Introduction

Among the various issues in the current debate on the future of the international trading system, three stand out: can the World Trade Organization (WTO) function in a progressively more multi-polar trading system; has the WTO reached the limits of what it can sensibly cover; and is the multilateral system being undermined by the rise of – predominantly bilateral – preferential trade and investment agreements? ¹

For a discussion of the challenges facing the WTO and various proposals for how it should be reformed see Sutherland Report (2007), Warwick Commission (2007) and Jones (2010).

For general readings covering the evolution of and current status of the world trading system see Jackson (2000), Trebilcock and Howse (1995) and Hoekman and Kostecki (2001).

The Founding of the Post-1947 International Trading System

The post-war trading system was shaped by the experience of protection, economic nationalism and trade discrimination in the 1920s and 1930s that contributed to the collapse of the international economy and the political conflict of the interwar period. The United States emerged from the Second World War as the dominant economic power and it was the United States that provided leadership in the establishment of the GATT. This policy was based on the US domestic consensus and on the position of the US Congress, which favoured reciprocal trade liberalization. This principle was codified in the 1933 US Reciprocal Trade Agreements Act, which reversed the protectionist Smoot–Hawley Tariff of 1930. The US-led system therefore differed from the unilateral trade policy pursued by Britain before 1914.

The original intention had been to establish an International Trade Organization (ITO) alongside the Bretton Woods institutions of the International Monetary Fund (IMF) and the World Bank (IBRD). Indeed, negotiations on trade began before those on international monetary relations, but broke down because of an American determination to put an end to preferential trade agreements (PTAs) and the British reluctance to dismantle the Imperial Preferences established at the Ottawa Conference of 1933. The Havana Charter was negotiated in 1948, but was never presented to the US Congress for ratification. The demise of the ITO has been explained by opposition from protectionists, who saw the liberal intent as a threat, and perfectionists who saw too much scope for government intervention (Diebold 1952). Foreign policy also played a role in the sense that the Truman Administration preferred, at the onset of the Cold War, to expend its political capital getting legislation on the Marshall Plan and NATO through the Congress rather than the ITO. The GATT, which had been negotiated in 1947 as part of the ITO process, also offered much of what the United States wanted and a contractual agreement between states required no congressional approval.

The GATT, as the name implies, was an agreement rather than an international organization, and a negotiating forum in which initiatives for new trade liberalization or rulemaking came from the Contracting Parties (CPs) and not from the staff of a large secretariat. In actual fact, staff and the offices of the old League of Nations were initially used as the secretariat. The GATT consisted of a framework of basic principles and rules as well as a series of tariff reductions; the first of a series of multilateral tariff reductions that were to follow in the next 70 years.

Principles of the GATT

The GATT 1947 was based on non-discrimination in international trade. The codification of this took two forms, the most favoured nation (MFN) principle (Article I, GATT) and national treatment (NT) (Article III, GATT). The MFN provision obliged all CPs not to discriminate between countries. Any favourable treatment, such as a reduced tariff, provided to another – most favoured – nation had to be extended to all CPs. National treatment required that all products imported into a customs territory be treated the same as nationally made like products. MFN therefore allowed for no PTAs and thus discrimination. National treatment precluded discrimination against foreign products, but left national governments scope to regulate (Jackson 2000).

The GATT 1947 was also based on some de facto norms, notably reciprocity and flexibility. The understanding was that tariff liberalization would be achieved through mutual tariff concessions that ensured ‘global’ or across-the-board reciprocity. Global reciprocity meant a broad balance of benefits for CPs and differed from the more protectionist idea of reciprocity within narrow sectors. Tariff negotiations were conducted bilaterally between an importer and the ‘principal suppliers’ of a product, but then multilateralized through the MFN obligation. Provided there was global reciprocity, CPs could therefore decide how fast they wished to liberalize. Multilateral rounds of negotiations offered a means of ensuring ‘concessions’ in areas of ‘defensive’ interests could be traded against lower tariffs in sectors of ‘offensive’ interests.

