Reading 2 | Chapter 2, Cotton Wars & WTO Showdown
CHAPTER 2: THE WTO AND THE WORLD TRADE SYSTEM
Not so long ago, world trade involved almost exclusively the exchange of finished
goods
e.g. Toyota produced cars in Japan and exported them to the US
During the last 20 years, economic production has gone global
Today, intermediate goods (goods assembled together into finished goods)
make up a growing proportion of trade
Toyota sources components for its autos from producers throughout the
world; these components are shipped to factories in the US, where workers
assemble them into cars and trucks sold to American consumers, as well as
exported to +20 countries around the world
Global production networks (global value chains) are increasingly common in
today’s global economy
e.g. Nutella: Uses cocoa from Nigeria, hazelnuts from Turkey, sugar from
Brazil, Vanillin from China, Palm Oil from Malaysia; these ingredients are
transformed into Nutella in 9 factories throughout the world; the production
network is managed from Italy
The fragmentation of production into these global networks has been made
possible by the liberalization of and rapid growth of world trade flows
World trade has grown so rapidly because an international political structure, the
WTO and the GATT, has supported and encouraged such growth
Most political scientists believe world trade would not have grown so rapidly
without it
All markets rest on political structures
Trade is made possible by the political institution that structures trade
relationships
Internationalization has been brought about by the decisions governments
have made about the rules and institutions that govern world trade
What is the WTO?
1947-1994: The GATT fulfilled the role now played by WTO
WTO provides a forum for trade negotiations, administers trade agreements
governments conclude, provides a mechanism through which governments can
resolve trade disputes
Three components: a set of principles and rules, an intergovernmental bargaining
process, dispute settlement mechanism
Rules constrain the policies that governments can use to control the flow of goods,
services, and technology into and out of their national economies
Two core principles: market liberalism and nondiscrimination
1. Market liberalism
Provides the economic rationale for the trade system
, Asserts that an open, or liberal, international trade system raises the world’s
standard of living
Every country enjoys a higher standard of living with trade than it can achieve
without trade
Gains from trade are greatest (for countries and the world) when goods can flow
freely across national borders unimpeded by government-imposed barriers
(economic logic on which WTO is based)
2. Nondiscrimination
Ensures each WTO member faces identical opportunities to trade with other WTO
members
Ensures firms in every country face the same market opportunities and barriers in
the global economy
Most-Favored Nation (MN): Prohibits governments from using trade policies to
provide special advantages to some countries and not to others
Requires WTO members to treat all other members the same; assures all
countries have access to foreign markets on equal terms
e.g. US cannot apply lower tariffs to goods imported from Brazil than it
applied to goods imported from another member; if the US reduces tariffs on
goods imported from Brazil, it must extend the same tariff rates to all other
WTO members
Exceptions:
Regional trade agreements: States can depart from MFN if they join a
free-trade area or customs union (NAFTA)
Generalized System of Preferences (GSP): Allows advanced
industrialized countries to apply lower tariffs to imports from
developing countries than they apply to the same goods coming from
other advanced industrialized countries
National treatment
Prohibits governments from using taxes, regulations and other domestic
policies to provide an advantage to domestic firms at the expense of foreign
firms
Requires governments to treat domestic and foreign versions of the same
product identically once they enter the domestic market
Intergovernmental bargaining
WTO’s primary decision-making process; how all WTO rules are created
Involves negotiating agreements that directly liberalize trade and indirectly support
that goal
Focuses on negotiating agreements that reduce and eliminate government-
imposed barriers to market access
To liberalize trade, governments must alter policies that restrict the cross-border
flow of goods and services:
Tariffs: Taxes governments impose on foreign goods entering the country
Non-tariff barriers: Health and safety regulations, government purchasing
practices, etc.
, Governments organize their negotiations in bargaining rounds
Governments meet as the WTO Ministerial Conference
Growing length of bargaining rounds reflects the complexity of issues at the
center of negotiations and the growing diversity of interests involved
Rules established by intergovernmental bargaining provide a framework of law for
international trade relations
Participation in the WTO requires governments to accept common rules that
constrain their actions
WTO Dispute Settlement Mechanism
Ensures governments comply with the rules they establish
If all governments believed they could disregard WTO rules with impunity, they
would comply less often
Ensures compliance by helping governments resolve disputes and by authorizing
punishment in the event of noncompliance
Ensures compliance by providing an independent quasi-judicial tribunal
This tribunal investigates the facts and relevant WTO rules whenever a
dispute is initiated and then reaches a finding
A government found to be in violation is required to alter the offending policy
or compensate the country being harmed
By creating rules, establishing a decision-making process to extend and revise
them, and enforcing compliance, governments have brought the rule of law into
international trade relations
Hegemons, public goods, and the world trade system
Stability of the WTO (and of international trade systems) is a function of the
distribution of power in the international system
Hegemonic Stability Theory
Often used to explain why the system shifts between periods in which it is open
and liberal, and periods in which it is closed and discriminatory
Rests on the logic of public goods provision
Public goods
Public goods are non-excludable and non-rival
Non-excludability: Once the good has been supplied, no one can be
prevented from enjoying its benefits
Non-rivalry: Consumption by one individual does not diminish the quantity of
the good available to others
Public goods tend to be undersupplied relative to the value society places on them
Undersupply is a result of free riding, which is a situation in which
individuals rely on others to pay for a public good
The severity of the free-riding problem is partly a function of the size of the group
CHAPTER 2: THE WTO AND THE WORLD TRADE SYSTEM
Not so long ago, world trade involved almost exclusively the exchange of finished
goods
e.g. Toyota produced cars in Japan and exported them to the US
During the last 20 years, economic production has gone global
Today, intermediate goods (goods assembled together into finished goods)
make up a growing proportion of trade
Toyota sources components for its autos from producers throughout the
world; these components are shipped to factories in the US, where workers
assemble them into cars and trucks sold to American consumers, as well as
exported to +20 countries around the world
Global production networks (global value chains) are increasingly common in
today’s global economy
e.g. Nutella: Uses cocoa from Nigeria, hazelnuts from Turkey, sugar from
Brazil, Vanillin from China, Palm Oil from Malaysia; these ingredients are
transformed into Nutella in 9 factories throughout the world; the production
network is managed from Italy
The fragmentation of production into these global networks has been made
possible by the liberalization of and rapid growth of world trade flows
World trade has grown so rapidly because an international political structure, the
WTO and the GATT, has supported and encouraged such growth
Most political scientists believe world trade would not have grown so rapidly
without it
All markets rest on political structures
Trade is made possible by the political institution that structures trade
relationships
Internationalization has been brought about by the decisions governments
have made about the rules and institutions that govern world trade
What is the WTO?
