Objectives:
i.
To understand the various
international financial institutions and their roles in international business
ii.
To describe the importance and
roles played by these institutions
iii.
To develop an insight into the
formation and development of these institutions
iv.
To evaluate the advantages and
disadvantages of these institutions
Introduction
International business is facilitated by a number of financial and
other institutions that play a critical role in supporting and enhancing
international transactions. These include:
·
The International monetary
fund,
·
The World Bank and,
·
The World trade Organization
THE INTERNATIONAL MONETARY FUND (I.M.F)
The I.M.F was established
in 1945 and according to article 1 of the articles of agreement of the
international monetary fund it has the following aims
i.
To promote
international monetary co-operation through a permanent institutions which
provides the machinery for consultation and collaboration on international
monetary problems
ii.
To facilitate the
expansion and balanced growth of international trade, and to contribute thereby
to the promotion of maintenance of high levels of employment and real income
and to the development of the productive resources of all members as primary
objectives of economic policy
iii.
To promote exchange
stability, to maintain orderly exchange arrangements among members, and to
avoid competitive exchange depreciation
iv.
To assist in the
establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade
v.
To give confidence to
members by making the general resources of the fund temporarily available to
them under adequate safeguards thereby providing them with the opportunity to
correct maladjustments in their balance of payments without resorting to
measures destructive of national or international prosperity
vi.
In accordance with the
above, to shorten the duration and lessen the degree of disequilibrium in the
international balances of payments of members
The I.M.F has 184 members
to date, including Kenya, and carries out work in three main areas:
i.
Surveillance.
This involves the monitoring of economic and financial developments and the
provision of policy advice, aimed at crisis prevention
ii.
Lending.
The I.M.F lends to countries with balance of payments difficulties as a means
of providing temporary financing and in order to support policies aimed at
correcting the underlying problems. In addition, loans are provided to
low-income countries which are especially aimed at poverty reduction
iii.
Technical assistance
and training. These are provided by the I.M.F
in its areas of expertise
iv.
Research and
statistics. This function is aimed at
supporting the previous three aspects of the work of the I.M.F
In recent years the IMF
has applied its surveillance and technical assistance work to the development
of standards and codes of good practice in its areas of responsibility and to
the strengthening of financial sectors, examples of these standards and codes
are data standards, fiscal transparency and transparency in monetary and
financial policies
I.M.F Lending
Loans from the I.M.F are
usually provided under an arrangement whereby the conditions that a country
must meet in order to gain access to the loan are stipulated. These
arrangements are based on economic programmes formulated by countries in
consultation with the international monetary fund. Loans are released in phased
instalments as the agreed programmes are carried out.
The I.M.F lending can take
the form of concessional and non-concessional
lending. These diverse loan instruments or facilities are tailored to the
requirements of its diverse membership. The I.M.F attempts to discourage an
excessive use of its resources by imposing a surcharge (an interest rate
premium) on large loans.
Concessional I.MF facilities
The poverty reduction and growth facility (PRGF)
Assistance to developing
countries was for many years provided through the enhanced structural
adjustment facility (ESAF). A decision was, however reached in 1999 to
strengthen the focus on poverty Reduction Strategy Paper which is prepared by
the country in collaboration with civil society and other development partners,
especially the World Bank. The interest rate levied on PRGF loans is 0.5
percent and loans repayment is over a period of 5.5 – 10 years
Non-concessional I.M.F facilities
Non-concessional facilities are subject to the I.M.F‘s
market-related interest rate which is based on the SDR interest rate. This
interest rate is based on the SDR rate on interest which in turn is revised
weekly to take account of changes in short-term interest rates in the major
international money markets. The non-concessional facilities include the following
i.
Stand-By
Arrangements (SBA). This facility is
designed to deal with short-term balance-of-payments problems and is the most
widely used facility of the I.M.F. it typically has a length of 12-18 months
and repayment is normally expected within 2.25 – 4 years unless an extension is
approved
ii.
