Chapter

6 International Trade

T
Definitions 102
rade across borders inflames passions and creates controversies that are
absent in discussions of trade within countries. Early chapters of this book
Theoretical Perspectives: demonstrated the importance of trade in the evolution of the contempo-
Free Trade and
rary global economic system. This chapter provides an introduction to under-
Protectionism 103
standing the political economy of the modern global trading system. One striking
Major Developments 108 feature of the contemporary international trading system arises from the conflict
Key Issues 115 between the continuing political importance of the national border and its declin-
ing economic relevance. Political conflicts over trade exist simultaneously with
Conclusion 124
the growth of transnational production (see Chapter 7), wherein production by
Further Reading 124 firms is less restricted by national frontiers than at any time in history.
This chapter provides an introduction to international trade through an exam-
ination of the material and normative structures that constitute the international
trading system. It begins with a brief definition of some key terms, and an intro-
duction to the importance of the means of exchange. Next, we discuss some of the
more important theoretical disputes and examine empirical claims made by vari-
ous proponents in key debates concerning the evolution and impact of free trade.
We then examine the major developments in the postwar international trading
system. These include the tremendous expansion in trade, the development of
new forms of protectionism, and the emergence and development of the regula-
tion of trade through, first, the General Agreement on Tariffs and Trade (GATT)
and, latterly, the World Trade Organization (WTO). The key issues considered in
this chapter are the special needs of developing countries, the growth of regional-
ism and the debate over the legitimacy of the trading system.

DEFINITIONS
Simply speaking, trade refers to the exchange of one commodity for another. When-
ever two or more individuals exchange goods and services, they are engaged in trade.
Thus we can see that trade has been a feature of all civilizations. Trade as an activity
takes place domestically when two or more individuals exchange goods and services.
International trade arises when the exchange is conducted across national borders.
However, the content of what are considered tradeable commodities and hence
part of the international trading system has changed historically. While current
definitions of international trade highlight it as consisting of the exchange of
goods and services, the latter has only recently been integrated into the interna-
tional trading system with the creation of the General Agreement of Trade in Ser-
vices (GATS) at the conclusion of the Uruguay Round of trade negotiations.
Traditionally, many parts of the services sector were seen as principally confined
 Chapter 6 INTERNATIONAL TRADE 103

to the domestic economy and not subject to trade policy 2 Subsidies: payments made to particular industries to
considerations. The increasing importance of the ser- help them to be competitive on the international
vices sector in national output, the deregulation of many market. Examples of subsidies include depreciation
service sectors previously held to be the domain of gov- allowances, cash grants and tax holidays.
ernment policy, and technological change leading to 3 Currency controls: limit the availability of foreign
removal of existing (national) barriers to entry created currency for the purchase of foreign goods.
conditions that led to changed attitudes concerning the 4 Administrative regulations: include bureaucratic
content of international trade and the need for interna- procedures, systems of advance payment, mini-
tional regulation. Pressure for GATS came from govern- mal domestic content rules, special marketing
ments in the developed world mainly, the European standards and health and safety provisions.
Union and the United States, and leading companies in 5 Voluntary export restraints: whereby one country
the financial and telecommunications services sectors. agrees to limit its exports to a third country (or
In any discussion of international trade, two issues countries). This agreement is usually made
are important: the existence of barriers or restrictions because the importing country (countries) threat-
to trade, and the medium of exchange in which trade is ens to place barriers against the goods of the export-
conducted. There are a number of different barriers to ing country.
trade and we will be concerned here with political
rather than technical barriers such as travel and dis- When two or more parties decide to engage in trade
tance. Political barriers to trade are erected wherever they have to agree on a medium of exchange. There are
different political authorities decide to prohibit or essentially two means of facilitating exchange – barter
restrict their citizens’ access to foreign goods and ser- and money. As described in Chapter 3, under a barter
vices. In other words, for a variety of reasons, the goods system a direct exchange of commodities takes place.
and services from one political region may be prohib- For example, person A swaps cows for goats with per-
ited from entering, or leaving, another region; or they son B. When trade becomes more complex, either
may be made more costly for a country’s citizens in through the number of traders involved or because of
comparison with similar domestic goods and services. the range of commodities traded, money tends to
Within the global political economy, therefore, the replace barter as the most efficient means of exchange.
national border has added significance, insofar as dif- Money need not take the form we know today: histori-
ferent national authorities may attempt to control the cally, many commodities, including cowrie shells and
activities of their citizens in making transactions across gold, have played the role of money, that is, as a store of
borders. Protectionism refers to policies designed to value and a means of exchange. In Chapter 8, we will
restrict the import of goods and services. In recent his- consider how different international monetary systems
tory, discussions of protectionism have referred to facilitate or hinder international economic activity such
national forms of protection, but this need not be the as trade.
case. For example, until Federation in 1901, the
Australian colonies had systems of protection against
imports from each other.
Protection can take many forms, but the most com-
THEORETICAL PERSPECTIVES:
mon has traditionally been tariffs. Tariffs are a tax FREE TRADE AND
imposed on imports of particular products. The tax rev-
enue goes to the government of the importing state.
PROTECTIONISM
More recently, protection has increasingly taken the Is trade beneficial or harmful? Should traders be free to
form of non-tariff barriers (NTBs), such as: move goods and services across national frontiers? And
if trade is to be subject to restrictions, what kinds of
1 Quotas: the application of a quantitative restriction barriers should be imposed and for what reasons?
against goods and services from another country These questions have confronted policy makers, citi-
or region, as well as health and safety require- zens, businesspeople and scholars for centuries. In the
ments. In other words, quotas are specific limits on era of globalization these questions take on an increased
the quantity of imports or their value. relevance.
104 Part 3 DYNAMICS

