The GATT came into action by its 23 founding members on October 30, 1947 and came into force on January 1, 1048. The original 23 founding countries include the US, Chile, India, Syria, UK, Netherlands, Canada, Australia, Myanmar, Lebanon, Norway, Cuba, New Zealand, Sri Lanka, South Africa, Belgium, Czechoslovakia Brazil, China, Pakistan, Zimbabwe, and Luxemburg (WTO 2012).
The WTO’s predecessor, GATT came into existence after World War II with the intention of harmonizing and facilitating international trade. The international community at that time raised awareness of the need for a multinational organization in addition to IMF and World Bank. The need for such body augured well with the international community after facing hurdles in reaching agreements on the reduction and elimination of quantitative restriction on international trade. This was in response to practices of protectionism in the 1930s that negative impact on world economy. The first 23 GATT countries were among over fifty, which consented to a draft Charter for International Trade Organization (ITO), which at the time acted as a specialized UN agency (Lin, and Chen 602). The aim of the Charter was to not only provide rules on international trade, but also make decisions regarding commodity agreements, employment, restrictive business practice, and international investment.
In an effort to promote trade liberalization after the World War II, and to start eliminating the large overhaul of protectionist measures, which existed up to the early 1930s, the 23 pioneering members of GATT opened tariff negotiations. This first round negation produced 45,000 tariff concessions affecting about one-fifth of the total world trade. The agreement was that these concessions should be protected by the acceptance of some of the “provisional” trade rules in the draft of ITO Charter. The rules together with the concession became known as Agreement on Tariffs and Trade and came into force in 1948.
Despite the acceptance of ITO Charter at a UN conference on trade and employment in Havana in March 1948, ratification in national legislation proved impractical in some cases. Announcement by the US government not to seek Congressional ratification of Havana Charter marked the death of ITO. Despite its provisional nature, the GATT only served as the only the only multilateral instrument governing international trade from 1948 until the establishment of WTO (Bagwell 76).
World Trade Organization (WTO) is a legal successor of GATT established in 1947. Its formation commenced on January 1, 1995 based on the multilateral trade negotiations at the Uruguay Round conducted by GATT members. WTO currently has 157 members, and in 2012, the organization welcomed new members including Montenegro, Samoa, Russian Federation and Vanuatu (Hanson 45).
GATT was never instituted, but WTO replaced GATT as a new international institution set as a permanent body. The organization came into existence to serve as a watchdog in spheres of foreign investment, trade in goods and in services, intellectual property, among others. One of the most important functions of WTO is to serve as a forum for multilateral trade negotiations because international negotiations involve detailed and technical issues. Furthermore, the WTO systems help keep global peace. The organization achieves this by ensuring smooth flow of trade, which culminates into international cooperation and confidence among member nations.
Moreover, trade is a core to in raising living standards and income. At the time of Uruguay Round in 1994, trade deals were estimated at only $109 billion, but following the Round, $510 billion was added to the world income. Economists have estimated that reducing trade barriers in manufacturing, agriculture, and services by one third has the potential of expanding the world economy by $613 billion.
The WTO systems provide an effective and appropriate means of using resources in production process. It also helps in reducing costs even further because of the principles established. Lower costs improve the living standards of the society my ensuring lower prices of goods and services such as clothes, food, cars, and real estate cheaper.
Another benefit world economies could get from joining WTO is Free Trade Agreements (FTAs) which is an example of preferential trade agreements and certainly the most popular. FTAs operate under WTO rules and such agreements enable members to enjoy preferential treatment in trade.
Non-tariff barriers to trade (NTBs) are trade barriers restricting imports but not in the usual form of tariff. Some of the examples of NTBs include countervailing duties and anti-dumping measures, which, although referred to as ‘non-tariff’ barriers, have same affects as tariffs once enacted (Bagwell 46). Tariff refers to tax levied on exports. Non-tariff barriers arise from different measures taken by government and authorities in the form of government regulations, laws, restrictions or specific requirements, conditions, and private sector business practices. They also emanate from prohibitions that protect domestic companies from foreign competition.
