Overview and mechanism Overview and mechanism of of

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of of multilateral trading systemmultilateral trading system

WatcharasWatcharas LeelawathLeelawathInternational Institute for Trade and Development (ITD)International Institute for Trade and Development (ITD)

Outline

A: A: Trade as an Engine of GrowthTrade as an Engine of Growth

B: B: Protectionism VS LiberalizationProtectionism VS Liberalization

-- Tools for national trade policiesTools for national trade policies

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-- Tools for national trade policiesTools for national trade policies

-- Import Substitution and Export PromotionImport Substitution and Export Promotion

C:C: Snapshots of the WTOSnapshots of the WTO

D: D: Economic integration and interplay with the WTOEconomic integration and interplay with the WTO

“No single change could make a greater “No single change could make a greater contribution to eliminating poverty than contribution to eliminating poverty than fully opening up the markets of prosperous fully opening up the markets of prosperous countries to the goods produced by poor countries to the goods produced by poor

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countries to the goods produced by poor countries to the goods produced by poor ones.”ones.”

Kofi AnnanKofi Annan

Secretary General of the United NationsSecretary General of the United Nations

Trade as an Engine of GrowthTrade as an Engine of Growth

“Economic growth is a sustained increase in “Economic growth is a sustained increase in real gross domestic product per capita.” real gross domestic product per capita.”

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“A positive change in the level of production of goods and services by a country over a certain period of time. Economic growth is usually brought about by technological innovation and positive external forces.”

According to Amartya Sen’s According to Amartya Sen’s Development as Freedom,Development as Freedom, economic economic growth is not an ultimate goal; it is a growth is not an ultimate goal; it is a mean to enhance people’s economic mean to enhance people’s economic freedom. freedom.

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Trade Trade ⇒⇒ Growth Growth ⇒⇒ Economic freedomEconomic freedom

-- Better livingBetter living

-- HappinessHappiness

How trade promote growth?How trade promote growth?

Trade helps an economy grow in several ways.Trade helps an economy grow in several ways.

�� Encourage specialization Encourage specialization ⇒⇒⇒⇒⇒⇒⇒⇒ Employ more Employ more resourcesresources

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It encourages economies to specialize and It encourages economies to specialize and produce in areas where they have a relative cost produce in areas where they have a relative cost advantage over other countries. Over time, this advantage over other countries. Over time, this helps economies to employ more of their human, helps economies to employ more of their human, physical and capital resources in sectors where physical and capital resources in sectors where they get the highest returns in open international they get the highest returns in open international markets, boosting productivity and the returns to markets, boosting productivity and the returns to workers and investors. workers and investors.

�� Expand markets Expand markets ⇒⇒⇒⇒⇒⇒⇒⇒ Economies of scale Economies of scale can be achievedcan be achieved

Trade expands the markets that local producers Trade expands the markets that local producers can access, allowing them to produce at the most can access, allowing them to produce at the most efficient scale to keep down costs. efficient scale to keep down costs.

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can access, allowing them to produce at the most can access, allowing them to produce at the most efficient scale to keep down costs. efficient scale to keep down costs.

Even in large developing economies, low incomes Even in large developing economies, low incomes often make producers’ potential local markets often make producers’ potential local markets small. This is because of limited purchasing small. This is because of limited purchasing power. So trade is very much essential. power. So trade is very much essential.

�� Make goods cheaper Make goods cheaper

⇒⇒⇒⇒⇒⇒⇒⇒ enhance producers’ and enhance producers’ and consumers’ welfareconsumers’ welfare

Removing tariffs on imports gives Removing tariffs on imports gives

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Removing tariffs on imports gives Removing tariffs on imports gives consumers access to cheaper products, consumers access to cheaper products, increasing their purchasing power and increasing their purchasing power and living standards, and gives producers living standards, and gives producers access to cheaper inputs, reducing their access to cheaper inputs, reducing their production costs and boosting their production costs and boosting their competitivenesscompetitiveness

Trade and PovertyTrade and Poverty

�� Most experts believe that as a country’s Most experts believe that as a country’s openness to trade increases poverty is openness to trade increases poverty is reduced reduced