The GATT 1947 was flexible in that it did not require national governments to deregulate or adopt any specific standards, but merely not to use regulation to discriminate or as a disguised form of protection. There was also flexibility in that governments could decide how they wished to liberalize, but free riding aside, limited concessions meant limited satisfaction of offensive interests. The GATT also provided – and continues to provide – flexibility in the form of various exceptions to the rules. Article VI (GATT 1947) provides for the application of antidumping duties on imports that cause or threaten ‘injury’ to a national industry and are sold, ‘unfairly’ or at a price below the cost of production (see Chapter 6). Relatively loose wording in the GATT rules and the fact that such duties could be applied selectively against certain exports meant that this provision found, and continues to find, wide application as a means of easing import competition. Article XVIII allows restrictions on imports when a CP is suffering balance of payments (BoP) difficulties. This provision found application among developing countries in particular and was, for example, used by India on a regular basis well into the 1990s. Article XIX provides for non-selective safeguard measures, for example tariffs or quotas, when there is substantial injury to an industry due to an unforeseen surge in imports. A country applying safeguards is, however, required to compensate the exporting countries affected by reducing tariffs on other products.

Article XX provides a general exemption from GATT rules for measures taken to protect human, animal and plant life. Such measures have to be proportionate. This article found use during the 1980s with increased awareness of environmental concerns (see Chapter 13). Finally, Article XXIV offers an exemption from MFN for customs unions and free trade areas. The motives behind the inclusion of Article XXIV in 1947 are not fully clear, but it was not drafted with major preferential agreements like the European Union in mind and was probably intended to provide for smaller customs unions that existed when the GATT 1947 was drafted. Subsequently Article XXIV has found very wide application as a legal basis for free trade agreements (FTAs) (see Chapter 22). Rather than a charter for free trade, the GATT could therefore be best described as a system of managed trade liberalization.

The Kennedy Round 1963–7: The First Major Multilateral

Following the original tariff reductions of 1947 further but limited liberalization was agreed in a number of early multilateral trade rounds between 1949 and 1961. These rounds brought in the Federal Republic of Germany in 1950 and Japan in 1955. In early November 1961 the United States proposed a new comprehensive round of trade negotiations that was to become the Kennedy Round. The principal US motivation was to limit the effects of the common external tariff (CET) of the European Economic Community (EEC) and to establish GATT discipline over the EEC’s Common Agricultural Policy (CAP). The CET replaced the bound MFN tariffs of the individual EEC members so the US wanted to ensure the CET bindings were as low or lower than the bound tariffs of the individual EEC member states it replaced in order to minimize trade diversion. ³

Trade diversion is the reduction of more competitive imports from a third country as a result of a tariff preference established between members of a customs union or free trade area. Less competitive products are imported from within the preferential area because of the lower tariff. Generally speaking, trade diversion always accompanies the trade creation resulting from a preference.

For agricultural trade in general see Chapter 8.

The enhanced market power of the EEC, thanks to the CET, facilitated significant mutual, linear tariff reductions averaging 30 per cent in manufactures. This necessitated concessions from the US Congress, which viewed tariff reductions of more than 20 per cent as going beyond the ‘peril point’ at which US industries would be injured. The Trade Expansion Act of 1962 in fact provided for up to 50 per cent reductions. ⁵

The timetable of trade negotiations up to and including the Uruguay Round has been in effect determined by US trade legislation. For example, it was no accident that the Kennedy Round negotiations finished one day before the expiry of trade authority under the 1962 Trade Expansion Act. The timetable of other rounds has been similarly influenced by the existence and duration of negotiating authority granted by the US Congress.

The Kennedy Round was more transatlantic than multilateral. Other developed economies, such as Australia, had ambiguous positions on liberalization and although the 1960s saw many developing countries (DCs) join the GATT on independence, these were accommodated by the introduction of Part IV of the GATT (see also Chapter 18). Part IV facilitated the exemption of DCs from the obligation of making reciprocal liberalization commitments, whilst guaranteeing them MFN treatment under Article I. Developing countries favoured this because it allowed them to follow the development paradigm of the time which was the promotion of infant industry policies as a means of ensuring economic as well as political independence (see Chapter 2). For the developed countries Part IV simplified negotiations by removing many smaller economies from the equation, but the adoption of Part IV in 1964 and the subsequent enabling clause effectively created a two-tier trading system.

