The Political Economy of the World Trading System: From GATT to WTO

by Bernard M. Hoekman

ESTABLISHED in 1995, the World Trade Organization (WTO) administers the trade agreements negotiated by its members, in particular the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-related Intellectual Property Rights (TRIPS). The value of total world trade in goods and services, including payments for intellectual property was some US$16 trillion (thousand billion) in 2007. The WTO's rules and principles establish a legal framework for much of this exchange.

By the end of the Uruguay Round (1994),128 countries had joined the GATT. Since the entry into force of the WTO in 1995, another two dozen countries acceded, bringing the total to 153 as of 2008.

The underlying philosophy of the WTO-as was the case for the GATT that preceded it-is that open markets, transparency and nondiscriminatory trade policies are conduc...

Although there are many similarities with the GATT, the WTO differs in a number of important respects from th...

The WTO rules apply to all members, and are subject to binding dispute ...

Almost from the start of its existence the WTO attracted a significant amount of critical attention. Public concerns are to some extent a reflection of the increasing speed at which global integration is occurring. Between 19oo and 2000 the value of international trade doubled. The cross-border flow of foreign direct invest...

In the post 2000 period, the growth rates of developing country trade have significantly exceeded those of high-income countries, helping to sustain high rates of economic growth and reductions in poverty rates. These positive trends coincid...

In 2006, some 75 million people were employed by foreign affiliates of multinational companies, a threefold increase compared to 1990, with muc...

Developing countries as a group now account for 35 per cent of world trade, up ...

the early...

The need for liberalization is greatest in agriculture where policies in rich countries impose significant

negative spillovers of many developing countries-a central issue in the Doha Development Agenda (DDA), and the one that is largely responsible for the slow progress of the negotiations.

The enormous heterogeneity of the WTO membership-which can no longer be characterized by a North-South divide-complicates the needed agreement on where the boundaries of the institution lie. Views differ significantly on what the objectives of the WTO are or should be.

A number of the ministerial meetings of the WTO post-1995 were accompanied by demonstrations by groups spanning the nongovernmental organization (NGO) community, farmers and labour unions seeking to limit or to expand the reach of multilateral disciplines.

Although efforts to liberalize trade have always been opposed-sometimes very vocally-by domestic groups who stand to lose from greater competition (for example farmers in high-income countries), the terms of the debate surrounding the WTO now extend well beyond the traditional trade liberalization agenda.

The volume of trade increased 27-fold between 1950 and 20o6, three times more than the growth in global gross domestic product (GDP) (WTO, 2007). The GATT and, since 1995, the WTO played an important role in creating the multilateral framework that has supported this trade expansion.

The value of global trade in goods and services passed the US$i5 trillion (thousand billion) mark in 20o6.

Reported data on trade in knowledge, as measured by payments of ...

trademarks, patents and so forth, added up to some US$14...

Trade growth has been driven by a mix of technological and policy changes that reduced trade costs.

Developing countries began to liberalize their trade unilaterally during the 198os and 199os, supported by the international financial organizations, in particular the World Bank and the International Monetary Fund (IMF). The significance of the trading system for developing country members' policies only began to rise after the creation of the WTO in 1995.

As of 2006, the average uniform tariff

equivalent of OECD merchandise trade policies was only 4 per cent (Kee, Nicit...

mostly reflecting protection of ...

Global trade flows are dominated by exchanges within and between the three major regions of the global economy (the so-called triad): Europe, North America and East Asia. In 2oo6, intra-East Asia and intra-North American trade-represented by the circles in Figure 1.3-accounted for 53 per cent of world...

All 49 LDCs' together accounted for only 1 per cent of world trade in 20o6, reflecting the small...

very low per capita...

Latin America (excluding Mexico) another...

Developing countries have increasingly become producers and traders of manufactures. The share of manufactures in total exports of developing countries increased from just 30 per cent in 1980 to some 70 per cent in 2005-almost as high as in high-income countries

Agricultural products accounted for only 8 per cent of world trade in 2oo6-with the three largest exporters being developed economies: the EU, the US and Canada.

Among developing countries, East Asian economies took the lead in specializing in labour-intensive manufactures.

the East Asian experience illustrates that regional integration reinforces the process of globalization if driven by market forces and complemented by openness to trade with the rest of the world.

The `standard' prediction from endowment-based theories of comparative advantage (Heckscher-Ohlin) is that as OECD countries have a more educated and skilled labour force, they should specialize in products

that use such factors relatively intensively.

The relative prices of goods that use less skilled labour more intensively should then fall as trade is liberalized (and those of skilled goods increase), which in turn should reduce the relative wages of ...

Indeed, a large literature has concluded that the observed rise in the capital and skill-intensity of production and trade is mainly a reflection of technical change that is `biased' towards (benefits) the more skilled. Skill-biased technical change (SBTC) is one explanation for the declining share of unskilled labour in total exports of almost all countries.

The global value of stocks of FDI rose sixfold between 199o and 2006, substantially faster than the growth in trade, which increased `only' 35 times over the same period.

Vertical FDI involves the establishment of facilities that specialize in specific parts of the production chain, with location of affiliates depending on the comparative advantage (comparative costs) of the host country. Horizontal FDI entails a firm essentially replicating plants that produce similar goods, implying that FDI and trade are substitutes for the parent firm.

The relative importance of horizontal and vertical FDI varies depending on many factors. On average horizontal FDI tends to be relatively more important for developed countries, reflecting their similarity in factor endowments. Vertical FDI tends to be relatively more important for North-South FDI flows.

Of the US$12 + trillion global trade in goods, a significant share is intra-firm, involving flows between affiliates and parent firms.

In the case of the US, some 45 per cent of total merchandise imp...

Empirical research by economists has shown a significant positive relationship between openness and economic growth (e.g. Greenaway, Morgan and Wright, 2002).

In a widely cited article, Sachs and Warner (1995) conclude that open developing countries grew by an average of 3.5 percentage points faster than a comparator group of closed economies.

they argue that it may be it is growth that leads to openness rather than the other way around.

While the technical academic debate continues, Frankel and Rose (2002) have shown that openness does indeed play a role even after allowing for geography and its possible indirect effects, while Wacziarg and Welch (2008) demonstrate that even if the cross-country evidence was not robust over the 199os, if one takes countries' histories individually, the dates of trade liberalization do characterize breaks in investment and GDP growth rates. Specifically, for the i95o-98 period, they find that countries that liberalized their trade (raising their trade-to-GDP ratio by an average of 5 percentage points) enjoyed on average 1.5 percentage points higher growth in GDP per year compared with their pre-reform growth rate.

For example, liberalization will increase the variety of imports available to firms and households, allowing for a better match with the preferred characteristics of goods that are sought by buyers.

Feenstra and Kee (2004) show for a sample of 34 countries that more than 50 per cent of country productivity differences in the 1982-97 period can be explained by...

More open economies tend to be more innovative, because of greater trade in knowledge (a greater quantity and variety of information, ideas and technologies associated with product and process innovations), and because greater competition spurs innovation, lead...

Empirical research has found that more productive firms are innately better at exporting, so that opening an economy leads to their growth and t...

Using firm-level panel data, Pavcnik found that the productivity of plants in the import-competing sectors grew 3-10 per cent more than in the nontraded goods sector, which suggests that the exposure to international competition forced previously shielded plants to improve their performance. Exiting plants were on average 8 per cent less productive than plants that continued to operate.