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�� Countries like China and Malaysia have Countries like China and Malaysia have experienced rapid growth since experienced rapid growth since establishing more liberal trade policiesestablishing more liberal trade policies

�� As countries become open to trade, per As countries become open to trade, per capita GDP has increased and poverty capita GDP has increased and poverty has been reducedhas been reduced

� Many potential benefits from trade:

• Increases economic growth and increases incomes

• Speeds spread of technology and innovation

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• Speeds spread of technology and innovation

• Allows most efficient country to supply

• Can substitute for aid in development process

• Increases competition

• Greater consumer choice

• Political benefits

Protectionism VS Liberalization

Protectionism: : � Protectionism is based on the belief that exports are good

for the country, but imports are bad for the country.

� Trade between countries is restricted through measures to reduce imports from coming to the country.reduce imports from coming to the country.

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Liberalization:

• Liberalization allows imports from other countries to access domestic market of the home country, by reducing or eliminating barriers to trade.

• It is based on the philosophy of comparative advantages.

• It promotes efficient uses and allocation of resources.

Tools for national trade policies

�� Tariffs:Tariffs:

The most important type of trade restrictions is tariff. A tariff is a

tax or duty levied on the traded commodity as it crosses a national boundary. national boundary.

An import tariff is a duty on the imported commodity.

�� NonNon--tariffs:tariffs:

Non-tariff barriers could be in various forms such as import

quota, product standards, food safety standards, import licensing etc.

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Why does a country impose import tariffs?Why does a country impose import tariffs?

� To raise tariff revenue

� To lower the quantity of imports

To protect domestic suppliers

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� To protect domestic suppliers

� To prevent job loss in some sectors

� To prevent a reduction of workers’ income

� To achieve investment objectives, which in turn, create jobs within the country

Analyzing the effects of import tariffsAnalyzing the effects of import tariffs

�� Domestic price of good Domestic price of good ⇑⇑

Quantity of imports Quantity of imports ⇓⇓

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�� Quantity of imports Quantity of imports ⇓⇓

�� Quantity of domestic products sold Quantity of domestic products sold ⇑⇑

�� Tariff revenue Tariff revenue ⇑⇑

Non-tariff barriers

Rules of OriginRules of Origin

Rules of origin are used to determine Rules of origin are used to determine the nationality of product. the nationality of product.

This is to determine whether a product This is to determine whether a product shall be given preference or whether shall be given preference or whether the MFN tariff should be paid when a the MFN tariff should be paid when a product is imported. product is imported.

The primary objective of SPS (Sanitary and phytosanitary measures) and TBT (Technical barriers to trade) is to protect consumers so as to maximize social welfare. However, the WTO recognizes that both standards may impede trade.

TBT and SPSTBT and SPS

trade.

Though the WTO provides freedom for each member to have its own standards, the WTO encourages members to adopt standards developed by international organizations on a non-discriminatory basis.

TBT relates to technical standards TBT relates to technical standards covering all products, including food, covering all products, including food, and product specification issues such and product specification issues such as size, shape, weight and packaging as size, shape, weight and packaging

TBT

as size, shape, weight and packaging as size, shape, weight and packaging material requirements, including material requirements, including labeling and safe handling. labeling and safe handling.

SPS includes all measures to ensure the safety of food for human and prevent the spread of animal an plant pests and diseases.

SPS

SPS covers food and agricultural sector and the issues relates to the level of microbial, toxic and physical contaminations.

�� Disciplines imposed on measures used to Disciplines imposed on measures used to protect human, animal and plant life from protect human, animal and plant life from foreign pests, diseases and contaminantsforeign pests, diseases and contaminants

SPS

�� Such measures can significantly impede tradeSuch measures can significantly impede trade

�� Must be nonMust be non--discriminatorydiscriminatory

�� Measures must now be based on scientific Measures must now be based on scientific assessment of risksassessment of risks

Potential impacts of standardsPotential impacts of standards

Developing countries are standard takers, not standard setters.

� High cost to ensure the compliance with importing countries’ health or safety regulations

⇒ New investment is required.

