FREE TRADE, WTO AND REGIONAL

GROUPING OF COUNTRIES AND ITS

IMPACT

SOUMENDRA ROY
 INTRODUCTION
Free trade refers to a situation where a
government does not attempt to restrict what
its citizens can buy from another country or
what they can sell to another country
While many nations are nominally committed
to free trade, they tend to intervene in
international trade to protect the interests of
politically important groups
 INSTRUMENTS OF TRADE POLICY
Question: How do governments intervene in
international trade?

There are seven main instruments of trade policy

1. Tariffs specific and ad valorem
2. Subsidies
3. Import quotas
4. Voluntary export restraints
5. Local content requirements
6. Antidumping policies
7. Administrative policies
 THE CASE FOR GOVERNMENT INTERVENTION
Question: Why do governments intervene in trade?
There are two types of arguments
1. Political arguments are concerned with
protecting the interests of certain groups within
a nation (normally producers), often at the
expense of other groups (normally consumers)
2. Economic arguments are typically concerned
with boosting the overall wealth of a nation (to
the benefit of all, both producers and
consumers)
 THE CASE FOR GOVERNMENT INTERVENTION
Political arguments for government intervention
include
1. protecting jobs
2. protecting industries deemed important for
national security
3. retaliating to unfair foreign competition
4. protecting consumers from dangerous
products
5. furthering the goals of foreign policy
6. protecting the human rights of individuals in
exporting countries
 THE CASE FOR GOVERNMENT INTERVENTION
Economic arguments for government
intervention in international trade
include
1. The infant industry argument
2. Strategic trade policy
 THE REVISED CASE FOR FREE TRADE
New trade theorists believe government
intervention in international trade is justified
Classic trade theorists disagree
Some new trade theorists believe that while
strategic trade theory is appealing in theory, it may
not be workable in practice they suggest a revised
case for free trade
Two situations where restrictions on trade may be
inappropriate
Retaliation
Domestic Policies
DEVELOPMENT OF THE WORLD TRADING
SYSTEM
Up until the Great Depression of the 1930s,
most countries had some degree of
protectionism
In 1930, the U.S. enacted the Smoot-Hawley
Act, which created significant import tariffs on
foreign goods
Other nations took similar steps and as the
depression deepened, world trade fell further
DEVELOPMENT OF THE WORLD TRADING
SYSTEM

Since World War II, an international trading

framework has evolved to govern world trade
In its first fifty years, the framework was
known as the General Agreement on Tariffs
and Trade (GATT)
Since 1995, the framework has been known as
the World Trade Organization (WTO)
DEVELOPMENT OF THE WORLD TRADING
SYSTEM
Since its establishment, the WTO has emerged as an
effective advocate and facilitator of future trade
deals, particularly in such areas as services
So far, most countries have adopted WTO
recommendations for trade disputes
The WTO has brokered negotiations to reform the
global telecommunications and financial services
industries
The 1999 meeting of the WTO in Seattle
demonstrated that issues surrounding free trade
have become mainstream, and dependent on
popular opinion
DEVELOPMENT OF THE WORLD TRADING
SYSTEM
The WTO is currently focusing on
1. Anti-dumping policies
The WTO is encouraging members to strengthen the
regulations governing the imposition of antidumping
duties
2. Protectionism in agriculture
The WTO is concerned with the high level of tariffs and
subsidies in the agricultural sector of many economies
3. Protecting intellectual property
Members believe that the protection of intellectual
property rights is essential to the international trading
system
TRIPS obliges WTO members to grant and enforce patents
lasting at least 20 years and copyrights lasting 50 years
DEVELOPMENT OF THE WORLD TRADING
SYSTEM
4. Market access for nonagricultural goods and
services
The WTO would like to bring down tariff rates on
nonagricultural goods and services, and reduce the
scope for the selective use of high tariff rates
5. A new round of talks: Doha
The WTO launched a new round of talks in 2001 to
focus on
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
IMPLICATIONS FOR MANAGERS
Question: Why should international managers
care about the political economy of free trade
or about the relative merits of arguments for
free trade and protectionism?