Within the contemporary global economy, interna- The theory of comparative advantage thus lies at the
tional trade touches many societies and communities centre of neoclassical trade theory. Prior to the devel-
through direct and indirect effects. It reaches into our opment of the theory of comparative advantage (or
homes, workplaces and recreational venues. Depending comparative costs, as it is sometimes known) by the
on where we live and how deeply our society is inte- British political economist David Ricardo in the 19th
grated into the global economy, we can find daily century, the dominant approach to trade focused on
reminders of the importance of international trade absolute advantage. Mercantilist theories argued that
through the consumption patterns of our families and the aim of a country was to increase its trade relative to
friends. At its simplest level, the food we eat and the that of its rivals, thus increasing its wealth. For mercan-
clothes we wear provide evidence of the tremendous tilists, trade was a zero-sum game with one country’s
importance of trade across national frontiers. But gain equivalent to a loss sustained by its trading part-
despite this importance, there is no consensus concern- ner. Since mercantilists believed there was a fixed
ing the costs and benefits to countries from engaging in amount of gold in the world, it therefore followed that
the pursuit of trade. Perhaps we should say that con- a country with a trade surplus received more gold and
flicting views exist because of the salience of trade. hence an increase in its wealth. Adam Smith provided
Given the conflicting values and interests in this struc- an answer to mercantilist theorists with his concept of
ture of the global political economy, it is not surprising absolute advantage. Smith argued that two countries
to discover the absence of agreement on the answers to could benefit from trade if they specialized in the
the questions posed above. goods they produced better than their rivals and traded
We will now explore contrasting perspectives on the with each other. Smith’s theory of absolute advantage
costs and benefits of international trade, beginning was an advance on mercantilist thought, but Ricardo’s
with arguments that emphasize the benefits of free singular achievement was to demonstrate that trade
trade before moving on to examine critical perspec- was a positive-sum game in which all parties benefited
tives. Liberal political economy emphasizes the benefits even if one party had an absolute advantage in the pro-
of trade. For liberals, free trade benefits everyone, duction of all goods and services. Stated simply, the
increases efficiency and raises productivity. In sharp theory of comparative advantage shows that if a coun-
contrast, nationalist and radical critics argue that free try specializes in the production of those goods and
trade can undermine national economies, create uneven services in which it is relatively efficient (or alterna-
development and damage the environment. tively, relatively less inefficient) compared with its com-
petitors, it will be better off. As illustrated in Chapter 4,
Ricardo’s model discussed two countries and two prod-
Proponents of free trade ucts and showed how, given different cost structures of
production, trade was beneficial for both countries
Within academic and policy contexts, liberal trade the- since it enabled them to consume more than they
ory provides the framework for the analysis of interna- would be able to without trade.
tional trade. This is a sophisticated and substantial body Under a liberal order, trade would be undertaken by
of work that has emerged since its tentative origins in countries according to their comparative advantage.
the 19th century. Liberal trade theory appears counter- Countries would improve their economic growth, and
intuitive since it propounds a positive-sum view of become more stable, powerful and efficient since they
something that many people perceive as being zero would be specializing in the production of goods and
sum. A common-sense view of transactions sees one services in which they were the most efficient produc-
side as gaining while the other one loses. Many people ers and enabling their consumers to buy foreign goods
are sceptical of the notion that both sides to a transac- at the lowest prices. Specialization in accordance with
tion can make a profit. The liberal case for free trade, comparative advantage promotes efficiency since, by
that is, a situation in which all can gain, is based on the definition, a small market is an obstacle to growth.
theory of comparative advantage. According to the the- Ricardo’s theory provides the basic principles underly-
ory of comparative advantage, countries should special- ing modern trade theory. However, its assumption that
ize and produce the goods and services in which they differences in labour productivity were the sole deter-
are most efficient. minant of comparative advantage is too limiting, and
 Chapter 6 INTERNATIONAL TRADE 105