The
Extended Fund Facility (EFF) This facility was
established in 1974 with the aim of helping countries to address protracted
balance-of-payments problems that were rooted in the structure of the economy.
Given this emphasis arrangement under this facility are longer and repayment is
normally expected within 4.5 – 7 years unless an extension is specifically
approved
iii.
Supplementary
Reserve Facility (SRF) This facility was
introduced in 1997 in order to meet a need for very short-term financing on a
large scale. Under this facility countries are expected to repay loans within
1-1.5 years, although an extension of up to 1 year may be requested
iv.
Contingent
Credit Lines (CCL) This facility was
established in 1999 and it differs from other I.M.F facilities because it aims
to help member countries to prevent crises. It is aimed at countries that are
implementing sound economic policies but which may find themselves threatened
by a crisis elsewhere in the world economy. It is subject to the same repayment
conditions as the SRF, except that CFF loans carry no surcharge
v.
Emergency
assistance. The I.M.F provides emergency
assistance to countries that have experienced a natural disaster or are
emerging from a conflict situation. These loans are subject to the basic rate
of charge and must be repaid within 3.25 – 5 years.
THE WORLD BANK GROUP
The World Bank Group
consists of five closely associated institutions, all owned by the member
countries. Each institution plays a distinct role in the mission to fight
poverty and improve living standards for people countries. The term World Bank
Group encompasses all five institutions whereas the term “World Bank” refers
specifically to the IBRD and the IDA.
i.
The
International Bank for Reconstruction and Development (IBRD)
This
institution was established in 1945 and has currently 184 members, including
Kenya which became a member on February 3rd 1964. The IBRD aims to
reduce poverty by promoting sustainable development in middle-income and
creditworthy poorer countries by means of loans, guarantees, and non-lending
which includes analytical and advisory services. The IBRD does not aim at
maximising profits but it has earned a net income each year since 1984. Its
profits fund several developmental activities and ensure financial strength
which in turn enables the member countries and the IBRD links voting power to
members’ capital subscriptions. These subscriptions are in turn based on a
country’s relative economic strength.
ii.
The
International Development Association (IDA)
This
institution was established in 1960 and has 162 members to date. The IDA helps
the world’s poorest countries to reduce their levels of poverty by providing
interest-free credits with a ten year grace period and maturities of 35 to 40
years. In most of the countries supported by the IDA assists in providing
access to better basic services such as health and education and supports
reforms and investments aimed at employment creation and productivity growth.
iii.
The
International Finance Corporation (IFC)
This
institution was established in 1956 and currently has 175 members. The mandate
of the IFC is to further economic development through the private sector. In
association with business partners it invests in sustainable private
enterprises in developing countries and also provides long-term loans,
guarantees, and risk management and advisory services to its clients. The IFC
invests in regions and projects in regions and sectors which are insufficiently
served by private investment and seeks new ways to develop promising
opportunities in markets which are considered too risky by commercial investors
in the absence of IFC participation.
iv.
The
Multilateral Investment Guarantee Agency (MIGA)
MIGA
was established in 1988 and to date has 157 members. MIGA aims at promoting
foreign direct investment into emerging economies in order to improve people’s
lives and to reduce poverty. This mandate is fulfilled by MIGA by offering
political risk insurance in the form of guarantees to investors and lenders
thereby helping developing countries to attract and retain foreign investment.
These non-commercial risks for which MIGA provides guarantees include
expropriation, currency inconvertibility and transfer restrictions, and war
civil disturbances. MIGA’s guarantee coverage requires investors to adhere to
high social and environmental standards. MIGA also provides technical
assistance to help countries disseminate information on investment
opportunities. MIGA also offers investment dispute mediation on request.
v.
