Notes 3- GATT-WTO-Trade-Globalisation - Dani Rorik

Questions

 “Trade policy is politically contentious because it has important domestic distributional

consequences and because it generates clashes between values and institutions in
different nations”. Discuss (2015)

 The WTO marked the pursuit of a new kind of globalization where domestic economic
management became subservient to international trade and finance, reversing the
Bretton Woods priorities. Comment and discuss. (2016)

 “Trade policy is politically contentious because it has important domestic distributional

consequences and because it generates clashes between values and institutions in
different nations”. Discuss the effects of globalization on poor in the developing
countries in light of the conflicting viewpoints of the economists. (2018)

Trade policy is politically contentious because it has important domestic distributional

consequences. As World War II drew to a close, John Maynard Keynes and Harry Dexter
White were looking for ways to answer the question – how could an open global economy
be restored in a world where domestic politics reigned supreme?
 Historical experience showed that when domestic needs clash with the requirements of
the global economy, domestic needs ultimately emerge victorious. Keynes and White
realized that it was better to accept this and build the safety valves into the system than
to ignore it and risk total collapse.
 The system they crafted came to be called the Bretton Woods regime, after the New
Hampshire resort town at which Keynes, White, and other officials from forty-four
nations met in July 1944 at a conference to draft the new rules.
Bretton Woods Institutions
The deal created two new international organizations: the International Monetary Fund and
the World Bank, and would govern the world economy for the first three decades following
World War II.
Moderate globalization with space domestic policy autonomy
 The institutions were not inspired by any cosmopolitanism, but by the importance of
domestic political motives even while transcending narrow national interests.
 The new regime allowed enough international discipline and progress towards trade
liberalization with plenty of space for national governments to respond to social and
economic needs at home.

