effectively created a twotier trading system The Tokyo Round 19739 Containing New Protectionism Launched with the Tokyo Declaration in September 1973 this GATT round was the product of US pressure for stronger GATT discipline of what it saw as the unfair policies of its main trading partners Agreement to negotiate had formed part of the Smithsonian Agreement of December 1971 that sought to ease tensions following the end of dollar convertibility with gold and the 1971 imposition by the United States of a 10 per cent tariff to pressurize the Federal Republic of Germany and Japan to revalue their currencies Faced with a rising trade deficit the United States argued that its competitors needed to revalue their exchanges rates and stop intervening to support national champions by means of subsidies preferential use of public contracts and technical barriers to trade For the United States therefore 5 The timetable of trade negotiations up to and including the Uruguay Round has been in effect determined by US trade legislation For example it was no accident that the Kennedy Round negotiations finished one day before the expiry of trade authority under the 1962 Trade Expansion Act The timetable of other rounds has been similarly influenced by the existence and duration of negotiating authority granted by the US Congress Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 52 the trade agenda had to be extended by including such nontariff or behind theborder issues and by strengthening the dispute settlement provisions of the GATT to improve enforcement of the rules There was also a concern shared by the European Community about increased competition from Japan the Newly Industrializing Countries NICs and DCs in low value added sectors such as textiles and clothing In other words the trade agenda was already being extended and responding to a shift in the balance of market power The negotiations were therefore framed by the United States and driven by domestic interests to include tariffs agriculture and nontariff issues on the agenda6 The EC resisted pressure to liberalize agriculture and to impose tight disciplines on the nontariff barriers because most EC member states made use of industrial policytype instruments7 Both the United States and EU included textiles and clothing on the agenda Japan and the NICs were keen to see more discipline of contingent protection by the EC and United States in the form of antidumping or voluntary export restraint VER agreements but resisted the ECs idea that the GATT safeguard provisions should be reformed to allow for selective safeguards Progress in the negotiations was held up by international events Following the Yom Kippur War of October 1973 and the Arab oil embargo there followed the first oil crisis a fourfold increase in oil prices in late 1973 The rising tide of new protectionism in the form of voluntary export restraint agreements against exports from the NICs however strengthened the desire to conclude an agreement The G7 summits established in 1975 provided political support and in the run up to the 1978 Bonn summit a ninepage outline of an agreement was tabled The end result was modest compared to the Kennedy Round There were tariff reductions averaging 35 per cent over eight years to 1988 based on the Swiss formula favoured by the EC because it helped bring down US tariff peaks8 But sensitive sectors were excluded from cuts Codes were agreed on subsidies and countervailing duties customs valuation9 technical barriers to trade and a government procurement agreement GPA but these were too weak to have much effect Likewise the revised 6 The US Secretary of State Kissinger sought to include scope to offer the Soviet Union MFN status in the trade legislation as part of the US détente policy but this ran into problems in Congress which in the JacksonVanik amendment effectively linked trade to the performance of the USSR on human rights 7 The 1974 Trade Act in the United States provided for a number of contingency measures including the use of countervailing duties against subsidized imports It also introduced the infamous Section 301 fair trade provision that was to find later application in the 1980s On the other hand the 1974 Act established Fast Track and modernized US trade policymaking 8 The Swiss formula used was y 14x14x which meant for example that a 20 per cent tariff was reduced to 8 per cent and a 50 per cent tariff to just under 11 per cent see also Chapter 4 9 Customs authorities designate a customs code for each product As tariffs vary from product to product how products are allocated can determine the tariff The Brussels Tariff Nomenclature of 1950 had been adopted by all GATT members in 1970 but some issues remained such as the continued use of the American Selling Price ASP according Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 53 provisions on antidumping failed to impose much discipline with the US Congress resisting more effective rules on how to determine material injury as a condition for applying duties There was no agreement on a safeguards code which meant in effect no discipline of VERs Following the precedent of the previous negotiations the EC was able to exclude agriculture Agreement was however reached on a MultiFibre Arrangement MFA that provided an extensive system of protection against textile and clothing imports from NICs and developing countries Developing countries were still not inclined to lower tariffs and spent much of the 1970s arguing for a New