The
International Centre for Settlement of Investment Disputes (ICSID)
ICSID
was established in 1966 and currently has 134 members. ICSID aims at encouraging
foreign investment by the provision of international facilities for
conciliation and arbitration of investment disputes. It thereby helps to
encourage an environment of mutual confidence between states and foreign
investors. Many international agreements in the area of investment refer to the
arbitration facilities provided by ICSID. Recourse to ICSID reconciliation and
arbitration is voluntary, although once parties have consented to arbitration
under the ICSID convention; neither can unilaterally withdraw its consent. In
addition, ICSID has research and publishing activities in the areas of
arbitration law and foreign investment law
What is the World Trade
Organization?
The
World Trade Organization (WTO) is the only international body dealing with the
rules of trade between nations. At its
heart are the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations. These documents provide
the legal ground-rules for international commerce. They are essentially contracts, binding
governments to keep their trade policies within agreed limits. Although negotiated and signed by
governments, the goal is to help producers of goods and services, exporters and
importers conduct their business.
Three main
purposes
The
system’s overriding purpose is to help trade flow as freely as possible-so long
as there are no undesirable side-effects.
That partly means removing obstacles.
It also means ensuring that individuals, companies and governments know
what the trade rules are around the world, and giving them the confidence that
there will be no sudden changes of policy.
In other words, the rules have to be “transparent” and predictable.
Because
the agreements are drafted and signed by the community of trading nations,
often after considerable debate and controversy, one of the WTO’s most
important functions is to serve as a forum for trade negotiations.
A
third important side to the WTO’s work is dispute settlement. Trade relations often involve conflicting
interests. Contracts and agreements,
including those painstakingly negotiated in the WTO system, often need
interpreting. The most harmonious way to
settle these differences is through some neutral procedure based on an agreed
legal foundation. That is the purpose behind the dispute settlement process
written into the WTO agreements.
Three years
old, but not so young
The WTO began life on 1 January 1995, but its trading system is half
a century older. Since 1948, the General
Agreement on Tariffs and Trade (GATT) had provided the rules for the
system. The second ministerial meeting,
held in Geneva in May 1998, included a celebration of the 50th
anniversary of the system. It did not take long for the General Agreement to
give birth to an unofficial, de facto
international organization, also known informally as GATT. Over the years GATT evolved through several
rounds of negotiations.The latest and largest round was the Uruguay Round which
lasted from 1986 to 1994 and led to the creation of WTO’. Whereas GATT had
mainly dealt with trade in goods, the WTO and its agreements now cover trade in
services and in traded inventions, creations and designs (intellectual
property).
Principles of the trading
system
The WTO agreements are lengthy and complex because they are legal
texts covering a wide range of activities.
They deal with: agriculture, textiles and clothing, banking,
telecommunications, government purchases, industrial standards, food sanitation
regulations, intellectual property, and much more. But a number of simple, fundamental
principles run throughout all of these documents. These principles are the foundation of the
multilateral trading system.
A closer look at these principles
Trade without
discrimination
1. Most-favoured-nation (MFN):
treating other people equally.
Under the WTO Agreements, countries cannot normally discriminate
between their trading partners. Grant
someone a special favour (such as a lower customs duty rate for one of their
products) and you have to do the same for all other WTO members.
This principle is known as most-favoured-nation (MFN) treatment (see
box). It is so important that it is the
first article of the General Agreement on Tariffs and Trade (GATT), which
governs trade in goods. MFN is also a
priority in the General Agreement on Trade in Services (GATS)(Article 2) and
the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
(Article4), although in each agreement the principle is handled slightly
differently. Together, those three
agreements cover all three main areas of trade handled by the WTO.
Some exceptions are allowed.
For example, countries within a region can set up a free trade agreement
that does not apply to goods from outside the group. Or a country can raise barriers against
products from specific countries that are considered to be traded
unfairly. And in services, countries are
allowed, in limited circumstances, to discriminate. But the agreements only permit these
exceptions under strict conditions. In
general, MFN means that every time a country lowers a trade barrier or opens up
a market, it has to do so for the same goods or services from all its trading
partners – whether rich or poor, weak or strong.