modern trade theory focuses on factor endowments view, trade is an engine of growth and generates a
(capital, land and labour). Developed by Eli Heckscher number of dynamic, educative effects, including the dif-
(1919) and Bertil Ohlin (1933), factor endowment the- fusion of knowledge of production and organizational
ory states that comparative advantage arises from the techniques, and changed patterns of demand. Speciali-
different relative factor endowments of countries. zation leads to an increase in productivity and eco-
Countries will have a comparative advantage in those nomic growth. The theory of comparative advantage, it
industries that concentrate on the natural advantages or is argued, is relevant for all countries. Free trade offers
endowments of that country. For example, a country hope for low-income countries, whereas protectionism
that has a large poor population will be most efficient in harms poor countries (see Box 6.1). Liberal trade theo-
industries that require cheap labour (such as textile rists argue that specialization brings the likelihood of
production), while a country with a large amount of an improvement in skills and an increase in workforce
fertile land and a small population will be better off productivity. They contend that since the export sector
specializing in farming. Following this theory, it is not can act as a stimulus to the economy as a whole, and
surprising that Bangladesh has a comparative advan- foreign investment accompanies increased trade, devel-
tage in textiles and New Zealand has one in sheep and oping countries will be better off under a free-trade
dairy products. Bangladesh has greater factor endow- regime. Liberal economists argue that the evidence
ments in labour, while New Zealand has the factor shows that technological progress has been faster, all
endowment advantage in land. In this case, the Heck- other things being equal, for countries that have been
scher-Ohlin theorem would predict that New Zealand increasing their openness to the international flow of
will export sheep or dairy products to Bangladesh in goods, services, capital, labour, technology and ideas.
exchange for textiles. Low-income, developing countries can import technol-
Liberal trade theory has been further refined to take ogies and information at virtually zero cost, whether
account of the growth of intra-firm and intra-industry explicitly (the actual process or plan) or implicitly
trade, but these refinements do not challenge the basic (through the goods themselves). They insist that the
underlying assumptions of the liberal paradigm. Lib- process of innovation and the diffusion of knowledge is
eral trade theory does not enquire into the origin of linked to international trade and is crucial for growth.
comparative advantage, that is, it does not ask how the Although the theory of comparative advantage is
different cost structures were established initially. It is theoretically elegant, it has consistently been attacked
also prescriptive, since it suggests that the welfare of an by critics. Despite these attacks, the theory has been suf-
individual country and that of the world as a whole will ficiently robust to withstand these various critiques. We
be improved if countries specialize according to their will now discuss two schools of thought critical of the
comparative advantage. This theory therefore pre- liberal arguments in support of free trade. First, we will
scribes free trade and warns of the dangers of protec- examine the approaches of writers who can, broadly
tionism. From a liberal perspective, protectionism is speaking, be grouped together under the umbrella of
inefficient, since it reduces competition and increases mercantilism and neomercantilism. We will then look
the monopoly power and thus the profits of the indus- at variants of critical theory.
tries (or companies) that benefit from protection. On
the other hand, free trade increases the amount of
products available to consumers, although ultimately it Critics of free trade
may reduce the level of product differentiation in each
country. The gains from trade come partly from greater Mercantilist and neomercantilist writers advocate the
product variety and partly from the lower price per regulation of economic life to enhance state power or
product. protect a variety of national groups from competition.
Free-trade theory emphasizes the gains or benefits Support for protection comes from groups who argue
from trade for a nation. There are two aspects to the that protection of local production increases national
gains from trade: the static benefits deriving from (usually economic) welfare. Many people are willing to
specialization according to comparative advantage and forgo absolute gain for relative gain; that is, in an anar-
those deriving from and contributing to the process of chical international system, states in pursuit of power
economic growth and development over time. In this may give primacy to the relative gains from trade and
106 Part 3 DYNAMICS