International Economic Order NIEO that would give them a greater say in policy more development aid debt relief and access to OECD markets Under these conditions the twotier system based on Part IV continued but now included the Generalized System of Preferences GSP that permitted developed economies to offer autonomous that is to say unbound tariff preferences for developing country exports as another exception to MFN Qualified MFN was also used for the nontariff barrier codes that were signed only by the developed OECD economies The Tokyo Round therefore witnessed the emergence of a form of club model in which the agenda and negotiations were shaped by the leading OECD economies rather than the United States But the multilateral system still excluded the Soviet bloc and effectively the developing countries of the South The Uruguay Round 198694 Towards an Inclusive Rulesbased System The period of the Uruguay Round UR negotiations marked a significant broadening of the trading system in the form of a more active participation by more countries and an associated increased heterogeneity of the trading system as well as a deepening with the most significant increase in the scope of the trade regime to date There was also a shift to a significantly more rulesbased international trading system10 As in previous decades it was the United States that pressed for this agenda from the early 1980s Bergsten and Cline 1982 Although no agreement on launching a new comprehensive round could be reached at the 1982 GATT Ministerial meeting mainly because of European reluctance work on an agenda including agriculture services and intellectual property began in the OECD By the middle of the decade the reform in the European Community in the form of the single European market for goods and to a lesser degree services and a move to which tariffs on chemical imports into the United States were based on the selling price of the chemical 10 For general histories of the Uruguay Round see Golt 1988 for the early stages Croome 1995 and Stewart 1993 for a detailed negotiating history Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 54 away from promoting national champions brought about a shift in the EC towards a more liberal rulesbased approach to external trade and investment The decision to establish a Preparatory Committee for the new round was effectively taken by a club of OECD members in April 1985 Preeg 1970 54 As the negotiation progressed it became clear that it was the Quad United States EC Japan and Canada and within this the USEC duopoly that shaped the agenda and determined progress Woolcock 1990 The most important developing countries in the Preparatory Committee Brazil and India which led the socalled Group of 10 G10 opposed a new comprehensive round The G10 was not able to block progress towards a new round because a number of NICs were keen to see a strengthening of the rules to contain EC and US protectionism The G10 of the 1980s could be seen as a rather less successful forerunner of the G20 established under similar leadership in 2003 Narlikar 2010 The G10 aside the UR was not characterized by the type of NorthSouth divisions seen in the Tokyo Round Issue based coalitions were formed such as the Cairns group of agricultural exporters and the Café au Lait group led by Colombia and Switzerland Japan and the Asian NICs such as Hong Kong were also more active The UR resulted in a more inclusive WTO with the ending of Part IV of the qualified MFN codes and of the twotier trading system by means of a Single Undertaking This was an aim of developed countries that wished to deal with free riding and to ensure that the stronger NICs graduated to full membership of the trading system Special and differential treatment SDT for developing countries remained but in the form of expectations of lessthanfull reciprocity in commitments or longer transition periods to adopt rules By the end of the round in 1994 the Cold War had ended and many transition economies though not Russia were joining the WTO Thus although the Round was shaped by the OECD Club or the Quad the outcome created a far more inclusive international trading system Indeed by the time China joined in 2001 one could say the WTO was a global organization in a way that the GATT never was Reaching Further Beyond Market Access The UR was the most comprehensive round of negotiations to date Not only were all the agenda items inherited from the Tokyo Round revisited but significant new issues were added in the form of services investment and intellectual property rights initially limited to counterfeit goods Tariff reductions were based on targets for average cuts and zeroforzero agreements in which tariffs were removed in certain sectors The result was an overall average reduction of 30 per cent in tariffs but tariff peaks the higher tariffs for certain more sensitive products remained Developed countries average bound MFN tariffs in manufactures were reduced to between 45 per cent with average tariffs in agriculture of around 15 per cent Developing country bound MFN tariffs in manufactures were higher in a range Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 55 between 15 and 50 per cent with higher rates again for agriculture11 Developing countries also bound fewer tariff lines Agriculture was brought back under GATT discipline in the UR in the face of dogged EC resistance thanks to pressure from the United States and the Cairns group but the level of actual liberalization was fairly limited