The Principles
The trading system should be:-
·
Without discrimination – a
country should not discriminate between its trading partners (they are all,
equally, granted “most-favoured-nation” or MFN status); and it should not
discriminate between its own and foreign products, services or nationals (they
are given “national treatment”)
·
Freer – with barriers coming
down through negotiation;
·
Predictable-foreign companies,
investors and governments should be confident that trade barriers (including
tariffs, non-tariff barriers and other measures) should not be raised
arbitrarily; more and more tariff rates and market-opening commitments are
“bound” in the WTO;
·
More competitive-by
discouraging “unfair” practices such as export subsidies and dumping products
at below cost to gain market share;
·
More beneficial for less developed
countries-by giving them more time to adjust, greater flexibility, and special
privileges.
Why is it called
‘most-favoured’?
The name sounds like a contradiction. It suggests some kind of special treatment
for one particular country, but in the WTO it actually means
non-discrimination-treating virtually everyone equally. What happens under the
WTO is this. Each member treats all the
other members equally as “most-favoured” trading partners. If a country improves the benefits that it
gives to one trading partner, it has to give the same “best” treatment to all
the other WTO members so that they all remain “most-favoured”.
Most-favoured nation (MFN) status did not always mean equal
treatment. In the 19th
century, when a number of early bilateral MFN treaties were signed, being
included among a country’s “most-favoured” trading partners was like being in
an exclusive club because only a few countries enjoyed the privilege. Now, when most countries are in the WTO, the
MFN club is no longer exclusive. The MFN
principle ensures that each country treats its over-100 fellow-members
equally. But there are some exceptions.
2. National treatment: Treating foreigners and locals equally.
Imported and locally-produced goods should be treated equally-at
least after the foreign goods have entered the market. The same should apply to foreign and domestic
services, and to foreign and local trademarks, copy-rights and patents. This principle of “national treatment”
(giving others the same treatment as one’s own nationals) is also found in all
the three main WTO agreements (Article 3 of GATT, Article 17 of GATs and
Article 3 of TRIPS), although once again the principle is handled slightly
differently in each of these.
National treatment only applies once a product, service or item of
intellectual property has entered the market.
Therefore, charging customs duty on an import is not a violation of
national treatment even if locally-produced products are not charged an
equivalent tax.
Freer trade:
Gradually, through
negotiation
Lowering trade barriers is one of the most obvious means of
encouraging trade. The barriers
concerned include customs duties (or tariffs) and measures such as import bans
or quotas that restrict quantities selectively.
From time to time other issues such as red tape and exchange rate
policies have also been discussed.
Since GATT’s creation in 1947-48 there have been eight rounds of
trade negotiations. At first these
focused on lowering tariffs (customs duties) on imported goods. As a result of the negotiations, by the late
1980s industrial countries’ tariff rates on industrial goods had fallen
steadily to about 6.3%. But by the 1980s, the negotiations had expanded to
cover non-tariff barriers on goods, and to the new areas such as services and
intellectual property. Opening markets can be beneficial, but it also requires
adjustment. The WTO agreements allow
countries to introduce changes, gradually, through “progressive liberalization”. Developing countries are usually given longer
to fulfil their obligations.
Predictability: through
binding
Sometimes, promising not to raise a trade barrier can be as
important as lowering one, because the promise gives businesses a clearer view
of their future opportunities. With stability
and predictability, investment is encouraged, jobs are created and consumers
can fully enjoy the benefits of competition – choice and lower prices. The multilateral trading system is an attempt
by governments to make the business environment stable and predictable. In the
WTO, when countries agree to open their markets for goods or services, they
“bind” their commitments. For goods,
these bindings amount to ceiling on customs tariff rates. Sometimes countries tax imports at rates that
are lower than the bound rates.
Frequently this is the case in developing countries. In developed countries the rates actually
charged and the bound rates tend to be the same.