� Difficulties in gaining access to relevant and useful information on rules and regulations

� Limited ability to maintain records at the field level as required by some standards

These standards are likely to be complied by large multinational companies (MNCs), not labor-intensive SMEs.

Indonesia Indonesia

�� Jakarta port closure for fruit imports Jakarta port closure for fruit imports

�� Import licensing on textiles and clothing; electronic appliances; toysImport licensing on textiles and clothing; electronic appliances; toys

�� SPS SPS imposed on red onion: root must be cut before export imposed on red onion: root must be cut before export →→ increase trade cost increase trade cost

Require imported pharmaceutical products to be registered with local pharmaceutical Require imported pharmaceutical products to be registered with local pharmaceutical

Protectionism in ASEAN

�� Require imported pharmaceutical products to be registered with local pharmaceutical Require imported pharmaceutical products to be registered with local pharmaceutical companycompany

�� Limit exports of rattan which is used to product furniture Limit exports of rattan which is used to product furniture →→ cost of producing furniture in cost of producing furniture in other countries increaseother countries increase

�� Campaign to lower rice consumption: “No rice day” program on Tuesday Campaign to lower rice consumption: “No rice day” program on Tuesday →→ effects effects Thailand’s export of rice and Thai restaurants in IndonesiaThailand’s export of rice and Thai restaurants in Indonesia

�� Label requirements for riceLabel requirements for rice

�� Safeguard investigation on imports of mackerel, finished casing and tubing, conveyor belts, Safeguard investigation on imports of mackerel, finished casing and tubing, conveyor belts, nonnon--alloy steelalloy steel

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Import Substitution and Export Orientation

Import substitution industrialization strategyImport substitution industrialization strategy: :

The industrialization policy that many developing countries followed The industrialization policy that many developing countries followed curing the curing the 19501950s, s, 19601960s, and s, and 19701970s involving replacement of s involving replacement of

imports of industrial goods with domestically produced goods.imports of industrial goods with domestically produced goods.

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imports of industrial goods with domestically produced goods.imports of industrial goods with domestically produced goods.

ExportExport--oriented industrialization strategyoriented industrialization strategy: :

The industrialization policy that pursued by some The industrialization policy that pursued by some developing countries that involves increasing the output of developing countries that involves increasing the output of manufactured goods for export. manufactured goods for export.

An import substitution strategy has four An import substitution strategy has four main advantages:main advantages:

� Low risks in setting up an industry

The market for the industrial product already exists, as evidenced by imports of the commodity, so that risks are reduced n setting up an industry to replace imports.

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� Easier to implement than export promotion strategy

Compared to export promotion strategy, an import substitution strategy is easier for developing countries to protect their domestic market against foreign competition than to force developed countries to lower trade barriers against their manufactured exports.

� Induce foreign investment

Foreign firms are induced to establish so-called tariff factories to overcome the tariff wall of developing countries.

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� Possibly lead to exports

After some time, domestic firms can develop their technology and know-how, and thereby improve the quality of their products. The firms can export the products, which once used to be produced only for domestic market.

The disadvantages of import substitution policy

are as follows:

� Protection ⇒ No incentive for domestic firms to become more efficient

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� Small domestic market ⇒ Can’t achieve economies of scale

� Relatively inefficient domestic production ⇒ More expensive goods

� Overcome smallness of domestic market

Export orientation strategy allows a developing country to take advantage of economies of scale and overcome the smallness of domestic market.

ExportExport--oriented industrialization strategy oriented industrialization strategy has three main advantages:has three main advantages:

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�� Promote efficiency throughout the economyPromote efficiency throughout the economy

Production of manufactured goods for export requires and stimulates Production of manufactured goods for export requires and stimulates efficiency throughout the economy. This is especially important when the efficiency throughout the economy. This is especially important when the output of one industry is used as an input of another domestic industry.output of one industry is used as an input of another domestic industry.

� Gain bigger market

Unlike import substitution, the expansion of manufactured exports is not limit by the growth of domestic market.