There has been in increase in the use of non-tariff barriers following the introduction of WTO rules that led to significant reduction in use of tariff. Some of the no-tariff barriers are expressively permitted in exceptional cases, when governments consider them necessary to protect safety, health, or sanitation, or to protect depletion of natural resources (Ferrantino 2012). However, non-tariff measures have received criticism in many circumstances. Governments use them to correct market failures arising from imperfect competition or information asymmetries, and pursue non-economic objectives such as protection of health and safety. On the other hand, governments have used non-tariff measures to protect domestic producers. A recent report by WTO discusses how growing awareness and demand among consumers for safety and quality of food products and the fragmentation of supply chain have contributed to an increase in private and governmental measures related to food safety and quality (WTO 2012).
Impacts of trade and welfare on non-tariff measures
The implications of trade and welfare on non-tariff measures vary. Application of non-tariff measures has the potential of reducing trade and increasing the welfare in a country that applies the measures. The effects largely depend on the type of non-tariff measure used and the nature of market failure addressed by the measure. An example is a case forwarded by US trade officials to WTO accusing Chinese government of using grants and subsidies to the make their economy rise to the fifth position in the world at the expense of US workers (Mason and Miles 2012). It is evident that Chinese government used non-tariff measures in stimulating economic growth but did not consider the overall implication it could have on American workers.
In case between Ohio versus China, Round Two, the union of steel workers plan to bring anti-dumping and countervailing duty cases against Chinese auto parts imports. According to the Union officials, the $1 billion Chinese government subsidies accounted for about 60 percent of China’s auto exports (Hanson 2012). The subsidies have enabled China to boost it production and export at the expense of the US workers who risk losing jobs. This case demonstrates how non-tariff measures can have implications on trading partners.
Recent trends in non-tariff barriers
Restrictions on international trade, primarily in the form of non-tariff measures have more than doubled in the 1980s. For example, the Japanese government began restricting exporting automobile in to the United States in 1981. A year later, the US government imposed quotas on sugar imports as part of an ongoing intervention. There are several reasons, besides their proliferation, to focus attention to non-tariff policies. Non-tariff barriers include a wide array of specific measures, many of which prove difficult to measure. For example, the implications of a government procurement process that favors domestic producers are difficult to quantify (Ferrantino 2012). Such discrimination violates GATT’s nation principle. Many mechanisms have been introduced by countries to restrict imports. A critical objective the Uruguay Round of GATT negotiations was for the elimination of non tariff barriers to trade on agricultural commodities and replace them with tariffs, a process called tarrification. In fact, tariffication of agricultural commodities became a major success of the 1994 GATT agreement.
Dumping involves a situation of international price discrimination, where a company exporting a product charges prices lower that the price it normally charges in its home market. Dumping has the potential of harming the domestic industry by reducing its market shares and sales volume, as well as its sales prices. The result would be loss of profitability, loss of jobs, and in some case forcing domestic industries out of business.
Anti-dumping policies negatively affect consumers. An article in Wall Street Journal featured a trade dispute over allegedly ‘dumping’ Japanese steel. American steel president, Josiah Barlett accused Japan for trying to export its way out of the economic turmoil by dumping steel in the American market and threatening US workers (4). Concerned parties are always quick at responding to such cases by introducing non-tariff taxes, but according to Josiah, responding with restrictions on steel exports could cost America $800,000 for every job saved. Economic theories of trade agreements call for policy substitution as the main motive behind regulation of non-tariff barriers and international cooperation (Bagwell & Staiger 2002). According to traditional theory, non-tariff barriers are used governments to manipulate the terms of trade. However, governments implement no-tariff measures to address legitimate public concerns and regulating these measures requires substitution of policies between tariff and non-tariff measures (Lee et al. 2012).