A country can change its bindings, but only after negotiating with
its trading partners, which could mean compensating them for loss of
trade. One of the achievements of the
Uruguay Round of multilateral trade talks was to increase the amount of trade
under binding commitments (see table).
In agriculture, 100% of products now have bound tariffs. The result of all this: a substantially
higher degree of market security for traders and investors.
The system tries to improve predictability and stability in other
ways as well. One way is to discourage
the use of quotas and other measures used to set limits on quantities of
imports – administering quotas can lead to more red-tape and accusations of
unfair play. Another is to make
countries’ trade rules as clear and public (“transparent”) as possible. Many WTO agreements require governments to
disclose their policies and practices publicly within the country or by
notifying the WTO. The regular
surveillance of national trade policies through the Trade Policy Review
Mechanism provides a further means of encouraging transparency both domestically
and at the multilateral level.
Promoting fair competition
The WTO is sometimes described as a “free trade” institution, but
that is not entirely accurate. The
system does allow tariffs and, in limited circumstances, other forms of
protection. More accurately, it is a
system of rules dedicated to open, fair and undistorted competition.
The rules on non-discrimination – MFN and national treatment – are
designed to secure fair conditions of trade.
So too are those on dumping (exporting at below cost to gain market
share) and subsidies. The issues are
complex, and the rules try to establish what is fair or unfair, and how
governments can respond, in particular by charging additional import duties
calculated to compensate for damage caused by unfair trade. Many of the other
WTO agreements aim to support fair competition: in agriculture, intellectual
property, services, for example. The
agreement on government procurement (a “plurilateral” agreement because it is
signed by only a few WTO members) extends competition rules to purchases by
thousands of “government” entities in many countries. And so on.
Encouraging development
and economic reform
It is widely recognized by economists and trade experts that the WTO
system contributes to development. It is
also recognized that the least-developed countries need flexibility in the time
they take to implement the agreements.
And the agreements themselves inherit the earlier provisions of GATT
that allow for special assistance and trade concessions for developing
countries.
Over three quarters of WTO members are developing countries and
countries in transition to market economies.
During the seven and half years of the Uruguay Round, over 60 of these
countries implemented trade liberalization programmes autonomously. At the same time, developing countries and
transition economies were much more active and influential in the Uruguay Round
negotiations than in any previous round.
This trend effectively killed the notion that the trading system
existed only for industrialized countries.
It also changed the previous emphasis on exempting developing countries
from certain GATT provisions and agreements.At the end of the Uruguay Round,
developing countries were prepared to take on most of the obligations that are
required of developed countries. But the
agreements did give the transition periods to adjust to the more unfamiliar
and, perhaps, difficult WTO provisions-particularly so for the poorest,
“least-developed” countries. A
ministerial decision adopted at the end of the round gives least developed
countries extra flexibility in implementing WTO agreements. It says better-off countries should
accelerate implementing market access commitments on goods exported by the least-developed
countries, and it seeks increased technical assistance for them.
The case for open trade
The economic case for an open trading system based upon
multilaterally agreed rules is simple enough and rests largely on commercial
common sense. But it is also supported
by evidence: the experience of world trade and economic growth since the Second
World War. Tariffs on industrial
products have fallen steeply and will average less than 4% in industrial
countries by 1 January 1999. During the
first decades after the war, world economic growth averaged about 5% per year,
a high rate that was partly the result of lower trade barriers. World trade grew even faster, averaging about
8% during the period.
The data show a definite statistical link between freer trade and
economic growth. Economic theory points
to strong reasons for the link. All
countries, including the poorest, have assets – human, industrial, natural,
financial – which they can employ to produce goods and services for their
domestic markets or to compete overseas.
Economics tells us that we can benefit when these goods and services are
traded.
Simply put, the principle of “comparative advantage” says that
countries prosper first by taking advantage of their assets in order to
concentrate on what they can produce best, and then by trading these products
for products that other countries produce best.Firms do exactly that quite
naturally on the domestic market. But what about the international market? Most
firms recognize that the bigger the market the greater their potential – they
can expand until they are at their most efficient size, and they can have
access to large numbers of customers.