Trade barriers impact firm strategy

Firms can play a role in promoting free trade
or trade barriers
WORLD TRADE
ORGANIZATION (WTO)
 INTRODUCTION TO WTO
Organization that intends to supervise and liberalize
international trade
International organization dealing with the global rules
of trade between nations
Commenced on January 1995 under the Marrakech
Agreement, replacing the General Agreement on Tariffs
and Trade (GATT), which commenced in 1948
The organization deals with regulation of trade between
participating countries
it provides a framework for negotiating and
formalizing trade agreements
 INTRODUCTION TO WTO
A dispute resolution process aimed at enforcing
participants' adherence to WTO agreements which are
signed by representatives of member governments and
ratified by their parliaments.
Most of the issues that the WTO focuses on derive from
previous trade negotiations, especially from the
Uruguay Round (1986-1994).
Its main function is to ensure trade flows as smoothly,
predictably & freely as possible.
Heart of the multilateral trading system is the WTOs.
 INTRODUCTION TO WTO
Agreements, negotiated and signed by a large majority
of the worlds trading nations, and ratified in their
parliaments.
Goal is to improve the welfare of the peoples of the
member countries.
WTO is currently trying to persist with trade
negotiations called DOHA ROUND/ DOHA
DEVELOPMENT AGENDA launched in 2001 to
enhance the equitable participation of poorer countries
majority of the worlds population.
 HISTORY OF WTO
WTO Predecessor, GATT established after world war II in
the wake of the new multilateral institutions dedicated to the
International economic cooperation IMF, World Bank, ITO.
GATT was only multilateral instrument governing from 1948
1995
Total number of rounds 7
After the 7 rounds, in Uruguay round, official signing of the
WTO regime April 1994 ministerial meeting at Marrakesh,
Morocco Marrakesh agreement.
GATT 1994 is not however the only legally binding agreement
included via final act at Marrakesh.
60 agreements, annexes, decisions and understandings was
adopted in GATT 1994.
 AGREEMENT PARTS
The Agreement Establishing the WTO
Goods and investment the Multilateral
Agreements on Trade in Goods including the GATT
1994 and the Trade Related Investment Measures
Services the General Agreement on Trade in
Services
Intellectual property the Agreement on Trade-
Related Aspects of Intellectual Property Rights
(TRIPS)
Dispute settlement (DSU)
Reviews of governments' trade policies (TPRM)
 OBJECTIVES
Trade without discrimination
To set and enforce rules for international trade,
To provide forum for negotiating and monitoring the
international trade
To resolve trade disputes,
To increase the transparency of decision-making
processes
To cooperate with other major international economic
institutions involved in global economic management
To help developing countries benefit fully from the
global trading system.
 SCOPE OF WTO
The WTO states that its aims are to
increase international trade by promoting
lower trade barriers
Providing a platform for the negotiation
of trade and to their business.
 FUNCTIONS OF WTO
WTO shall facilitate the implementation, administration
and operation of the plurilateral trade agreement.
WTO shall provide a forum for the negotiation among
its members concerning their multilateral trade relations
WTO shall administer the understanding on rules and
procedures governing the settlement of disputes
WTO shall administer the trade policy review
mechanism and
WTO shall co operate as appropriate with IMF AND
IBRD and with the affiliated agencies
WTO administers the 28 agreements contained in the
final act and the no of plurilateral agreements and the
government procurement through various councils and
committees
 FUNCTIONS OF WTO
It oversees the implementations of issues related to
tariff cut an non tariff measures agreed to in the trade
negotiations
It examines the trade regimes of the individual member
countries
WTO provides dispute settlement courts and panel
It acts as a management consultant for world trade
It provides technical co-operations and training
It can be used as a forum for continuous negotiations
It co-opts with the international institutions like IMF,
IBRD etc for making global economic policy
And it oversees the national trade policies of member
governments.
 STRUCTURES OF WTO
Ministerial
Conference