The Tokyo Round 1973–9: Containing New Protectionism

Launched with the Tokyo Declaration in September 1973, this GATT round was the product of US pressure for stronger GATT discipline of what it saw as the ‘unfair’ policies of its main trading partners. Agreement to negotiate had formed part of the Smithsonian Agreement of December 1971 that sought to ease tensions following the end of dollar convertibility with gold and the 1971 imposition by the United States of a 10 per cent tariff to pressurize the Federal Republic of Germany and Japan to revalue their currencies. Faced with a rising trade deficit, the United States argued that its competitors needed to revalue their exchanges rates and stop intervening to support national champions by means of subsidies, preferential use of public contracts and technical barriers to trade. For the United States therefore the trade agenda had to be extended by including such non-tariff or behind-the-border issues and by strengthening the dispute settlement provisions of the GATT to improve enforcement of the rules. There was also a concern, shared by the European Community, about increased competition from Japan, the Newly Industrializing Countries (NICs) and DCs in low value added sectors such as textiles and clothing. In other words, the trade agenda was already being extended and responding to a shift in the balance of market power.

The negotiations were therefore framed by the United States and driven by domestic interests to include tariffs, agriculture and non-tariff issues on the agenda. ⁶

The US Secretary of State Kissinger sought to include scope to offer the Soviet Union MFN status in the trade legislation as part of the US détente policy, but this ran into problems in Congress which, in the Jackson–Vanik amendment, effectively linked trade to the performance of the USSR on human rights.

The 1974 Trade Act in the United States provided for a number of contingency measures including the use of countervailing duties against subsidized imports. It also introduced the infamous Section 301 fair trade provision that was to find later application in the 1980s. On the other hand the 1974 Act established Fast Track and modernized US trade policymaking.

Progress in the negotiations was held up by international events. Following the Yom Kippur War of October 1973 and the Arab oil embargo, there followed the first oil crisis, a fourfold increase in oil prices in late 1973. The rising tide of ‘new protectionism’ in the form of voluntary export restraint agreements against exports from the NICs, however, strengthened the desire to conclude an agreement. The G7 summits, established in 1975, provided political support and, in the run up to the 1978 Bonn summit, a nine-page outline of an agreement was tabled. The end result was modest compared to the Kennedy Round. There were tariff reductions averaging 35 per cent over eight years to 1988 based on the Swiss formula favoured by the EC because it helped bring down US tariff peaks. ⁸

The Swiss formula used was y = 14x/(14+x) which meant for example, that a 20 per cent tariff was reduced to 8 per cent and a 50 per cent tariff to just under 11 per cent (see also Chapter 4).

Customs authorities designate a customs code for each product. As tariffs vary from product to product, how products are allocated can determine the tariff. The Brussels Tariff Nomenclature of 1950 had been adopted by all GATT members in 1970, but some issues remained, such as the continued use of the American Selling Price (ASP) according to which tariffs on chemical imports into the United States were based on the selling price of the chemical.

Developing countries were still not inclined to lower tariffs and spent much of the 1970s arguing for a New International Economic Order (NIEO) that would give them a greater say in policy, more development aid, debt relief and access to OECD markets. Under these conditions the two-tier system based on Part IV continued, but now included the Generalized System of Preferences (GSP) that permitted developed economies to offer (autonomous, that is to say, unbound) tariff preferences for developing country exports as another exception to MFN. Qualified MFN was also used for the non-tariff barrier codes that were signed only by the developed OECD economies. The Tokyo Round therefore witnessed the emergence of a form of ‘club model’ in which the agenda and negotiations were shaped by the leading OECD economies rather than the United States. But the ‘multilateral’ system still excluded the Soviet bloc and, effectively, the developing countries of the South.

The Uruguay Round 1986–94: Towards an Inclusive, Rules-based System

The period of the Uruguay Round (UR) negotiations marked a significant broadening of the trading system in the form of a more active participation by more countries and an associated increased heterogeneity of the trading system, as well as a deepening with the most significant increase in the scope of the trade regime to date. There was also a shift to a significantly more rules-based international trading system. ¹⁰

For general histories of the Uruguay Round see Golt (1988) for the early stages, Croome (1995) and Stewart (1993) for a detailed negotiating history.