In other words, liberal trade policies – policies that allow the
unrestricted flow of goods and services – multiply the rewards that result from
producing the best products, with the best design, at the best price.But
success in trade is not static. The
ability to compete well in particular products can shift from company to
company when the market changes or new technologies make cheaper and better
products possible. Experience shows that
competitiveness can also shift between whole countries. A country that may have enjoyed an advantage
because of lower labour costs or because it had good supplies of some natural
resources, could also become uncompetitive in some goods or services as its
economy develops. However, with the
stimulus of an open economy, the country can move on to become competitive in
some other goods or services. This is
normally a gradual process.
When the trading system is allowed to operate without the
constraints of protectionism, firms are encouraged to adapt gradually and in a
relatively painless way. They can focus
on new products, find a new “niche” in their current area or expand into new
areas. The alternative is protection against competition from imports, and
perpetual government subsidies. That
leads to bloated, inefficient companies supplying consumers with outdated,
unattractive products. Ultimately,
factories close and jobs are lost despite the protection and subsidies. If other governments around the world pursue
the same policies, markets contract and world economic activity is
reduced. One of the objectives of the
WTO is to prevent such a self-defeating and destructive drift into
protectionism.
NB: The directors-general of GATT and WTO:
·
Sir Eric Wyndham White (UK) 1948-68
·
Olivier Long (Switzerland) 1968-80
·
Aurthur Dunkel (Switzeeland) 1980-93
·
Peter Sutherland (Ireland) GATT 1993-94; WTO 1995
·
Renato Ruggiero (Italy) 1995.
Although the ITO Charter was finally agreed at a UN Conference on
Trade and Employment in Havana in March 1948, ratification in some national
legislatures proved impossible. The most
serious opposition was in the US Congress, even though the US government had
been one of the driving forces. In 1950,
the United States’ government announced that it would not seek Congressional
ratification of the Havana Charter, and the ITO was effectively dead. Even though it was provisional, the GATT
remained the only multilateral instrument governing international trade from
1948 until the WTO was established in 1995.
For almost half a century, the GATT’s basic legal text remained much
as it was in 1948. There were additions
in the form of “plurilateral” agreements (i.e. with voluntary membership), and
efforts to reduce tariffs further continued.
Much of this was achieved through a series of multilateral negotiations
known as “trade rounds” – the biggest leaps forward in international trade
liberalization have come through these rounds which were held under GATT’s
auspices.
In the early years, the GATT trade rounds concentrated on further
reducing tariffs. Then, the Kennedy
Round in the mid-sixties brought about a GATT Anti-Dumping Agreement. The Tokyo Round during the seventies was the
first major attempt to tackle trade barriers that do not take the form of
tariffs, and to improve the system. The
eighth, the Uruguay Round of 1986-94, was the latest and most extensive of all. It led to the WTO and a new set of agreements.
The Tokyo Round:
A first to reform the
system
The Tokyo Round lasted from 1973 to 1979, with 102 countries
participating. It continued GATT’s
efforts to progressively reduce tariffs.
The results included an average one-third cut in customs duties in the
world’s nine major industrial markets, bringing the average tariff on
industrial products down to 4.7%. The
tariff reductions phased in over a period of eight years, involved an element
of “harmonization”- the higher the tariff, the larger the cut, proportionally.
In other issues, the Tokyo Round had mixed results. It failed to come to grips with the
fundamental problems affecting farm trade and also stopped short of providing a
new agreement on “safeguards” (emergency import measures). Nevertheless, a series of agreements on
non-tariff barriers did emerge from the negotiations, in some cases
interpreting existing GATT rules, in others breaking entirely new ground. In most cases, only a relatively small number
of (mainly industrialized) GATT members subscribed to these agreements and
arrangements. Because they were not
accepted by the full GATT membership, they were often informally called
“codes”.