Dispute
General Trade Policy
Settlement
Council Review Body
Body

The Intellectual
Goods Services
Committee on Property
T&D and T&E Council Council
Council
 PRINCIPLES OF WTO
The basic principles of the WTO (according to the WTO):
Trade Without Discrimination
1. Most-favoured-nation (MFN): treating other people
equally Under the WTO agreements, countries cannot
normally discriminate between their trading partners. Grant
someone a special favour (such as a lower customs duty rate
for one of their products) and you have to do the same for all
other WTO members.
2. National treatment: Treating foreigners and locals
equally Imported and locally-produced goods should be
treated equally at least after the foreign goods have
entered the market. The same should apply to foreign and
domestic services, and to foreign and local trademarks,
copyrights and patents.
 PRINCIPLES OF WTO
Freer trade: gradually, through negotiation
Lowering trade barriers is one of the most obvious means of
encouraging trade
The barriers concerned include customs duties (or tariffs) and
measures such as import bans or quotas that restrict quantities
selectively
Predictability: through binding and transparency
Sometimes, promising not to raise a trade barrier can be as
important as lowering one, because the promise gives businesses
a clearer view of their future opportunities
With stability and predictability, investment is encouraged, jobs
are created and consumers can fully enjoy the benefits of
competition choice and lower prices
The multilateral trading system is an attempt by governments to
make the business environment stable and predictable
 PRINCIPLES OF WTO
Promoting fair competition
The WTO is sometimes described as a free trade institution,
but that is not entirely accurate
The system does allow tariffs and, in limited circumstances,
other forms of protection
More accurately, it is a system of rules dedicated to open, fair
and undistorted competition
Encouraging development and economic reform.
The WTO system contributes to development
On the other hand, developing countries need flexibility in the
time they take to implement the systems agreements
And the agreements themselves inherit the earlier provisions of
GATT that allow for special assistance and trade concessions for
developing countries.
 ROLE OF WTO
The main goal of WTO is to help the trading
industry to become smooth, fair, free and
predictable
It was organized to become the administrator
of multilateral trade and business agreements
between its member nations
It supports all occurring negotiations for latest
agreements for trade
WTO also tries to resolve trade disputes
between member nations.
 ROLE OF WTO
Multi-lateral agreements are always made between
several countries in the past
Because of this, such agreements become very
difficult to negotiate but are so powerful and
influential once all the parties agree and sign the
multi-lateral agreement
WTO acts as the administrator
If there are unfair trade practices or dumping and
there is complain filed, the staff of WTO are
expected to investigate and check if there are
violations based on the multi-lateral agreements
 TRIMs AND TRIPS OF WTO
1. Agreement on Trade-Related Investment Measures (TRIMs)
TRIMs refers to certain conditions or restrictions imposed by a
governments in respect of foreign investment in the country
The agreement on TRIMs provides that no contracting party
shall apply any TRIM which is inconsistent with the WTO
Articles.
2. Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS)
The Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS) is an international agreement
administered by the World Trade Organization (WTO) that sets
down minimum standards for many forms of intellectual
property (IP) regulation as applied to nationals of other WTO
Members
 TRIMs AND TRIPS OF WTO
It was negotiated at the end of the Uruguay Round of the
General Agreement on Tariffs and Trade (GATT) in 1994.
TRIPS contains requirements that nations' laws must meet
for copyright rights, including the rights of performers,
producers of sound recordings and broadcasting
organizations; geographical indications, including
appellations of origin; industrial designs; integrated circuit
layout-designs; patents; monopolies for the developers of
new plant varieties; trademarks; trade dress; and
undisclosed or confidential information
Specifies enforcement procedures, remedies, and dispute
resolution procedures
 THE RELEVANCE OF WTO
The system helps promote peace.
The system allows disputes to be handled constructively.
A system based on rules rather than power makes life easier
for all.
Freer trade cuts the cost of living.
It gives consumers more choice and a broader range of
qualities to choose from.
Trade raises incomes.
Trade stimulates economic growth and that can be good
news for employment
The basic principles make the system economically more
efficient, and they cut costs.
 THE AGREEMENTS
The WTO is rules-based; its rules are negotiated
agreements
Overview: a navigational guide
Plurilateral agreement
Further changes on the horizon, the Doha Agenda
Some of the agreements of WTO:
Tariffs: more bindings and closer to zero
The Agriculture Agreement: new rules and
commitments
Textiles: back in the mainstream
Intellectual property: protection and enforcement
 THE AGREEMENTS
The agreement covers five broad issues:
How basic principles of the trading system and other
international intellectual property agreements should be
applied
How to give adequate protection to intellectual property
rights