see Chapter 8 Agriculture was generally the issue that determined the pace of progress in the negotiations as a whole and the slow pace of reform of the CAP in Europe determined the pace of progress in agriculture There were three pillars to the agriculture negotiations reductions in export and domestic subsidies and market access tariff liberalization After many years of negotiation and many crises agreement was reached on agriculture between US and EC negotiators in Blair House in Washington in November 1992 After further internal debate and controversy within the EU the final outcome was a reduction of 21 per cent in the volume of exports benefiting from export subsidies a 20 per cent reduction in domestic subsidies and a 36 per cent reduction in tariffs an outcome that was rather nearer the EC than the declared US aim of elimination of all subsidies12 Of the new issues the TradeRelated Intellectual Property Rights TRIPs proved to be the most controversial This constituted a significant shift towards establishing positive obligations on WTO members The GATT tends to require governments to not do things but the TRIPs which was favoured by research intensive industries such as pharmaceuticals in the United States Europe and Japan requires all signatories to the WTO to comply with a number of international conventions covering protection of patents literary and other rights see Chapter 16 Noncompliance with these conventions opens the country concerned to the threat of trade retaliation TRIPs was opposed by DCs because it was seen as benefiting the developed economies and limiting the ability of DCs to access technology and essential medicines at a reasonable price But ultimately the developing countries accepted the TRIPs agreement when offered the carrot of liberalizing textiles and clothing and threatened with the stick of US unilateral trade sanctions for non enforcement of IPRs under Section 337 of the US Trade Act The General Agreement on Trade in Services GATS was in comparison less controversial This consisted of a framework agreement and a series of commitments to apply MFN and national treatment to foreign suppliers of services whether these services were supplied across borders Mode 1 by means of the consumer moving to another country to obtain a service Mode 2 by investment or establishment of the service provider in the host country Mode 3 or by workers entering the host country market Mode 4 see Chapter 9 The GATS outcome has been seen as a glass half empty because liberalization was generally little more than a 11 Bound MFN tariffs are the rates that WTO members cannot exceed Many countries and especially developing countries generally have lower applied tariffs For example developing country average applied tariffs are nearer the range of 1015 per cent for manufactures The difference between the applied and bound tariff rates provides countries with flexibility to increase tariffs and is termed the water in the tariff 12 On the outcome of the Uruguay Round see Schott 1994 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 56 commitment to bind what had in any case been liberalized unilaterally Mode 3 commitments in the GATS constitute commitments to provide preestablishment national treatment for foreign service providers in other words access for foreign investment Commitments are made in schedules using positive listing to specify sectors that are included but also negative listing within these sectors to exclude certain activities For example a positive listing could mean business services are covered but a negative listing could then exclude lawyers Investment in the Round also came in the shape of TradeRelated Investment Measures TRIMs negotiations The TRIMs covered performance requirements on investors by host governments such as those specifying local content or export requirements Host governments require these in an effort to ensure that foreign investment contributes to value added in their economy The TRIMs agreement prohibited six core performance requirements but stopped a long way short of a full investment agreement covering liberalization and investment protection The negotiations in the 1980s also produced more effective GATT rules on nontariff barriers The Tokyo Round codes were replaced with fully fledged agreements In some cases such as antidumping a good deal of discretion was left for national governments but the agreements generally strengthened multilateral disciplines On safeguards multilateral discipline was effectively reestablished over VERs one of the main instruments of new protectionism The nonselective character of Article XIX was largely retained and all VERs had to be notified to the WTO and phased out On subsidies GATT rules were made more operational by reaffirming the ban on selective state subsidies but permitting support for general RD regional development and environmental policies To this end a traffic light system was introduced that classified aid as totally banned red potentially trade distorting and thus subject to countervail amber and permitted green13 The rules for applying countervailing duties were also tightened A more sophisticated approach to technical barriers to trade TBTs was also developed that followed the EU model by distinguishing between mandatory technical regulations conformance assessment and voluntary standards National treatment remained the norm for mandatory regulations and conformance assessment and a voluntary code was established for standardsmaking