They were not multilateral, but they were a beginning. Several codes were eventually amended in the
Uruguay Round and turned into multilateral commitments accepted by all WTO
members. Only four remained
“plurilateral” – those of government procurement, bovine meat, civil aircraft
and dairy products. In 1997 WTO members
agreed to terminate the bovine meat and dairy agreements from the end of the
year.
NB: The Tokyo Round ‘codes’
·
Subsidies and countervailing measures – interpreting Articles 6, 16
and 23 of GATT
·
Technical barriers to trade – some-times called the Standards Code
·
Import licensing procedures
·
Government procurement
·
Customs valuation – interpreting Article 7
·
Anti-dumping – interpreting Article 6, replacing the Kennedy Round
code
·
Bovine Meat Arrangement
·
International Dairy Arrangement
·
Trade in Civil Aircraft.
Did GATT succeed?
GATT was provisional with a limited field of action, but its success
over 47 years in promoting and securing the liberalization of much of world
trade is incontestable. Continual
reductions in tariffs alone helped spur very high rates of world trade growth
during the 1950s and 1960s – around 8% a year on average. And the momentum of trade liberalization
helped ensure that trade growth consistently out-paced production growth
throughout the GATT era, a measure of countries’ increasing ability to trade
each other and to reap the benefits of trade.
The rush of new members during the Uruguay Round demonstrated that
the multilateral trading system was recognized as an anchor for development and
an instrument of economic and trade reform.
But as time passed new problems arose.
The Tokyo Round was an attempt to tackle some of these but its
achievements were limited. This was a
sign of difficult times to come.
GATT’s success in reducing tariffs to such a low level, combined
with a series of economic recessions in the 1970s and early 1980s, drove
governments to devise other forms of protection for sectors facing increased
foreign competition. High rates of
unemployment and constant factory closures led governments in Western Europe
and North America to seek bilateral market-sharing arrangements with
competitors and to embark on a subsidies race to maintain their holds on
agricultural trade. Both these changes
undermined GATT’s credibility and effectiveness.
The problem was not just a deteriorating trade policy environment. By the early 1980s the General Agreement was
clearly no longer as relevant to the realities of world trade as it had been in
the 1940s. For a start, world trade had
become far more complex and important than 40 years before: the globalization
of the world economy was underway, trade in services – not covered by GATT
rules – was of major interest to more and more countries, and international
investment had expanded. The expansion
of services trade was also closely tied to further increases in world
merchandise trade. In other respects
GATT had been found wanting. For
instance, in agriculture, loopholes in the multilateral system were heavily
exploited, and efforts at liberalizing agricultural trade met with little
success. In the textiles and clothing sector, an exception to GATT’s normal
disciplines was negotiated in the 1960s and early 1970s, leading to the
Multi-fibre Arrangement. Even GATT’s
institutional structure and its dispute settlement system were giving cause for
concern.
These and other factors convinced GATT members that a new effort to
reinforce and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round,
the Marrakesh Declaration, and the creation of the WTO.
Trade rounds: progress by package
They are often lengthy – the Uruguay Round took seven and a half
years – but trade rounds can have an advantage.
They offer a package approach to trade negotiations that can sometimes
be more fruitful than negotiations on a single issue.
·
The size of the package can
mean more benefits because participants can seek and secure advantages across a
wide range of issues.
·
In a package, the ability to
trade-off different issues can make agreement easier to reach because somewhere
in the package there is something for everyone.
This has political as well as economic implications. Concessions (perhaps in one sector) which are
necessary but would otherwise be difficult to defend in domestic political
terms can be made more easily in the context of a package because the package
also contains politically and economically attractive benefits (in other
sectors). As a result, reform in politically-sensitive sectors of world trade
can be more feasible in the context of a global package-reform of agricultural
trade was a good example in the Uruguay Round.