WTOWTO

Snapshots of the WTO

Regional

Bilateral

Background and functions of WTOBackground and functions of WTO

�� Created on January Created on January 11, , 19951995

Successor of the General Successor of the General �� Successor of the General Successor of the General Agreements on Tariffs and Trade Agreements on Tariffs and Trade (GATT)(GATT)

The International Organization that Governs the

Rules of Trade Between Nations

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Functions:

-administer WTO trade agreements-forum for trade negotiations-handle trade disputes-monitor national trade policies-technical assistance and training-cooperate with international organizations

After WW II

World Bank IMF International Trade Organization

Not successful

GATTWorld Trade Organization

(WTO) From 1948 to 1995

WTO organization chartWTO organization chart

WTO’s Fundamental PrinciplesWTO’s Fundamental Principles

Based on five principles:Based on five principles:

•• Trade without discriminationTrade without discrimination

•• Freer trade, gradually, through Freer trade, gradually, through negotiationnegotiation

•• Predictability, through binding and Predictability, through binding and transparencytransparency

•• Promoting fair competitionPromoting fair competition

•• Encouraging development and Encouraging development and economic reformeconomic reform

Major issues negotiated under WTO

� Agriculture--GATT

� Non-Agricultural Market Access (NAMA)--GATTNon-Agricultural Market Access (NAMA)--GATT

� Services---GATS

� Intellectual Property--TRIPS

Agricultural NegotiationsAgricultural Negotiations

Three pillars of the negotiationsThree pillars of the negotiations

�� Export subsidiesExport subsidies

�� Domestic supportDomestic support

�� Tariff cutsTariff cuts

Export subsidies and domestic support Export subsidies and domestic support lead to price distortions in global lead to price distortions in global market. market.

Subsidy/support Subsidy/support ⇒⇒ Supply rises Supply rises ⇒⇒ Price Price Subsidy/support Subsidy/support ⇒⇒ Supply rises Supply rises ⇒⇒ Price Price fallsfalls

Points for negotiations under NAMA Points for negotiations under NAMA

�� Reducing average tariffs by adopting Reducing average tariffs by adopting Swiss formulaSwiss formula

NAMA

�� Reducing average tariffs by adopting Reducing average tariffs by adopting Swiss formulaSwiss formula

�� Reducing the number of tariff peaksReducing the number of tariff peaks

�� Reducing tariff escalation Reducing tariff escalation

Automotive & partsAutomotive & parts

Bicycles &partsBicycles &partsElectronicsElectronics

forest productsforest products

fish and fish productsfish and fish products

gems and jewellerygems and jewellery

ChemicalsChemicalsSectorSector

gems and jewellerygems and jewellery

hand toolshand tools

raw materialsraw materials

textiles, clothing and footweartextiles, clothing and footwear

toystoyssports equipmentsports equipment

mmachineryachinery

SectorSector

NonNon--Agricultural Market Access NAMA)Agricultural Market Access NAMA)

Doha Mandate

Reduce/Eliminate Takes into Account

High Tariffs

Tariff Peaks

Tariff Escalation

Non-Tariff Barriers

Special Needs& Interest ofDevelopingCountries

In particular to Product of

Export Interest to Developing

countries

�� Three most liberalized services sectors: Three most liberalized services sectors:

•• TourismTourism

•• Financial servicesFinancial services

•• Telecommunication servicesTelecommunication services

Services Negotiations

�� In general, developed countries have In general, developed countries have made commitments in all major sectors made commitments in all major sectors except courier and postal servicesexcept courier and postal services

�� All developing countries have made All developing countries have made commitments on tourism servicescommitments on tourism services

Doha negotiationsDoha negotiations

�� Started in Doha in Started in Doha in 20012001

Many deadlines have been missed.Many deadlines have been missed.�� Many deadlines have been missed.Many deadlines have been missed.

•• 20042004

•• July July 20072007

•• and…..a few more after that..and…..a few more after that..

Economic integration and interplay with the WTO

Economic Integration refers to the commercial Economic Integration refers to the commercial policy of discriminatively reducing or eliminating policy of discriminatively reducing or eliminating trade barriers only among the nations joining trade barriers only among the nations joining together.together.

