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

by Bernard M. Hoekman

Thus, openness leads to better exploitation of comparative advantage in terms not only of industries but also of firms within each industry.

Trade liberalization is not a panacea that will automatically generate large growth benefits. Ben-David and Papell (1998) examine the post-Second World War growth path of 74 countries and conclude that 46 experienced a significant slowdown in economic growth rates during the period, even though openness ratios were rising.

Of course, there is much more to growth than trade and trade policy. Greater trade integration is associated with faster growth, but complementary measures are needed to realize its full potential-including management of fiscal and monetary policy, public investment in human capital (education) and infrastructure, and the quality of public and private sector governance and contract enforcement.

Although barriers to trade and investment have been declining, for many sectors and activities policy continues to discriminate against foreign producers.

For much of [history] trade can only be understood as being the outcome of some military or political equilibrium between contending powers ...

Politics thus determined trade, but trade also helped to determine politics, by influencing the capacities and incentives facing states.

Sometimes trade agreements have been a key element in the process of economic integration of independent territories-a noteworthy example was the German customs union (the Zollverein), which was a key building block of what is now the Federal Republic of Germany.3 A characteristic of colonial expansion was the application of metropolitan systems of law and protection of property rights to `associated' territories-indeed, a defining characteristic of an empire is that control extends beyond foreign to domestic policy (Doyle, 1986).

Local rulers who sought to limit the impact of a foreign presence on their control of society frequently were willing to accept such extra-territoriality. One form this took was through establishment of so-called treaty ports. Examples were Macao, Nagasaki and Goa.

Trade cannot prosper without legal security of property rights and mechanisms to enforce contracts.

As already mentioned, a major exception in the nineteenth century was Great Britain. It repealed its so-called Corn Laws in 1846 (which restricted imports of wheat and other grains and had been imposed in 1815 at the end of the Napoleonic wars) and moved to essentially a unilateral free trade stance at home and in the overseas territories it controlled. This free trade policy applied to all sources of supply, not just British goods.6

Other major powers also liberalized trade during this period, but did so through the negotiation of trade treaties. The conclusion of the Cobden-Chevalier Treaty between Britain and France in 186o created the equivalent of a free trade zone between the two countries and was followed by a series of trade agreements.

All these treaties included a most-favoured-nation clause, following the lead of the C...

Average tariffs in Europe fell to some 9-12 per cent in the mid-187os as a result of these...

A key outlier during this period was the United States, which maintained high tariffs on manufact...

The ideas of Smith and Ricardo on the benefits of free trade and the principle of comparative advantage provided the intellectual support for the free trade movement in Europe-both on the European continent and in Britain.

This expansion in trade and factor flows generated significant adjustment pressures. In the case of Britain, for example, the rapid growth in New World agricultural production and exports led a large decline in the profitability of British agriculture.

The resulting lobbying for protection led to gradually increasing protection of agriculture on the European continent. Average tariffs rose from essentially o to 20/40 per cent between 188o and 1910 in countries such as France and Germany.

After the First World War, restrictive trade policies...

the US Congress adopted the infamous Smoot-Hawley Tariff Act, raising average US tariffs on dutiable i...

This led US trading partners to impose retaliatory trade restrictions and engage in rounds of competitive devaluation of their currencies. A domino effect resulted, as trade flows were diverted to relatively unprotected markets, forcing down prices, giving rise to pro...

They perceived the need for establishing cooperative mechanisms to avoid both competitive devaluation and the excessive use of trade barriers to guarantee the national...

In the Anglo-American view, the post-war international economic system was to be constructed in such a way as to remove the economic causes of friction that were believed to ...

In the US, the Reciprocal Trade Agreements Act of 1934 had already initiated a shift to a more liberal trade policy stance through the adoption of the unconditional MFN principle, albeit firmly grounded in the principle of reciprocity. This policy was extended after the Second W...

Because a central authority is absent in international relations, political scientists have developed the concept of a regime, defined as `sets of implicit or explicit principles, norms, rules and decision-making procedures around which expectations converge in a given area of international relations' (Krasner, 1983: 2). The principles and procedures imply obligations, even though these are...

among m...

that are based on the existence of shared interests. The multilateral trading system is a...

The first is to regard it as a mechanism for the exchange of trade policy commitments. The second is to consider it as a mechanism through which the resulting code of conduct in implemented and enfo...

We then summarize the main elements of the system as a code of conduct: the nondiscrimination rule (MFN and national treatment), tran...

The WTO is a forum for the exchange of liberaliza...

Bargaining and negotiation are the main instruments used to reduce barriers to trade and a...

who gain from protection with another lobby that may be equally powerful: the set of firms that benefit from greater access to foreign markets. Similarly, through reciprocally reducing trade barriers, the prisoners' dilemma that confronts large countries can be overcome, again improving world welfare. Moreover, by encompassing many products, a MTN can generate some automatic compensation for those who lose protection for their sector by lowering the average price of consumption and investment goods by providing access to cheaper imports.

Motivations for activist trade policy can be divided into a number of types. First, revenue: governments need income, and taxing trade is often the easiest method of collecting it.

Another motivation for trade policy is to improve the terms of trade-the ratio of the prices they get for their exports and the prices they pay for imports.

This rationale applies only to countries that have the power to influence world market prices because of their economic size or market power.

A third motivation is mercantilist-a belief that imports are bad and exports are good. This belief is generally based on the observation that imports must be paid for and thus imply the transfer of foreign exchange abroad

whereas exports bring in foreign exchange.

The objective of mercantilist policy is a trade surplus-ensuring that the value of exports ex...

Moreover, a trade surplus will have macroeconomic effects that will act to push the balance of payments back into equilibrium.'° The theory of comparative advantage and gains from free trade was developed la...

Fourth, trade barriers frequently have been used as instruments for agricultural an...

Finally, trade policy is a source of rents for specific groups in society.

Protectionist policies have the effect of redistributing income from consumers of the affected goods to those that produce them or to those that control the right to import.

Economists have developed two broad types of analytical frameworks to reflect the fact that policy is endogenous-the result of a political process in which groups seek to maximize their utility or welfare.

Both proceed by embedding either a voting or lobbying model of the political process into an economic model.

These models help to understand why countries adopt policies that do not maximize national welfare: policies may not be economically efficient, but they are `politically' efficient-they emerge as the...

This changed with the development of a formal theoretical political economy framework by Grossm...

(C): G = aW + C, where a is the weight the government puts on a dollar of...

dollar of contributions from speci...

Free trade would be the efficient outcome if the government maximized welfare, that is, if the objecti...

Owners of sector-specific capital in an import-competing sector thus have a strong incentive to politically organize and offer the government contributions in return for a tariff-with higher tariffs eliciting a higher `payment (contribution). The Grossman-Helpman model yields a precise testable implication about the cross-sector pattern...

The model predicts that in politically organized import-competing sectors (those that form lobbies) trade protection is positively related to the...