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  International economic policy would have to be subservient to domestic policy
objectives — full employment, economic growth, equity, social insurance, and the
welfare state — and not the other way around.
 The goal would be moderate globalization, not hyper-globalization.
Multilateralism – not overt imperial control
 The most notable American innovation in postwar international economic system was
multilateralism — rule-setting through international organizations, based on the avowed
principle of nondiscrimination.
 Multilateralism meant that rule enforcement and belief systems would work henceforth
through international institutions — the International Monetary Fund, the World
Bank, and the General Agreement on Tariffs and Trade (GATT) — rather than
through naked power politics or imperial rule.
 This was a very important innovation. Even though the influence of the United States
was undeniable, multilateralism endowed these institutions with a certain degree of
legitimacy independent of the powers that backed them up.
 They never became truly autonomous from the major economic powers, but
neither were they purely an extension of these powers. They played important
rulemaking, rule-enforcing, and legitimating roles. Multilateralism gave smaller and
poorer nations a voice and protected their interests in an unprecedented way.
GATT
 The institutional embodiment of multilateralism in trade during the fifty years
subsequent to the Bretton Woods Conference was the GATT.
 Despite a slow start, successive rounds of multilateral trade negotiations (eight in
all between 1947 and 1995) managed to eliminate a substantial part of the import
restrictions in place since the 1930s and reduce tariffs from their postwar heights.
 The volume of world trade grew at an average annual rate of almost 7 percent between
1948 and 1990, considerably faster than anything experienced to date. Output also
expanded at a higher rate than ever before in rich and poor nations alike — both a cause
and effect of the rapid rise in trade. In terms of the breadth and depth of economic
progress, the Bretton Woods regime eclipsed all previous periods.
 Trade in most manufactured products among industrial countries was progressively and
substantially liberalized. Transport costs continued to decline.
 And yet, large parts of world trade remained completely outside multilateral
agreements. The goal was freer trade in some areas, not free trade in all.
 If there ever was a golden era of globalization, this was it. Except for one odd thing:
GATT policies did not directly take aim at globalization.
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  What pushed globalization along instead was the background of economic growth,
equity, security, and stability that the Bretton Woods compromise helped sustain.
 It was seen that healthy national economies make for a bustling world economy,
even in the presence of trade controls.
 There is a long list of areas liberalization barely touched. Agriculture was kept out
of GATT negotiations and remained riddled with tariff and non-tariff barriers. Most
services insurance, banking, construction, utilities, and the like) escaped liberalization
as well. Manufacturing sectors that were liberalized but began to face significant
competitive threat from lower-cost/higher-productivity exporters soon received
protection. So, the textile and clothing industries of the developed countries were
sheltered from 1974 on by the Multi-Fibre Arrangement (MFA), a set of quotas on
exports from developing nations. The 1980s witnessed the spread of voluntary export
restrictions (VERs), arrangements whereby (typically) Japanese exporters of autos,
steel, and some other industrial products undertook to keep their exports within specific
quotas.
 Meanwhile, developing nations themselves were pretty much free to do as they
pleased with their trade policies. They typically were not required to offer tariff
“concessions” during GATT negotiations. They had recourse to various GATT clauses
that allowed them to resort to limitations on imports virtually on a permanent basis.
 Even for the industrial countries, the rules contained loopholes wide enough for an
elephant to pass. Any big business could buy itself protection through the GATT’s
Anti-Dumping (AD) or Safeguard clauses. With the AD arrangement, the importing
country could impose duties as long as it determined that an exporter had sold its
products at “less than normal value” and caused “injury” to the competing industry at
home. Domestic authorities could easily manipulate the notion of “less than normal
value.” And punitive tariffs could be imposed even if the behavior in question
constituted normal commercial practice. These rules were widely exploited by domestic
firms to obtain custom-made protection.
 Finally, the enforcement powers of the GATT were a joke. If a government thought
another one had violated the rules, it could ask a GATT panel to adjudicate. If the panel
ruled for the plaintiff and the panel’s report was approved by GATT’s membership, the
guilty party had to change the offending policy or else the plaintiff was entitled to
compensation. The only catch was that approval of the panel report required a
unanimous decision. Every single member of GATT, including the government that had
been found in violation of the rules, had to sign off on it. If a jury includes the defendant,
it is a safe bet that it will not often rule against him.
So, the GATT rules left whole segments of world trade uncovered; they were weak where they
existed; and they were clearly unenforceable. These features made the institution obviously
deficient — and made the ensuing World Trade Organization, which took over in 1995.
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WTO: Era of hyper-globalization
Domestic economic management was to become subservient to international trade and finance
Economic globalization, the international integration of markets for goods and capital (but not
labor), became an end in itself, overshadowing domestic agendas.
Reasons behind this transition from GATT to WTO
 Shortcomings of GATT which were to be done away with.
 Multinational companies demanded more extensive global rules that would facilitate
their international operations.
 Developing nations sought to become export platforms and became increasingly willing
to submit themselves to such rules in their drive to attract foreign investment.
 All these were accompanied by an important ideological shift and emergence of blind
faith on the virtues of the market system and very bleak view of the capacity of
governments to act in socially desirable ways. We were told that the governments stood
in the way of markets instead of being indispensable to their functioning, and
accordingly had to be cut down to size.
Features of WTO – Deeper Globalisation
 The regime under WTO involved a significant ramping up of economic globalization
and a dramatic re-balancing of nation-states’ domestic and international responsibilities.
 Elaborate agreement with much broader coverage than anything else accomplished
under the GATT. Agriculture and certain services, two areas which had eluded trade
negotiators in the past, were now firmly brought in to the liberalizing fold.
 In services, countries were required to specify areas they were willing to open up, and
the extent of liberalization varied across countries.
 In agriculture, import quotas were to be phased out and converted in to tariffs and
subsidies.
 In addition, there were new rules on patents and copyrights, requiring developing
countries to bring their laws in to conformity with those in the rich countries.
 Domestic health and safety regulations became subject to WTO scrutiny.
 Tighter restrictions were put in place on the use of government subsidies; prohibitions
on government rules requiring firms to use local content or limit their imports in relation
to their exports.
 For the first time, developing nations, except for the poorest among them which
remained exempt, had to comply with rules that tightly circumscribed certain important
areas of industrial policy.
 A new appellate court was a defining feature of the WTO.
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  WTO dispute settlement was both compulsory and binding. Member states had no
choice but to submit to it and accept the consequences of the WTO’s ruling.
Is the trade regime under WTO subverting democracy by allowing it to override
domestic legislation? Or is it helping nations achieve better outcomes by preventing
protectionist groups from hijacking the domestic political process for their narrow
interests?
 According to Dani Rodrik, the reality is a bit of both.
 Robert Lawrence makes a useful distinction between “shallow” and “deep” versions
of global integration.
 Under shallow integration, as in Bretton Woods, the trade regime requires relatively
little of domestic policy.
 Under deep integration, by contrast, the distinction between domestic policy and trade
policy disappears. Any discretionary use of domestic regulations can be construed as
posing an impediment to—a transaction cost on—international trade. Global rules in
effect become the domestic rules. Trade officials and technocrats become tone-deaf to
other economic and social objectives when the pursuit of globalization develops a life
of its own.
Actual Impact of WTO led globalization
 A long list of academic studies during the nineties downplayed the impact of
globalization on domestic income distribution.
 The increase in inequality in the United States was undeniable, but most economists
thought the real culprit was “skill-biased technological change” that raised the demand
for educated and highly skilled workers while reducing the demand for less educated
workers. Income gaps were the result of technological advances, not increased
globalization.
 Paul Krugman, however, in 2008, said that globalization’s negative effects on
domestic equity could not be written off so easily. Krugman cited two changes since the
mid-1990s which intensified the role of trade as a force behind widening inequality:
First, U.S. imports from developing nations had doubled since the 1990s in relation to
the size of the American economy. Second, the developing nations against which U.S.
producers now compete have much lower wages compared to the developing country
exporters of earlier decades.
 China, in other words, has made all the difference. China has penetrated a large share
of the American market and wages in China are a tiny fraction of those in the United
States (Krugman cites a ratio of 3 percent). These do exert a significant downward
pressure on U.S. wages, in addition to the contribution of technological change,
particularly for workers at the low end of the income distribution.