bodies EU experience was also followed with provisions promoting mutual recognition and the use of agreed international standards In the related field of sanitary and phytosanitary SPS measures the agreement reached was one that permits controls on imports that threaten human animal or plant health but only when these are based on scientific evidence and are not disguised forms of protection In cases where there is a potential risk but not yet sufficient scientific evidence the Agreement on SPS allows for the use of precautionary measures until such evidence is available When this agreement was negotiated European consumers had not yet been exposed to mad cow disease Bovine Spongiform Encephalopathy or BSE Under consumer pressure following the case of mad cow disease in which scientists had assured consumers that beef with BSE was safe to eat when it was 13 The traffic light regime was due for review in 1999 but was not extended Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 57 not a number of European governments moved in conflict with the SPS rules to ban certain products regardless of existing scientific evidence14 Finally the negotiations reached beyond the border in adopting a plurilateral Government Procurement Agreement GPA that formed part of a political package with the UR rather than part of the Single Undertaking The GPA 1994 strengthened the framework rules agreed in the 1979 GPA and included in particular a bid challenge provision that enables aggrieved tenderers to challenge decisions by public purchasing entities that they consider to be illegal It also introduced tighter more extensive rules on transparency and contract award procedures The second element of the GPA is a set of bilateral reciprocitybased liberalization negotiations on coverage specifying which government departments levels of government and public enterprises are required to comply with the rules Thanks in part to an extension of the EU regime to include public utilities the 1994 GPA had broader coverage but not many more signatories than the 1979 agreement The UR therefore constituted the most significant extension of the scope of the international trade regime to date Included in its definition of trade were many measures that reached well beyond border measures and into areas that had previously remained under national policy autonomy The UR also moved beyond national treatment to require positive action by signatories to the WTO to comply with certain agreed international standards Institutional Strengthening The UR strengthened the multilateral institutions In 1988 as part of an early harvest the Trade Policy Review Mechanism TPRM was established The TPRM provides for regular peer reviews of all WTO members trade policies based on reports produced by both the WTO member concerned and the WTO Secretariat The UR also established the World Trade Organization WTO Based on a Canadian proposal in 1990 the idea of creating a stronger institution found widespread support with the most vocal opposition coming from the US Congress that feared it would encroach upon its sovereignty The agreement establishing the WTO largely codified existing GATT practice such as one member one vote but with consensus of all countries present and not objecting as normal practice The WTO incorporates the GATT 1994 the revised GATT the GATS and TRIPs agreements In order to ensure that the Single Undertaking was effective GATT 1947 was wound up and all countries wishing to benefit from the strengthened rulesbased system that is the GATTWTO were obliged to sign up to the WTO One innovation with the WTO was the creation of regular biennial Ministerial meetings Last but by no means least the UR included the Understanding on Dispute Settlement UDS Jackson 1998 see also Chapter 21 This finally ended the ability of individual countries to veto the adoption of dispute settlement panel reports 14 There then followed a number of actions against the EU under WTO dispute settlement on beef hormones and genetically modified products Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 58 something the United States had been seeking for decades Henceforth panel reports were considered adopted unless there was a consensus against doing so An Appellate Body AB was also added in order to ensure that panel decisions were coherent and consistent with established GATTWTO principles The UR negotiations concluded by DG Peter Sutherland in December 1993 therefore produced a comprehensive rulesbased and global trade regime The Doha Development Agenda DDA Modest Ambition for the WTO The assumption among the trade policy community after the completion of the UR was that the next stage would be an extension of the trade regime to cover investment Given the nature of international markets and the close links between trade and investment the absence of comprehensive multilateral rules on investment was seen as an anomaly At the first WTO Ministerial meeting in Singapore investment was therefore included on the agenda15 Other topics for discussion were competition policy and government procurement which together with investment and trade facilitation became the Singapore issues most strongly promoted by the EU and Japan Indeed it was around this time that the EU emerged as the main proponent of a new round of comprehensive negotiations But the balance of influence in the WTO was shifting Having joined the club with the Single Undertaking developing countries expected to have a say in shaping the rules