The decision to establish a Preparatory Committee for the new round was effectively taken by a club of OECD members in April 1985 (Preeg 1970: 54). As the negotiation progressed it became clear that it was the Quad (United States, EC, Japan and Canada) – and within this, the US–EC duopoly – that shaped the agenda and determined progress (Woolcock 1990). The most important developing countries in the Preparatory Committee, Brazil and India which led the so-called ‘Group of 10’ (G10), opposed a new comprehensive round. The G10 was not able to block progress towards a new round because a number of NICs were keen to see a strengthening of the rules to contain EC and US protectionism. The G10 of the 1980s could be seen as a rather less successful forerunner of the G20 established under similar leadership in 2003 (Narlikar 2010). The G10 aside, the UR was not characterized by the type of North–South divisions seen in the Tokyo Round. Issuebased coalitions were formed, such as the Cairns group of agricultural exporters and the Café au Lait group, led by Colombia and Switzerland. Japan and the Asian NICs, such as Hong Kong, were also more active.

The UR resulted in a more inclusive WTO with the ending of Part IV, of the qualified MFN codes and of the two-tier trading system by means of a ‘Single Undertaking’. This was an aim of developed countries that wished to deal with free riding and to ensure that the stronger NICs graduated to full membership of the trading system. Special and differential treatment (SDT) for developing countries remained, but in the form of expectations of less-than-full reciprocity in commitments or longer transition periods to adopt rules. By the end of the round in 1994 the Cold War had ended and many transition economies, though not Russia, were joining the WTO. Thus although the Round was shaped by the OECD Club or the Quad, the outcome created a far more inclusive international trading system. Indeed by the time China joined in 2001 one could say the WTO was a global organization in a way that the GATT never was.

The Doha Development Agenda (DDA): Modest Ambition for the WTO

The assumption among the trade policy community after the completion of the UR was that the next stage would be an extension of the trade regime to cover investment. Given the nature of international markets and the close links between trade and investment, the absence of comprehensive multilateral rules on investment was seen as an anomaly. At the first WTO Ministerial meeting in Singapore investment was therefore included on the agenda. ¹⁵

For a discussion of the priorities for the new round as seen in 1996 see Schott (1996) and OECD (1996).

The EU lead had only lukewarm support from the United States and faced opposition from many developing countries. In 1998, at the second WTO Ministerial meeting that marked 50 years of the GATT, the United States agreed to support efforts to launch a new round, but these failed in Seattle in late 1999 due to differences between the OECD economies, opposition from developing countries, which believed an agenda was again being imposed upon them by the OECD countries and a lack of resolve on the part of national governments in the face of growing civil society opposition to ‘globalization’ (Schott 2000).

The DDA was finally launched in Doha in December 2001, thanks in part to the use of ‘constructive ambiguity’ in the wording of the communiqué. Failure in Seattle had also been, in part, due to efforts to agree on a very detailed text. The EU remained the main ‘demandeur’ for a new comprehensive round, in which it sought progress on the Singapore issues and market opening for services and manufactures in the larger emerging markets, in return for concessions on agriculture. The EU strategy favoured multilateral negotiations over preferential agreements and adopted a de facto moratorium on new preferential trade negotiations in 1999. In contrast to previous rounds, the United States provided only qualified support for a comprehensive round from 2001 when it obtained new Trade Promotion Authority. The US Administration began pursuing an active policy of ‘competitive liberalization’. This was a pragmatic approach in which bilateral, regional or multilateral approaches to liberalization were to be pursued depending on which offered the best prospects of results. Developing countries illustrated their intention to have a greater say by first making the launch of the DDA conditional upon a statement interpreting the TRIPs agreement in a way that favoured developing country interests. This was the Doha Declaration on TRIPs and essential medicines. Secondly, the developing countries led by India insisted on an ‘explicit consensus’ on the final agenda. As smaller DCs or least developed countries (LDCs) are sometimes not present in negotiations and often remained silent when they were, specifying explicit consensus clearly gave the DCs a stronger veto power.