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The degrees of economic integration are as follows:The degrees of economic integration are as follows:

•• Preferential trade arrangementsPreferential trade arrangements•• Free trade areaFree trade area•• Customs unionCustoms union•• Common marketCommon market•• Economic unionEconomic union

Economic integration and developmentEconomic integration and development

� LCDs in the region will be able to link their production to the supply chain in the region for eventual export to the destinations outside the region.

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� Higher investment from countries in the region will create more employment of semi-skilled and unskilled workers in LCDs in the region. As a result, income of the poor will increase and their quality of life will improve.

GATT Art. XXIVGATT Art. XXIV

� GATT sets out rules with which WTO members must comply in establishing a RTA covering trade in goods. It applies to customs unions (CUs) and free trade areas (FTAs).

WTO Rule on Economic Integration

Article XXIV imposes 3 obligations on WTO members wishing to enter into a RTA covering trade in goods;

• An obligation to notify a RTA to the WTO

• An obligation not to raise the overall level of protection and make access to products of third parties not participating in the RTA more difficult

• An obligation to liberalize substantially all the trade among constituents of the RTA

Forms of Economic IntegrationForms of Economic Integration

• Common Market

• Economic Union

� Preferential Tariff Arrangement

• Free Trade Arrangement

• Customs Union

• Common Market

Preferential Trade ArrangementsPreferential Trade Arrangements

PTAs provide lower barriers on trade PTAs provide lower barriers on trade

among participating nations than on among participating nations than on

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among participating nations than on among participating nations than on trade with nonmember nations. This is trade with nonmember nations. This is the loosest form of economic the loosest form of economic integration. integration.

Free Trade AreaFree Trade Area

An FTA is the form of economic integration wherein An FTA is the form of economic integration wherein all barriers are removed on trade among members, all barriers are removed on trade among members, but each nation retains its own barriers to trade but each nation retains its own barriers to trade with nonmembers. with nonmembers.

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with nonmembers. with nonmembers.

�� Within AFTA framework, Laos reduced customs Within AFTA framework, Laos reduced customs duties to duties to 00--55% by the end of % by the end of 20082008..

�� The government of Thailand has concluded bilateral The government of Thailand has concluded bilateral trade agreements with Australia, New Zealand, trade agreements with Australia, New Zealand, Japan and AFTA.Japan and AFTA.

Customs UnionCustoms Union

A customs union allows no tariffs or A customs union allows no tariffs or other barriers on trade among other barriers on trade among members (as in an FTA), and in members (as in an FTA), and in addition it harmonized trade policies addition it harmonized trade policies

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addition it harmonized trade policies addition it harmonized trade policies such as setting common tariff rates such as setting common tariff rates toward the rest of the world. toward the rest of the world.

�� European Common Market European Common Market 19571957

�� MercosurMercosur——South Common Market South Common Market

Common MarketCommon Market

A common market goes beyond a customs A common market goes beyond a customs

union by also allowing the free movement union by also allowing the free movement

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union by also allowing the free movement union by also allowing the free movement of labor and capita among member of labor and capita among member nations.nations.

�� The EU achieved the status of a common The EU achieved the status of a common market at the beginning of market at the beginning of 19931993..

Economic UnionEconomic Union

An economic union goes still further by An economic union goes still further by harmonizing or even unifying the harmonizing or even unifying the

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harmonizing or even unifying the harmonizing or even unifying the monetary and fiscal policies of member monetary and fiscal policies of member states. This is the most advanced type of states. This is the most advanced type of economic integration. economic integration.

�� The EuroThe Euro--zone, which consists of zone, which consists of 15 15 member countries within the EU. member countries within the EU.

SummarySummary

FTAFTA Customs

Union

Common

Market

Economic

Union

Free trade among Free trade among membersmembers

YesYes YesYes YesYes YesYes

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membersmembers

Common external Common external tarifftariff

NoNo YesYes YesYes YesYes

Free resource Free resource mobilitymobility

NoNo NoNo YesYes YesYes

Common macroCommon macro--economic policieseconomic policies

NoNo NoNo NoNo YesYes

THANK YOUTHANK YOU

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THANK YOUTHANK YOU

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