Box 6.1 The costs of protectionism: a liberal perspective

Many opponents of liberal trade argue that further liberalization damages the interests of people in poor
countries. However, the liberal theories examined above suggest the reverse. In other words, it is
protectionism rather than free trade that hurts the global poor in both developing and developed states.
Protectionism may be in the interests of some producers but overall it has a negative impact on consumers
in rich and poor countries.
While there is no agreement on the precise amount by which protectionism in the rich countries nega-
tively affects poorer countries the general consensus is that it is significant (Tokarick, 2008) and negatively
impacts both trade and growth (OECD, 2010). Furthermore, studies show that protectionism or unfair trade
practices hit precisely those sectors where poor countries have the greatest potential to reap gains from
trade, and thus impact the poorer segments of society (Goldin and Reinert, 2007, p. 61). An International
Food Policy Research Institute study has calculated that rich countries’ agricultural protectionism costs
developing countries around US$24 billion in lost income (Diao et al., 2003, p. 2). The authors note that
trade-distorting measures account for another US$40 billion of lost agricultural exports from the developing
world. Another study has concluded that although reform of the EU’s Common Agricultural Policy has
reduced its trade-distorting impact on world markets, heavy subsidies to European farmers nevertheless
result in significant losses for some developing countries’ producers (Matthews, 2008).
Liberal theorists contend that protectionism in OECD countries also has a detrimental effect on the host
country. For example, it has been estimated that American protectionist policies cost US consumers $70
billion in 1990, more than 1 per cent of gross national product (GNP) (Hufbauer and Elliott, 1994). Another
study of US protectionist practices claimed that the loss suffered by consumers was three times greater than
any gains to workers (Krol, 2008).

adopt protectionist measures in order to stabilize their be given to these industries until they become competi-
economies even though it diminishes their absolute tive and can reap the benefits of comparative advantage.
gains from trade. Historically, protectionist policies, by providing the
Some state-based critiques of liberal trade theory opportunity to develop economies of scale and domes-
have focused on the prescriptive power of the theory, tic market stability, have been important and perhaps
and others on the accuracy of its empirical claims. Two necessary components of government-led strategies of
arguments have been made consistently since the 19th economic growth and restructuring (Chang, 2002) in
century diminishing the desirability of free trade. The countries such as Germany and the US. According to
first argument is the so-called ‘infant industry’ case. advocates of this form of protection, governments
Supporters of industrialization argue that predomi- should intervene to protect those industries that have
nantly agricultural countries will experience obstacles the potential to develop efficient production but which
in their attempts to industrialize, since comparative at the moment would be destroyed by fierce interna-
advantage dictates that they continue to import indus- tional competition. In societies that have already indus-
trial products whereas they may well have a future com- trialized, infant industry arguments are mobilized in
parative advantage in the production of industrial favour of postindustrial areas of economic activity. For
products. The infant industry argument makes the case example, a country might be concerned about entering
for temporary protection for industries likely to become markets in the industries of the future such as nano-
competitive on the world stage. This perspective is not technology or biotechnology.
simply about individual industries but is tied to a wider Some liberal theorists are willing to accept the infant
societal vision. The process of industrialization, in this industry argument as an exception to standard com-
view, will be hindered in the absence of effective protec- parative advantage theory. However, while providing
tion of fledgling local industries, thus providing sup- support for temporary forms of protection, they stress
port for a policy of tariffs and other protections for new an inherent problem with the infant industry argument.
domestic industries. In other words, protection should Domestic producers are unlikely to willingly renounce
 Chapter 6 INTERNATIONAL TRADE 107