1947-1994: The GATT fulfilled the role now played by WTO
WTO provides a forum for trade negotiations, administers trade agreements
governments conclude, provides a mechanism through which governments can
resolve trade disputes
Three components: a set of principles and rules, an intergovernmental bargaining
process, dispute settlement mechanism
Rules constrain the policies that governments can use to control the flow of goods,
services, and technology into and out of their national economies
Two core principles: market liberalism and nondiscrimination
1. Market liberalism
Provides the economic rationale for the trade system
, Asserts that an open, or liberal, international trade system raises the world’s
standard of living
Every country enjoys a higher standard of living with trade than it can achieve
without trade
Gains from trade are greatest (for countries and the world) when goods can flow
freely across national borders unimpeded by government-imposed barriers
(economic logic on which WTO is based)
2. Nondiscrimination
Ensures each WTO member faces identical opportunities to trade with other WTO
members
Ensures firms in every country face the same market opportunities and barriers in
the global economy
Most-Favored Nation (MN): Prohibits governments from using trade policies to
provide special advantages to some countries and not to others
Requires WTO members to treat all other members the same; assures all
countries have access to foreign markets on equal terms
e.g. US cannot apply lower tariffs to goods imported from Brazil than it
applied to goods imported from another member; if the US reduces tariffs on
goods imported from Brazil, it must extend the same tariff rates to all other
WTO members
Exceptions:
Regional trade agreements: States can depart from MFN if they join a
free-trade area or customs union (NAFTA)
Generalized System of Preferences (GSP): Allows advanced
industrialized countries to apply lower tariffs to imports from
developing countries than they apply to the same goods coming from
other advanced industrialized countries
National treatment
Prohibits governments from using taxes, regulations and other domestic
policies to provide an advantage to domestic firms at the expense of foreign
firms
Requires governments to treat domestic and foreign versions of the same
product identically once they enter the domestic market
Intergovernmental bargaining
WTO’s primary decision-making process; how all WTO rules are created
Involves negotiating agreements that directly liberalize trade and indirectly support
that goal
Focuses on negotiating agreements that reduce and eliminate government-
imposed barriers to market access
To liberalize trade, governments must alter policies that restrict the cross-border
flow of goods and services:
Tariffs: Taxes governments impose on foreign goods entering the country
Non-tariff barriers: Health and safety regulations, government purchasing
practices, etc.
, Governments organize their negotiations in bargaining rounds
Governments meet as the WTO Ministerial Conference
Growing length of bargaining rounds reflects the complexity of issues at the
center of negotiations and the growing diversity of interests involved
Rules established by intergovernmental bargaining provide a framework of law for
international trade relations
Participation in the WTO requires governments to accept common rules that
constrain their actions
WTO Dispute Settlement Mechanism
Ensures governments comply with the rules they establish
If all governments believed they could disregard WTO rules with impunity, they
would comply less often
Ensures compliance by helping governments resolve disputes and by authorizing
punishment in the event of noncompliance
Ensures compliance by providing an independent quasi-judicial tribunal
This tribunal investigates the facts and relevant WTO rules whenever a
dispute is initiated and then reaches a finding
A government found to be in violation is required to alter the offending policy
or compensate the country being harmed
By creating rules, establishing a decision-making process to extend and revise
them, and enforcing compliance, governments have brought the rule of law into
international trade relations
Hegemons, public goods, and the world trade system
Stability of the WTO (and of international trade systems) is a function of the
distribution of power in the international system
Hegemonic Stability Theory
Often used to explain why the system shifts between periods in which it is open
and liberal, and periods in which it is closed and discriminatory
Rests on the logic of public goods provision
Public goods
Public goods are non-excludable and non-rival
Non-excludability: Once the good has been supplied, no one can be
prevented from enjoying its benefits
Non-rivalry: Consumption by one individual does not diminish the quantity of
the good available to others
Public goods tend to be undersupplied relative to the value society places on them
Undersupply is a result of free riding, which is a situation in which
individuals rely on others to pay for a public good
The severity of the free-riding problem is partly a function of the size of the group