Economic growth combined with relatively high tariffs in a number of emerging markets also gave these WTO members more leverage than the G10 had had in the previous decade In comparison the OECD markets although still much bigger were growing more slowly and had already liberalized much of their economies The EU lead had only lukewarm support from the United States and faced opposition from many developing countries In 1998 at the second WTO Ministerial meeting that marked 50 years of the GATT the United States agreed to support efforts to launch a new round but these failed in Seattle in late 1999 due to differences between the OECD economies opposition from developing countries which believed an agenda was again being imposed upon them by the OECD countries and a lack of resolve on the part of national governments in the face of growing civil society opposition to globalization Schott 2000 The DDA was finally launched in Doha in December 2001 thanks in part to the use of constructive ambiguity in the wording of the communiqué Failure in Seattle had also been in part due to efforts to agree on a very detailed text The EU remained the main demandeur for a new comprehensive round in which it sought 15 For a discussion of the priorities for the new round as seen in 1996 see Schott 1996 and OECD 1996 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 59 progress on the Singapore issues and market opening for services and manufactures in the larger emerging markets in return for concessions on agriculture The EU strategy favoured multilateral negotiations over preferential agreements and adopted a de facto moratorium on new preferential trade negotiations in 1999 In contrast to previous rounds the United States provided only qualified support for a comprehensive round from 2001 when it obtained new Trade Promotion Authority The US Administration began pursuing an active policy of competitive liberalization This was a pragmatic approach in which bilateral regional or multilateral approaches to liberalization were to be pursued depending on which offered the best prospects of results Developing countries illustrated their intention to have a greater say by first making the launch of the DDA conditional upon a statement interpreting the TRIPs agreement in a way that favoured developing country interests This was the Doha Declaration on TRIPs and essential medicines Secondly the developing countries led by India insisted on an explicit consensus on the final agenda As smaller DCs or least developed countries LDCs are sometimes not present in negotiations and often remained silent when they were specifying explicit consensus clearly gave the DCs a stronger veto power Between 2001 and 2003 a limited commitment to a new round combined with a general economic slowdown in 2001 slowed progress on the modalities for negotiation In an effort to move things along the EU and United States produced a joint text on agriculture in the run up to the 2003 WTO Ministerial Meeting in Cancun Given that transatlantic differences on agriculture had determined the pace of the UR there was a belief not shared by all policymakers in the EU that an EUUS agreement would help In effect the reverse was the case The joint text was seen by the major developing countries as a bid to sustain a transatlantic duopoly over the trade agenda and continued protection for EU and US special agricultural interests while pushing for DC concessions on other issues such as services non agricultural market access NAMA and the Singapore issues Brazil and India joined now by China and other developing countries formed the G20 and came forward with alternative proposals that made the overall ambition of the round dependent on the willingness of the EU and United States to make concessions on agriculture The Cancun meeting which was supposed to map out a course for the DDA failed even though the scale of ambition had been reduced by the EU effectively taking the three most controversial Singapore issues investment competition and government procurement off the table A more modest agenda was put together in the shape of the August 2004 Framework Agreement This excluded the Singapore issues except trade facilitation and focused on the traditional topics of agriculture and NAMA Even services slipped to a less than central position and although other topics were included in the negotiations such as rules on regional trade agreements antidumping and some aspects of intellectual property rights such as geographic indications GIs it became clear that the main substance of the negotiations concerned agriculture and NAMA In these the G20 sought progress on agriculture from both the United States reductions in domestic support and the EU elimination of export subsidies and lower tariffs In return the EU and United States sought reductions in tariffs Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 60 on manufactures in the major emerging markets as well as progress on services As always this simple depiction of the G20 against the EU and United States or perhaps the OECD countries is inaccurate In reality the picture was much more complex with tensions within both blocs For example there was certainly some concern among Chinas G20 partners as well as within the United States and EU about lowering tariffs on products in which China was already very competitive The DDA stumbled on through times when there appeared to be some progress such as at the Hong Kong 2005 WTO Ministerial meeting and times when