How countries should enforce those rights adequately in
their own territories
How to settle disputes on intellectual property between
members of the WTO
Special transitional arrangements during the period when
the new system is being introduced
 RECENT ISSUES
Trade to expand by 9.5% in 2010 after a dismal 2009, WTO
reports
Why was the trade decline so large?
Trade prospects for 2010
Lamy calls for addressing macro-economic imbalances
through cooperation
32 WTO members take anti-dumping actions during first half
of 2010
Transparency mechanism for preferential trade arrangements
set for approval
Market access for LDCs
Trade agreements between developing countries
Overseeing national trade policies: the TPRM
Trade policy reviews: ensuring transparency
 CONCLUSION
It is the place where the member country comes and talks
together and shares their grievance in order to resolve their
problem related to International trade
The countries make their decisions through various councils
and committees, whose membership consists of all WTO
members
The system helps promote peace, by handling Dispute of
member countries
It provides free trade which cuts the costs of living and
provides more choice of products and qualities and stimulates
economic growth
The WTO agreements cover goods, services and intellectual
property
They spell out the principles of liberalization, and the
permitted exceptions
 CONCLUSION
They include individual countries commitments to lower
customs tariffs and other trade barriers, and to open and keep
open services markets
They set procedures for settling disputes
They prescribe special treatment for developing countries
They require governments to make their trade policies
transparent
WTO deals with the special needs of developing countries as
two thirds of the WTO members are developing countries and
they play an increasingly important and active role in the WTO
because of their numbers, because they are becoming more
important in the global economy, and because they increasingly
look to trade as a vital tool in their development efforts.
 WTO AND ISSUES
CONCERNING INDIA
 BACKGROUND
India one of members of General Agreement on Tariffs and
Trade (GATT) since 1948.
After Marrakesh Agreement, India joined WTO since
inception in 1995.
Aim to participate in WTO rule based system with greater
stability, transparency and predictability in governance of
international trade.
Developing countries like India availed of greater trade
opportunities and also challenged certain policies of
developed countries (DCs)
Developmental issues increasingly focused along with
trade issues
S&D treatment for developing and LDCs incorporated
 AREAS OF CONCERN
In spite of special provisions for developing countries,
certain imbalances and inequities experienced
A number of DCs not fulfilled some obligations for
trade liberalization while developing countries asked to
reduce import duties and provide greater market
access
India has reduced tariffs to bring them to bound levels.
Even lower for a large number of commodities as part
of the reforms process
Now, India committed to reduce tariffs to bring in line
with South East Asian countries by 2007
We are not in a position to reduce tariffs substantially
to the extent suggested by developed countries since
 AREAS OF CONCERN
Customs duties important source of revenue for developing
countries like India.
The industrial sector faces several constraints-some
protection warranted for specific industries.
Non-agricultural tariffs gradually reduced but agricultural
tariffs require greater caution due to following reasons.
India and other developing countries have argued that
agriculture is way of life and employs large proportion of
workforce while contributing significantly to GDP.
Exposure to volatile international market would affect not
only domestic prices but also incomes of poor.
Some DCs not fully implemented the required reduction of
domestic support to farmers, export subsidies and tariffs.
 AREAS OF CONCERN
WTO permits non-distortionary subsidies. Experience
shows these can be trade distorting and DCs have
steadily increased such subsidies leading to excessive
global production.
Disadvantage to developing countries since such
subsidies unaffordable. Get less competitive in world
market.
Technical barriers to trade and stringent restrictions on
grounds of SPS regulations to be relaxed to prevent
protectionist measures by DCs on this plea.
Grant of patents on non-original innovations,
particularly linked to traditional medicines issue of
concern.
 AREAS OF CONCERN
Mechanism proposed for disclosure of source of origin of
biological material used along with consent of country of
origin. Dissemination of knowledge and also patent rights
for seed diversity important for developing countries.
Under agreement on Trade in Services, developing
countries have asked for relaxing restrictions on movement
of natural persons.
India has advantage in movement of highly skilled and
experienced professionals.
Developing countries had wanted unbundling of Singapore
issues comprising MAI, competition policy, trade facilitation
and transparency in Government procurement.
Some issues of concern for developing countries
incorporated in Doha Declaration.
 STATUS OF NEGOTIATIONS
Continued negotiations at WTO for remaining issues and
implementation of Doha Declaration
These issues brought forth by developing countries at
Cancun but no consensus arrived at
Divergence of interests
No agreement on formula for tariff reductions for