the protection from which they benefit, and agreement We can identify three different strands of the critical
on the point at which protection is to be discontinued or radical critique of free trade. The one with the long-
may therefore prove politically difficult even though the est historical legacy is the unequal exchange perspec-
economic arguments are compelling. How is a govern- tive. Writers in this perspective have a Marxist heritage
ment able to determine what needs protection and for and provide a powerful social justice critique of liberal
how long? Is a government likely to make a better deci- trade principles. Although a single unequal exchange
sion than the market? perspective does not exist, broadly speaking, we can
The second historical argument against free trade discern three main parts to this critique. First, these
claims that the dictates of national security take prece- writers stress the importance of historical power rela-
dence over trade. In other words, countries need to be tions in the creation of comparative advantage (Frank,
self-sufficient in the production of certain strategic 1967). Unlike liberal analysts who take comparative
industries. These may be related directly to the waging advantage as a given, unequal exchange theorists
of war or they may refer to foodstuffs. Whether items enquire into the construction of different cost struc-
are necessary for the direct defence of the nation or tures across national borders and argue that many have
food security, dependence on external markets can been determined by imperialist plunder. The second
threaten a nation’s security. In the interests of national aspect of the unequal exchange perspective is an
security, countries are urged to temper support for free emphasis on the redistributional benefits of free trade.
trade with policies protective of national security. It is They emphasize the unequal gains to participants in
widely accepted that if free trade jeopardizes other non- international exchange, which, they argue, freeze the
economic objectives such as national security, it is nec- status quo and make it difficult for poorer countries to
essary for governments to impose restrictions in order develop, and the concentration of economic power in
to protect society. From this perspective, the real income the hands of the wealthy (Coote, 1992; Oxfam Interna-
gains that motivate free trade cannot be separated from tional, 2002). Within the current world order, trade
the security externalities that can either impede or from this perspective sustains the activities of TNCs
facilitate it. Trade with an adversary can be harmful to a and large bureaucracies (government departments or
nation’s security, while trade with an ally can support a regional organizations) at the expense of peasants and
nation’s security. Although states resort to economic workers (Madeley, 1992). A third variant of this per-
warfare and use economic sanctions in cases of conflict, spective was developed by Arghiri Emmanuel (1972),
it can be argued that the security dimension of trade is an Italian Marxist, who argued that trade systematically
always present. discriminated against developing countries because of
The infant industry argument and the national secu- the lower wage rates in developing countries. Emma-
rity argument have a long historical pedigree. Two fur- nuel assumed that labour productivity did not vary
ther arguments for protection have emerged to lend between rich and poor countries and therefore the
support to the state-based critique of free trade. First, product of labour was equal in rich and poor countries.
strategic trade theory (Krugman, 1986, 1987) argues But since the prices of goods produced by rich coun-
that countries should pursue competitive advantage in tries reflected their high wages and those produced by
those industries of future economic benefit to the poor countries reflected their low wages, the exchange
nation where the economic and social costs of falling was inherently unequal since goods produced by rich
behind competitors are huge. Second, a number of gov- countries commanded a higher price internationally.
ernments and domestic groups concerned about the Another radical argument in favour of protection is
impact of globalization on their culture have argued made by environmental activists (Ekins, 1989; Morris,
that protectionist measures should be implemented to 1989), who claim that free trade contributes to envi-
protect the national culture. In the face of globalization, ronmental degradation. They argue that the externali-
many analysts warn that distinctive cultural practices ties of trade are omitted from standard trade theory
will be swamped by the import of goods and ideas from (Clapp and Dauvergne, 2011, pp. 129–30). Environ-
abroad. Cultural protection in relation to films, media mentalists contend that current trading practices are
and communications technologies is therefore sup- unsustainable and they campaign for a return to local
ported by those who want to resist what they see as the trade (Shrybman, 1990). This is discussed in more detail
undesirable consequences of globalization. in Chapter 12. Feminist scholars have also turned their
108 Part 3 DYNAMICS