negotiations were on life support Lee and Wilkinson 2007 In 2007 and especially in 2008 major efforts were made in the various negotiating groups in Geneva and in highlevel meetings away from the glare of the news media that had accompanied the big WTO ministerial conferences In 2008 an agreement was near after progress was made on the modalities for tariff and subsidy reductions in agricultural and tariff reductions in NAMA16 But the negotiations failed ostensibly on the issue of a special safeguard mechanism SSM for agriculture in which India with support from China wanted scope to reimpose tariffs in the event of import surges of agricultural products in order to protect its subsistence farmers The United States in particular saw the proposals as a means of maintaining or even increasing protection rather than safeguarding food security In reality however the main hindrance to agreement was a lack of domestic political support among key WTO members see also Chapter 2 The Rise of Bilateralism As noted above a number of WTO members were already considering active free trade agreement FTA policies before and as the DDA was launched There had been a strengthening of EU integration in the mid1980s and the adoption of the CanadaUS FTA CUSFTA in 1988 In 1990 negotiations began on a wider North American Free Trade Agreement NAFTA to include Mexico Arguably FTA activity began even before the end of the UR At the time this was seen as facilitating multilateralism but it could also be argued that by early 1991 the broad outlines of the UR could be seen in the Dunkel Text17 So that those interests seeking more in terms of access or rules would turn their minds to alternative negotiating fora such as bilateral agreements given that the next chance of getting satisfaction from the multilateral agenda was clearly going to be years away In the early 2000s FTA activity increased and as the DDA began to falter and the ambition of the multilateral approach was reduced FTAs began to be seen as alternatives to 16 For details of the Chairs negotiating texts and progress reached in the various negotiating groups at this stage see WTO documents at wwwwtoorgenglishtratope ddaeddaehtm 17 The GATT Director General Arthur Dunkel produced what was intended to be a compromise final text in December 1990 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 61 multilateral negotiations Indeed one could argue that the option of the bilateral alternative reduced the incentive to negotiate multilaterally Whatever the motives FTAs became a central feature of the international trading system during the 2000s This has raised questions concerning the compatibility of FTAs with a multilateral trading system and whether FTAs are building blocks or stumbling blocks for a wider system Heydon and Woolcock 2009 As time progressed and it became clear that the increase in FTAs was not a temporary phenomenon the debate shifted more to whether it would be possible to multilateralize regionalism Baldwin and Thornton 2008 Whilst the terms regionalism and regional trade agreements continued to be used the trend during the 2000s was very clearly towards bilateralism The number of FTAs increased but so did their scope with agreements involving the major OECD economies being especially more comprehensive18 For example the US agreements all included comprehensive investment provisions and TRIPs plus provisions on intellectual property rights The EU agreements often included in one form or another the Singapore issues as did Japans agreements Heydon and Woolcock 2009 Bilateral agreements were in most cases NorthSouth agreements negotiated between the developed and developing countries In practice the spread of comprehensive regional and bilateral agreements began to establish de facto international norms on investment and other Singapore issues even though these had been excluded from the multilateral agenda As the regional and bilateral agreements were generally rulesbased with developed dispute settlement procedures they also led to a further consolidation of a rulesbased order The balance between multilateral and regional or bilateral approaches will in the future depend on progress in multilateral negotiations and whether bilateral and regional approaches can be made compatible with a wider international system At the WTO level there have been efforts to enhance the multilateral rules on FTAs starting with improved transparency but operational rules under Article XXIV GATT have remained elusive WTO 2006 The threat of bilateral agreements may however not be as great as is sometimes stated Although they create preferences in terms of tariffs and discrimination in some other areas of market access and policy more comprehensive bilateral and regional agreements may be less distorting if they promote transparency regulatory best practice and the use of agreed international standards Conclusions What lessons can be drawn from this summary of the evolution of the trading system First if the evolution is compared to the debate on substantive policy issues 18 Many FTAs especially between developing countries appeared at least when first concluded to serve more of a signalling function than agreements that would be rigorously implemented and enforced Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Ashgate Research Companion to International Trade Policy 62 and topics it should be clear that the vast majority of issues in the current debate are not new International trade policy and the