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 However, evidences are not comprehensive and China in fact might have played a
double-effect puzzling role. By some measures, wage inequality in the United States
has stopped growing (or has even come down since the late 1990s), despite the rapid
pace of outsourcing. (a) Much of China’s exports are in technologically sophisticated
and skill-intensive sectors such as computers, where they do not pose a particular threat
to the wages of low-skill workers. (b) China tends to exports goods that make up a large
share of what poor households consume thereby reducing poor households’ cost of
living!
 For these reasons, many economists continue to think that globalization accounts for
just a small part — 10 or 15 percent at most — of the rise in U.S. inequality since the
1970s.
 Even if the economywide consequences are small, however, they provide small
comfort to the individual worker who gets displaced by imports and has to take on
another job at a substantial pay cut. Consider a shoe machine operator in the United
States. Between 1983 and 2002, the import competition faced by this worker roughly
doubled. It is inconceivable that this change would not have had a substantial impact on
his or her wages. Indeed, according to one estimate, trade produced an 11 percent
reduction in the average shoe machine operator’s earnings over this period. Similar
effects hold for many other occupations in the textile and clothing industries.
 Larry Summers, a staunch free trade advocate until recently, wrote a couple of
remarkable opinion pieces in which he expressed concern that globalization was no
longer a good deal for working people. The opposition to globalization, he said, reflects
a “growing recognition by workers that what is good for the global economy and its
business champions [is] not necessarily good for them.” Greater global integration
“places more competitive pressure on an individual economy [and] workers are likely
disproportionately to bear the brunt of this pressure’’.
 Alan Blinder, a Princeton professor and former vice chairman of the Federal Reserve
Board, warned of the “disruptive effect” of what he called “the next Industrial
Revolution.” Thanks to new information and communication technologies, certain
medical and education services, and financial services, are now increasingly moved
offshore to other countries where the services can be performed more cheaply. He points
out that the problem here is not unemployment; displaced workers may eventually find
jobs, but the problem is the sheer magnitude of the dislocation and income losses that
affected workers will experience.
 To free trade fundamentalists like Jagdish Bhagwati, the Columbia University
economist, none of these arguments weakens the case for trade liberalization. Bhagwati
argues that Krugman, Summers, Blinder, and other skeptics exaggerate the inequalities
and dislocations that trade with low-income countries generates. But more
fundamentally, he thinks that these authors draw the wrong policy lessons. If trade
makes some people worse off and exacerbates inequality, the correct response is to
enhance social safety nets and adjustment assistance. The problems that trade creates

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 should be solved not by protectionism but through domestic policies that compensate
the losers.
 This argument may be fine in principle. But the losers have every right to ask what
happens when promises of adjustment assistance and compensation fall short, as they
have repeatedly done in recent decades. Reassuring workers by telling them that they
would have been better off had the appropriate compensation taken place is a
weird way of selling free trade.
The unresolved questions:
 How can we ensure that WTO rules are designed to benefit all rather than the few? What
happens when different nations desire or need different rules?
 Can any model of deep integration prove sustainable when democratic politics remains
organized along national lines?
 There exists a growing recognition by workers that what is good for the global economy
and its business champions [is] not necessarily good for them.
 The MNCs are like “stateless elites whose allegiance is to global economic success and
their own prosperity rather than the interests of the nation where they are
headquartered.”
 These companies have little stake in the “quality of the work force and infrastructure in
their home country” and “can use the threat of relocating as a lever to extract
concessions.”
 Broad-based economic growth could help diminish the tensions, but that objective
would require locally tailored strategies and the requisite domestic maneuvering room.
 We cannot take it for granted that the potential economic benefits of this new wave of
globalization will accrue to the many rather than the few.
 If trade makes some people worse off and exacerbates inequality, one response is to
enhance social safety nets and adjustment assistance.
 But what happens when promises of adjustment assistance and compensation fall short,
as they have repeatedly done in recent decades?
 The reality is that we lack the domestic and global strategies needed to manage
globalization’s disruptions. As a result, we run the risk that the social costs of trade will
outweigh the narrow economic gains.