attention to the gendered nature of trade, arguing that world trade. The failure of states to create an Interna-
trade is not gender neutral (Samson, 1995; Van Staveren tional Trade Organization (ITO) after the Second
et al; 2007). In common with human rights and envi- World War left the GATT as the primary international
ronmental activists, feminists argue that trade theory framework governing trade relations. In 1995, the
has ignored the social costs of trade (Fontana et al., GATT gave way to the new WTO, an indication of a
1998). Similarly, scholars and activists wanting the further institutionalization of trade rules.
incorporation of labour rights (Verma, 2003) and
human rights issues into trade (see Abbott et al., 2006;
Dommen, 2002) have also explored ways of incorpo- Growth and protectionism
rating these concerns into the traditional paradigm.
In this section, we have examined competing per- Since the end of the Second World War, trade has
spectives on the relationship between free trade and increased more rapidly than production, which is a
national and/or world welfare. We have argued that clear indicator of the increased internationalization of
modern international trade theory provides a norma- economic activities and the greater interconnectedness
tive framework for the conduct of international trade. It that has come to characterize the world economy.
furnishes both an explanation of, and justification for, Between 1945 and 2007, growth in world trade consist-
trade. Thus, despite the claims of standard neoclassical ently outstripped growth in world production. In this
economics, trade theory is ideological and political. period, world production doubled but international
This does not mean that its analytical tools, prescrip- trade grew more than fourfold.
tions and conclusions are to be rejected as biased and The onset of the global economic recession in 2008
unscientific. Rather, this recognition brings to the fore led to the largest contraction in world trade (in 2009)
the fact that trade theory is not only socially con- since the Great Depression of the 1930s (see Table 6.1).
structed but is the subject and object of its own analysis. The impact of the recession on trade was short-lived
Actors in the trading system are influenced by the writ- with trade volumes increasing by 14 per cent in 2010
ings of trade theorists. While this captures part of the (WTO, 2012, p. 21) before returning to levels around
argument being made here, it fails to fully extend its the long-term trend by 2013. In this section we will
implications. The crucial point is that the ‘reality’ exam-
ined by trade theory is itself partly constructed by trade
theory. Table 6.1 Growth in the volume of world exports
Moreover, it is arguable that even if the principle of and production by major product groups,
comparative advantage is applied on a global basis, the 2005–13 (percentage change)
gains from trade will be evenly distributed. In the short 2005–13 2009 2011 2013
term, it is likely that free trade will result in an unequal
World merchandise 3.5 -12.0 5.5 2.5
distribution of costs and benefits, thus undermining the exports
basis for adherence to free-trade policies since those
Agricultural products 3.5 -2.5 6.0 3.0
countries losing out will resort to protectionist meas-
ures such as tariffs or subsidies. Fuels and mining 1.5 -5.5 2.0 0.5
products
Manufactures 4.0 -15.0 7.0 3.0
World merchandise 2.0 -2.5 3.0 2.0
MAJOR DEVELOPMENTS production
Agriculture 2.0 0.5 2.0 5.5
There have been two notable developments in the world Mining 0.5 -1.5 1.5 0.5
trading system since the end of the Second World War. Manufacturing 2.5 -4.0 4.0 1.5
One has been a large increase in the volume of world
World GDP 2.0 -2.5 2.5 2.0
trade and accompanying changing forms of protection-
ism as states struggle to cushion the dislocations caused Note: World merchandise production differs from world GDP in that
by trade liberalization. The second has been the trans- it excludes services and construction.
formation of the institutional arrangements governing Source: WTO (2011b, p. 19; 2014a, p. 21)
 Chapter 6 INTERNATIONAL TRADE 109