construction of an international trading system is an iterative process The current debate can therefore be informed by knowledge of what went before Second the international trading system has accommodated significant shifts in relative economic or market power during the post1947 era It has also found ways of accommodating large numbers of countries and countries at different levels of development This suggests that the shift in the relative market power towards the large emerging markets and the inclusion of a large number of developing countries in the WTO need not be an insurmountable problem If it was possible for the trading system to adapt to shifts in influence in the past it may be possible to do so again Third the coverage of the international trade regime has been defined by the dominant trading nations or regions or the period The definition of what is trade has changed over time There is no reason to believe that this will not continue to be the case The GATT 1947 was shaped by the United States as was the trade agenda right into the 1980s Once the EU established an internal consensus on trade it then began to seek to shape the trade agenda As new trade powers emerge they can be expected to have an increasing influence on the nature of the agenda But much will depend on the level of negotiation Within the WTO the DDA negotiations pitted the EU view of the multilateral trade regime and to a lesser degree that of the United States and other developed economies against that of the G20 But in bilateral FTAs the EU and United States still retain their asymmetric power Fourth the international trading system has never been a purely multilateral system if by multilateral we mean a trading system in which there is no discrimination and one that is shaped by all trading nations The application of the MFN principle to tariff liberalization and other trade barriers is close to a multilateral order but there have been many exceptions to MFN over the years such as the qualified MFN codes of the Tokyo Round the use of various exceptions and continued use of plurilateral agreements The evolution of the international trading system has also been shaped by a limited number of major economies This is likely to continue even if the membership of the club varies References Baldwin R and Thornton P 2008 Multilateralising Regionalism Ideas for a WTO Action Plan on Regionalism London Centre for Economic Policy Research Bergsten CF and Cline RW 1982 Trade Policy in the 1980s Washington DC Institute for International Economics Croome J 1995 Reshaping the World Trading System A History of the Uruguay Round Geneva World Trade Organization Diebold W 1952 The end of the ITO Princeton Essays in International Finance No 16 Princeton Princeton University Press Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 1043249781315613086ch3 The Evolution of the International Trading System 63 Evans JW 1971 The Kennedy Round in American Trade Policy The Twilight of the GATT Cambridge MA Harvard University Press Golt S 1988 The GATT Negotiations 198690 Origins Issues and Prospects Washington DC British North American Committee Heydon K and Woolcock S 2009 The Rise of Bilateralism Comparing American European and Asian Approaches to Preferential Trade Agreements Tokyo United Nations University Press Hoekman M and Kostecki B 2001 The Political Economy of the World Trading System 2nd Edition Oxford Oxford University Press Jackson JH 1998 The World Trade Organization Constitution and Jurisprudence Chatham House Papers Royal Institute of International Affairs London Pinter Jackson JH 2000 The World Trading System Law and Policy of International Economic Relations 2nd Edition Cambridge MA MIT Press Jones K 2010 The Doha Blues Institutional Crisis and Reform in the WTO Oxford Oxford University Press Lee D and Wilkinson R 2007 The WTO after Hong Kong Progress in and Prospects for the Doha Development Agenda London Routledge Narlikar A ed 2010 The new power in the club the challenge of global trade governance International Affairs 863 717728 OECD 1996 Market Access after the Uruguay Round Investment Competition and Technology Perspectives Paris OECD Preeg E 1970 Traders and Diplomats An Analysis of the Kennedy Round of Negotiations under the General Agreement on Tariffs and Trade Washington DC Brookings Institution Schott JJ 1994 The Uruguay Round An Assessment Washington DC Institute for International Economics Schott JJ 1996 WTO 2000 setting the course for world trade Policy Analysis in International Economics No 45 September Washington DC Institute for International Economics Schott JJ 2000 The WTO after Seattle Washington DC Institute for International Economics Stewart TP 1993 The GATT Uruguay Round A Negotiating History 19861992 Deventer Kluwer Law Taxation Sutherland Report 2007 The Future of the WTO Geneva World Trade Organization Trebilcock MJ and Howse R 1995 The Regulation of International Trade London and New York Routledge Warwick Commission 2007 The Multilateral Trade Regime Which Way Forward The Report of the First Warwick Commission Coventry University of Warwick Woolcock S 1990 The Uruguay Round Issues for the European Community and the United States Discussion Paper No 31 London Royal Institute of International Affairs World Trade Organization 2006 Negotiating Group on Rules Transparency Mechanism for Regional Trade Agreements Job0659Rev 5 Downloaded By 10397143 At 2053 16 Jun 2023 For 9781315613086 chapter3 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