·
Developing countries and other
less powerful participants have a greater chance of influencing the
multilateral system in trade round than in bilateral relationships with major
trading nations.But the wide range of issues that a trade round covers can be
both a strength and a weakness, leading to a debate on the effectiveness of
multi-sector rounds versus single-sector negotiations. Recent history is ambiguous. At some stages, the Uruguay Round seemed so
cumbersome that agreement in every subject by all participating countries
appeared impossible. Then the round did
end successfully in 1993-94, and this was followed by two years of failure to
reach any major agreement in separate, single-sector talks on maritime transport,
basic telecommunications and financial services.
Did this mean that trade rounds were the only route to success? No. In 1997, single-sector talks were
concluded successfully in basic telecommunications, information technology
equipment and financial services. The
debate continues. Whatever the answer,
the reasons are not straightforward; perhaps success depends on using the right
type of negotiation for the particular time and context.
1.
WTO and GATT:
Are
they the same?
No. They are different – the WTO is GATT plus a lot more.
Two GATTs
It is probably best to be clear from the start that the General
Agreement on Tariffs and Trade (GATT) involved two sets agreements: (1) an
international agreement, i.e. a document setting out the rules for conducting
international trade, and (2) an international organization created later to
support the agreement. The text of the agreement could be compared to law, the
organization was like parliament and the courts combined in a single body.
As its history shows, the attempt to create a fully fledged
international trade agency in the 1940s failed.
But GATT’s drafters agreed that they wanted to use the new rules and
disciplines, if only provisionally. Then
government officials needed to meet to discuss issues related to the agreement,
and to hold trade negotiations. These
needed secretarial support, leading to the creation of an ad hoc organization-
that continued to exist for almost half a century.
GATT, the international agency, no longer exists. It has now been replaced by the World Trade
Organization. GATT, the agreement, does still exist, but it is no longer the
main set of rules for international trade.
And it has been updated. What happened? When GATT was created after the
Second World War, international commerce was dominated by trade in goods. Since then, trade in services – transport,
travel, banking, insurance, telecommunications, transport, consultancy and so
on – has become much more important. So
has trade in ideas – inventions and designs, and goods and services
incorporating this “intellectual property”.
The
General Agreement on Tariffs and Trade always dealt with trade in goods, and it
still does. It has been amended and
incorporated into the new WTO agreements.
The updated GATT lives alongside the new General Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS). The WTO brings the three together within a
single organization, a single set of rules and a single system for resolving
disputes.
In
short, the WTO is not a simple extension of GATT. It is much more.
So, the GATT
is dead, long live the GATT!
While
GATT no longer exists as an international organization, the GATT agreement
lives on. The old text is now called
“GATT 1947. The updated version is
called “GATT 1994”.
Moreover,
GATT’s key principles have been adopted by the agreements on services and
intellectual property. These include
non-discrimination, transparency and predictability. As the more mature WTO developed out of GATT,
you could say that the child is the father of the man.
The main
differences
·
GATT was ad hoc and
provisional. The General Agreement was
never ratified in members’ parliaments, and it contained no provisions for the
creation of an organization.
The WTO and its agreements are permanent. As an international organization, the WTO has
a sound legal basis because members have ratified the WTO agreements, and the
agreements themselves describe how the WTO is to function.
·
The WTO has “members”. GATT had “contracting parties”, underscoring
the fact that officially GATT was a legal text.
·
GATT dealt with trade in
goods. The WTO covers services and
intellectual property as well.
·
The WTO dispute settlement system
is faster, more automatic than the old GATT system. Its rulings cannot be blocked.
The world is complex. This booklet highlights some
of the benefits of the WTO’s “multilateral” trading system, but it doesn’t
claim that everything is perfect---otherwise there would be no need for further
negotiations and for the rules to be revised.
No
claims that everyone agrees with everything in the WTO. That’s one of the most important reasons for
having the system: it’s a forum for countries to thrash out their differences
on trade issues.
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