review the developments in international trade between Instead of embracing trade, communist authorities
1945 and 2014. approached trade with suspicion, viewing it as a source
There are some noticeable features of world trade of economic leakage rather than, as it turned out, a
growth in the postwar period and these will be dis- source of economic strength. Trade remained a residual
cussed below. We will focus on the magnitude of trade, element in national economic plans where the drive
its geographical concentration, the commodity compo- was for self-sufficiency. Even the attempt at integration
sition of trade and the growth in intra-industry and through the Soviet-dominated trading organization,
intra-firm trade. the Council for Mutual Economic Assistance, was pred-
The growth in trade has been uneven and there have icated less on exploring dynamic comparative advan-
been periods of recession when trade growth slowed, tage through the benefits of specialization than on
but overall the trend has been positive. For example, the protecting what were perceived to be national interests.
WTO (1998) calculated that merchandise exports grew Not only has overall trade growth been uneven, it
on average 6 per cent per annum between 1947 and has also been so in respect of different countries and
1997, and that total trade in 1997 was 14 times the level regions (see Table 6.2). However, the historical imbal-
of 1950. These trends continued in the early 21st cen- ance in shares of world trade between developed and
tury until the onset of the global financial crisis in 2008. developing countries appears to be shifting. A steady
Between 2000 and 2005, world merchandise trade grew increase in developing countries’ share of world trade
approximately 10 per cent (WTO, 2006, p. 11); although was further stimulated by the recent global economic
there was some slowdown in 2006 and 2007, with crisis. In 1980 developing countries accounted for
annual increases of 8 per cent and 5.5 per cent, respec- 34% per cent of world trade but this had risen to
tively (WTO, 2007, p. 2; 2008, p. 2). Trade growth has 47%per%cent by 2011 (WTO, 2013, p. 5). Both exports and
since fluctuated with sizable increases in 2010 before imports from the emerging market economies have
falling again in 2011 and 2012 (United Nations, 2013a, benefitted from increased trade volumes (UNCTAD,
p. vi). These figures indicate that trade has been an 2013, p. iii). Moreover, South–South trade grew from
important sector in the contemporary global economy 8%per cent of world trade in 1980 to 24 per cent in 2011
and a main agent of economic growth. (WTO, 2013, p. 6).
The relationship between trade and growth has been Whereas the theory of comparative advantage pre-
intensely debated during this period, especially since it dicts that trade will grow fastest between unlike econo-
is an important consideration for countries trying to mies, postwar trade growth has seen the reverse of this
promote economic development. The consensus among proposition. In the 1950s and 60s, trade grew fastest in
economists is that trade promotes growth. Countries manufactured products. In 1945, the commodity com-
with an open economy engaging in international trade position of international trade reflected the sectoral
have performed better than those countries where pol- composition of output in the leading economies and
icy has restricted domestic access to foreign products. was therefore mainly composed of merchandise trade.
The relation between trade and economic growth is
twofold. First, trade acts as a stimulus to the local econ-
Table 6.2 Percentage share of world merchandise
omy, providing it with resources cheaper than it would
trade by region, 2013
cost to produce them domestically. Trade thus raises the
production possibility frontier, enabling countries to Exports Region Imports
consume more than they would have done in the 100 World 100
absence of trade. The relationship between consump-
13.2 North America 17.4
tion and growth will be discussed below where we will
show the importance of consumption to contemporary 4.0 South and Central America 4.2
economic growth. Second, trade forces domestic pro- 36.3 Europe 35.8
ducers to manufacture goods to world market stand- 3.3 Africa 3.4
ards, thus increasing productivity and product quality. 7.4 Middle East 4.2
This leads to a more efficient use of resources. In the
31.5 Asia 31.8
light of these arguments, it is possible to see one of the
reasons for the failure of Soviet-style communism. Source: WTO (2014a, pp. 24–5)
110 Part 3 DYNAMICS

But as services became the dominant sector in industri- the OECD countries as the dynamic comparative
alized economies, so the trade in services has expanded, advantage of developing countries became evident.
with the result that one of the major developments in Industries such as textiles and footwear were initially
the international trading system has been the rise of developed in the industrialized countries but during
trade in services. While trade in services is not the larg- this period the technological know-how associated
est sector in world trade, it has been the fastest growing with these activities was diffused to some developing
sector. countries.
The term ‘intra-industry trade’ refers to the situation During the long boom (1947–73), it was relatively
where trade occurs within the same industry rather easy for developed countries to make the necessary
than between industries. One of the main features of adjustments to imports of manufactures from the devel-
postwar trade growth has been the phenomenon of oping world because the employment-creating effects
intra-industry trade. Countries have exchanged similar of international trade outweighed the employment-
products where price and product differentiation have displacing effects. The outcome of these developments
played an important part. In consumer goods, we have was that the benefits of trade were obvious and, by and
seen the exchange of consumer durables so that large, consumers and producers willingly acquiesced in
although the UK, for example, produces motor vehicles the trade liberalization process. Thus, protectionist pres-
and washing machines, it has also imported these items sures were specific rather than general.
from other OECD member countries. International With the downturn in the world economy following
trade has supported both horizontal and vertical inte- the first oil crisis in 1973–4, unemployment grew and
gration. The growth of intra-industry trade has also became a critical political issue in the industrialized
been matched by the growth of intra-firm trade. The world. The importance of the recession of 1973–7 was
rise of the TNC and a global production system (see to focus the attention of various pressure groups on the
Chapter 7) has stimulated intra-firm trade. An increas- perceived connection between foreign trade and
ing percentage of world trade takes place within firms domestic employment, that is, on the link between
rather than between separate, individual firms. One of employment displacement and import penetration.
the crucial implications for trade theory and for Employment preservation through the restriction of
national governments is that if trade takes place within imports became an acceptable means of preventing
a TNC, pricing policies will not reflect real costs. In unemployment from rising. What characterized this
such cases, trade is driven not by comparative costs but period was the resort to non-tariff instruments of pol-
by the management decisions of the firm. icy. Countries abandoned the use of old protectionism
The period 1947–73 was one of unprecedented in the form of tariffs for new protectionism using NTBs.
expansion for the world economy, with output and Because they were the most vulnerable, discrimination
trade growing faster than in any previously recorded against developing countries grew at an alarming rate.
period. Global output expanded at an annual average of As an OECD report declared: ‘developing countries
5 per cent, while exports grew at 7 per cent per annum. have in practice been most exposed to discriminatory
This provided an economic climate conducive to trade export restraint agreements and other trade distorting
liberalization, and it was against this background that measures, with the incidence of this discrimination
protectionism was reduced on manufactured products. being greatest in those sectors in which they have a
A number of significant structural changes took place comparative advantage’ (Goldin et al., 1993, p. 22).
between 1947 and 1973. The most important change in If structural change accounted for the onset of pro-
the context of the trading system was the shift away tectionism, it was the existence of the GATT that
from a traditional dependence on the export of pri- shaped the forms the new protectionism would take.
mary commodities to the increasing specialization in The 1947 GATT Articles provide for the introduction
labour-intensive, low-tech manufactured products by a of restraints under certain designated circumstances.
number of developing countries, such as India, Brazil For example, Article XIX condones the use of import
and the East Asian newly industrializing countries. controls for the emergency protection of domestic
These developing country exporters took advantage of industry. Recourse to these ‘escape clauses’ became
expanding markets in the developed economies and the increasingly prevalent in the 1970s, as the major
contraction of productive capacity in some sectors in developed countries made more frequent usage of the
 Chapter 6 INTERNATIONAL TRADE 111