The US president Barack Obama recently announce his plans to file a new trade complaint against China, accusing it of illegally subsidizing exports of cars and car parts (Lee & White 2012). A US official maintains that China’s actions were forcing US manufacturers to shift their productions oversees. According to the US president, subsidies encourage US manufacturers to outsource production of cars and car parts to China resulting into massive job loss. Despite pledging to remove export subsidies after joining WTO in 2001, China’s subsidies to car sector amounted to $ 1 billion between 2009 and 2011. The US government has already filed two other cases to the WTO accusing China of restricting export of rare earth metal used in production of high-tech devices.
Using non-tariff measures as in the case with China has both bad and good effects. Through subsidies, China has been able to achieve a strong economic growth making it the fifth largest economy in the world. It is evident that US is accusing China of dumping cars and car parts in the US market. In addition to offering subsidies, China also imposes anti-dumping duties on US cars to China. The US filed a case against China at the WTO accusing China of imposing unfair duties of more than $ 3 billion in export of US cars. These protectionism measure already undertaken by China could have significant implications to the US economy. If no regulated, the use of non-tariff barriers by countries could cripple international trade (Hornby 2012)
In the Uruguay Round of the GATT/WTO negotiations, members agreed to drop the use of non-tariff barriers and import quotas in favor of tariff-rate quotas. In addition, countries consented into lowering tariff rate and raising the quantity at which the low tariff rate would apply. The mechanisms use by China in regard to export promotes dumping because they sell exported cars and car parts at prices lower that they offer in their home country. China has also devised mechanisms to restrict imports by charging high duties on export of US cars. Japan recently complained that the US continues to maintain five anti-dumping measures against exports from the country (Hanson 2012). It also expressed concern over anti-dumping investigation by China on certain high-performance stainless steel and resorcinol. Such complaints come amid growing concern over the essence of ethics of using non-tariff barriers to trade. Implementation of non-tariff measurers poses challenges to international cooperation.
The main feature distinguishing WTO from other intergovernmental institutions is their power to settle international disputes. The Dispute Settlement Body (DBS) is responsible for establishing to handle international disputes. DBS has been involved in solving several international cases. In a recent case, China accused the US of violating subsidies and countervailing measures. The DBS administers dispute settlement that consists of WTO’s General Council.
Bagwell, Kyle. and Staiger, Robert. The Economics of the World Trading System, Cambridge, MA: MIT Press. 2002.
Cipollina, Maria, and Luca Salvatici. "Measuring Protection: Mission Impossible?." Journal of Economic Surveys 22.3 (2008): 577-616. Business Source Complete. Web. 14 Nov. 2012.
Ferrantino, Mody. "Using Supply Chain Analysis to Analyze the Costs of NTMs and the Benefits of Trade Facilitation", Geneva, World Trade Organization, Working Paper ERSD 2012-02.
Hanson, David. Limits to Free Trade: Non-Tariff Barriers in the European Union, Japan and United States. Massachusetts: Edward Elgar Publishing, 2010.
Harrison, Chris. “Countries Must Drop Non-Tariff Barriers”. Jakarta Globe 16 Oct. 2012. Web 15 Nov. 2012 http://www.thejakartaglobe.com/editorials/editorial-countries-must-drop-non-tariff-barriers/550446
Hornby, Lucy. “China announces anti-dumping cases on some chemicals”. Reuters 14 Nov. 2012. Web 15 Nov 2012 http://uk.reuters.com/article/2012/11/14/uk-china-trade-chemicals-idUKBRE8AD03V20121114
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Lin, Chung-Ming, and Chen-Kuo Lee. "Relations Between Free Trade And Economic Protection: A Game Theory Analysis." International Journal Of Management 29.2 (2012): 591-605. Business Source Complete. Web. 15 Nov. 2012.
World Trade Organization. "Trade and public policies: a closer look at non-tariff measures in the 21st century", Geneva: WTO. 2012.
World Trade Organization. Members review anti-dumping actions. Web. 14 Nov. 2012. http://www.wto.org/english/news_e/news12_e/anti_25oct12_e.htm