Between 2001 and 2003 a limited commitment to a new round combined with a general economic slowdown in 2001 slowed progress on the ‘modalities’ for negotiation. In an effort to move things along the EU and United States produced a joint text on agriculture in the run up to the 2003 WTO Ministerial Meeting in Cancun. Given that transatlantic differences on agriculture had determined the pace of the UR there was a belief, not shared by all policymakers in the EU, that an EU–US agreement would help. In effect the reverse was the case. The joint text was seen by the major developing countries as a bid to sustain a transatlantic duopoly over the trade agenda and continued protection for EU and US special agricultural interests, while pushing for DC concessions on other issues, such as services, non-agricultural market access (NAMA) and the Singapore issues. Brazil and India, joined now by China and other developing countries, formed the G20 and came forward with alternative proposals that made the overall ambition of the round dependent on the willingness of the EU and United States to make concessions on agriculture. The Cancun meeting, which was supposed to map out a course for the DDA, failed even though the scale of ambition had been reduced by the EU effectively taking the three most controversial Singapore issues (investment, competition and government procurement) off the table.

A more modest agenda was put together in the shape of the August 2004 Framework Agreement. This excluded the Singapore issues, except trade facilitation, and focused on the traditional topics of agriculture and NAMA. Even services slipped to a less than central position and although other topics were included in the negotiations, such as rules on regional trade agreements, antidumping and some aspects of intellectual property rights such as geographic indications (GIs), it became clear that the main substance of the negotiations concerned agriculture and NAMA. In these the G20 sought progress on agriculture from both the United States (reductions in domestic support) and the EU (elimination of export subsidies and lower tariffs). In return the EU and United States sought reductions in tariffs on manufactures in the major emerging markets as well as progress on services. As always this simple depiction of the G20 against the EU and United States or perhaps the OECD countries is inaccurate. In reality the picture was much more complex with tensions within both ‘blocs’. For example, there was certainly some concern among China’s G20 partners as well as within the United States and EU about lowering tariffs on products in which China was already very competitive.

The DDA stumbled on through times when there appeared to be some progress, such as at the Hong Kong 2005 WTO Ministerial meeting, and times when negotiations were ‘on life support’ (Lee and Wilkinson 2007). In 2007 and especially in 2008 major efforts were made in the various negotiating groups in Geneva and in high-level meetings away from the glare of the news media that had accompanied the big WTO ministerial conferences. In 2008 an agreement was near after progress was made on the modalities for tariff and subsidy reductions in agricultural and tariff reductions in NAMA. ¹⁶

For details of the Chair’s negotiating texts and progress reached in the various negotiating groups at this stage see WTO documents at www.wto.org/english/tratop_e/dda_e/dda_e.htm.

Conclusions

What lessons can be drawn from this summary of the evolution of the trading system? First, if the evolution is compared to the debate on substantive policy issues and topics, it should be clear that the vast majority of issues in the current debate are not new. International trade policy and the construction of an international trading system is an iterative process. The current debate can therefore be informed by knowledge of what went before.

Second, the international trading system has accommodated significant shifts in relative economic or market power during the post-1947 era. It has also found ways of accommodating large numbers of countries and countries at different levels of development. This suggests that the shift in the relative market power towards the large emerging markets and the inclusion of a large number of developing countries in the WTO need not be an insurmountable problem. If it was possible for the trading system to adapt to shifts in influence in the past it may be possible to do so again.

Third, the coverage of the international trade regime has been defined by the dominant trading nations or regions or the period. The definition of what is ‘trade’ has changed over time. There is no reason to believe that this will not continue to be the case. The GATT 1947 was shaped by the United States as was the trade agenda right into the 1980s. Once the EU established an internal consensus on trade it then began to seek to shape the trade agenda. As new trade powers emerge they can be expected to have an increasing influence on the nature of the agenda. But much will depend on the level of negotiation. Within the WTO the DDA negotiations pitted the EU view of the multilateral trade regime, and to a lesser degree that of the United States and other developed economies, against that of the G20. But in bilateral FTAs the EU and United States still retain their asymmetric power.

Fourth, the international trading system has never been a purely multilateral system, if by multilateral we mean a trading system in which there is no discrimination and one that is shaped by all trading nations. The application of the MFN principle to tariff liberalization and other trade barriers is close to a multilateral order, but there have been many exceptions to MFN over the years, such as the qualified MFN codes of the Tokyo Round, the use of various exceptions and continued use of plurilateral agreements. The evolution of the international trading system has also been shaped by a limited number of major economies. This is likely to continue even if the membership of the ‘club’ varies.