agricultural commodities as well as on Singapore issues
Proposed relaxations under S&D found inadequate by
developing countries
Under Singapore issues, definition of investment and scope
for investors obligations could not be made
 STATUS OF NEGOTIATIONS
Extent of competition policy and trade facilitation not arrived at
Formula for tariff reductions in non-agricultural products that
would take care of tariff peaks, high tariffs and tariff escalations
not agreed
Group could not arrive at consensus towards finalizing a
declaration
There is continued attempt to work out a mutually acceptable
solution and negotiations.
A blended formula for tariff reductions in agriculture proposed
by US and EC whereby a proportion of tariff lines would be
subject to Uruguay Round formula tariff reductions and a
proportion to be made duty free.
However, G-20 not found this acceptable. Felt it would prevent
proper delivery of Doha mandate for market access. Continued
negotiations are on.
TARIFF STRUCTURE IN INDIA
Given importance attached to reduction of tariffs,
we look at tariff structure in India and alternative
strategy for tariff negotiations.
Tariff structure in India highly complex in early
1990s.
With initiation of reforms, substantial reduction in
customs duty rates.
Simple average duty rates declined from 128% in
1991-92 to 22.4% as per interim budget for the
year 2004-05.
Weighted average duty rates declined from 72.5%
to 18.2% during this period, as in table.
 Average Import Duty Rates in India
1991-92 2004-05
Simple Avg.
Agriculture 108.0 32.5
All Coms. 128.0 22.4
Wtd Avg. *
Agriculture 47.0 27.5
All Coms. 72.5 18.2
CV
All Coms. 32.0 53.6
Tot dut y includes basic, surcharge, SA D & excludes CV D.
* For 1991-92 import s of 1992-93 are t aken as weight s, while
f or 2004-05 of 2002-03
 TARIFF STRUCTURE IN INDIA
While average duty rates have declined, still large
number of tariff rates prevalent ranging from zero
per cent to over 150% during 2004-05.
Co-efficient of variation (CV) around average duty
rates quite high.
Commodity Groups in range 100% or higher in
2004-05 include coffee, tea, alcoholic beverages,
essence and perfumes, sugar items, grapes and
juices, motor cars, and motor cycles.
In the 50-100% range, commodities are edible oils,
wheat, rice and some other agricultural goods.
 TARIFF STRUCTURE AND IMPORTS
While undertaking tariff reductions, important to look at
trade implications of plausible scenarios
Simple econometric exercise undertaken to look at relation
of imports and tariff structure at two digit HS level. Period
taken is 1991-92 to 2001-02
Several functional forms attempted
Relative share of imports to GDP as functional tariffs seen
as function of tariffs in linear and as a double log function.
(Mi /GDP) = a + b*(Ti)
(Mi /GDP) = a * (Ti)b
where Mi is imports in US $ million and Ti is tariff rate in the
ith commodity groups respectively seen at the 2 digit level.
 TARIFF STRUCTURE AND IMPORTS
Latter function yielded better fit and hence chosen for
further analysis. b co-efficient gave elasticity of imports to
GDP ratio
Projections made accordingly, given growth rates of GDP
and actual tariff rates
Results not very robust although R2 and t values not
insignificant for most commodity groups. Import
projections compared to actual imports for the year
information available i.e. for 2002-03 suggest that
projected imports much higher than actual quantities
imported
Sectoral analysis suggests that actual imports much lower
for sectors like petroleum and products and other mineral
oils and mineral products; cereal products, certain oilseeds;
pharmaceutical products; fertilizers; printed books; railway
locomotives & equipments; and project goods
 TARIFF STRUCTURE AND IMPORTS
This requires further analysis. Important identify reasons
why this fit gave good projection in earlier study taking
period 1991-92 to 1997-98 but not for this longer period up
to 2001-02.
Looking at import elasticities, found elasticity less than
(-)1.0 for 13 commodity groups out of 99. This suggests
that reduction in tariff would result in higher percentage
increase in import ratio for these commodities.
These items included animal/vegetable fat, sugars, cocoa,
vegetable and fruit preparations, tobacco items, carpets
and textile, floor coverings, apparels and clothing, human
hair, feathers, ships and boats, furniture, beddings, toys,
sports items
Other sectors elasticity found to be between (-)1.0 and
zero and even positive for few.
 SOME FINAL OBSERVATIONS
Large tariff reductions of essential import items like
cereals, dairy products, edible oils and other
agricultural products with low elasticity would
benefit the consumers but would be unacceptable
on considerations of number of people dependent
on these items for their livelihood and implications
on domestic production. These sensitive items are
also heavily subsidized by DCs.
On the other hand, drastic tariff reductions on
items with high import elasticity could lead to
substantial surge in imports and affect the domestic
economy adversely.
 SOME FINAL OBSERVATIONS
It is imperative that tariff rates need to be
rationalized and more importantly made more
uniform and transparent.
While undertaking reduction commitments, need to
carefully identify sectors that could be subjected to
greater tariff reductions than others.
At the same time, items of export interest with high
import content need separate treatment.
Delicate balance of various considerations required
to determine tariff reductions such that have
minimal detrimental impact on economy.
Thank you