protectionist option. However, recourse to Article XIX safety and environmental standards. Protectionism also
was rather limited, since many countries taking protec- took the form of subsidies and government procure-
tionist action preferred to evade GATT stipulations on ment policies. This move from GATT’s rule of law
non-discrimination and reciprocity and therefore brought with it a heightened absence of transparency,
turned to extralegal alternatives that suited their pur- given that non-transparency is a property of NTBs.
poses better than Article XIX. These provisions are cen- The rise of new protectionism and the failure of the
tral to the explanation of a reluctance to use Article XIX GATT to remedy these developments contributed to
and a willingness to look for alternatives outside the dissatisfaction with the organization’s performance.
GATT framework. The most widely used NTBs were This issue will be addressed in the next section. While
voluntary export restraints, import quotas, product the new protectionism is no longer a major issue since
standards, including regulations pertaining to health the creation of the WTO gave a boost to liberalizing
and technical safeguards, and anti-dumping measures forces, the confrontation between advocates of trade
and countervailing duties, which are still drawn on liberalization and those of protectionism remains an
today. An example of the use of health standards to important issue in the contemporary global economy.
discriminate against imports is given in Box 6.2. The The growth in world trade in the early years of the
negotiation of a voluntary export restraint allowed 21st century has been uneven, reflecting the global eco-
action to be taken on a discriminatory basis, a facility nomic cycle. Nevertheless, it is possible to discern the
unavailable under Article XIX. In order to appease emergence of a new geography of trade centred on the
pressure groups at home while doing little to impair rapid growth of developing economies. Concomitant to
export prospects, governments followed the path of rising growth rates and increased shares of global GDP,
least resistance. This period also saw the mushrooming developing countries as a group have developed a larger
of administrative controls such as the use of health, stake in the world trading system (UNCTAD, 2013,

Box 6.2 Health risks and hormone-treated beef

The EU first banned the importation of hormone-treated meat in 1989, arguing that injecting livestock with
bovine somatropin (BST) posed a health risk to humans. BST, a growth hormone produced by beef cattle,
was in use by major meat-producing countries including Canada and the US. Scientists from meat-
exporting countries that used BST argued that it was safe, but consumer groups in the EU and the
European farm lobby protested that hormonal irregularities or cancer would result from its consumption.
Was this a genuine health issue or a form of disguised protectionism? The EU claimed it was a health issue,
but producers affected by the ban argued that it reflected an attempt to protect the inefficient EU meat
industry. At the centre of the dispute is whether the EU’s ban is in compliance with the WTO Agreement on
Sanitary and Phytosanitary Measures (SPS).
In 1997, the WTO’s dispute settlement panel found the EU ban to be incompatible with its obligations
under the SPS Agreement; and in 1998 the WTO’s Appellate Body confirmed that the European ban on
hormone-fed beef violated its rules, but noted that the EU ban would be justified if convincing scientific
proof could be provided concerning the health risks of hormone-treated beef. The outcome from the WTO
process supported the contention of meat exporters to the EU who had lost revenue as a result of the EU
ban. For example, US red meat exports to the EU fell from $231 million in 1988 (a year before the ban) to
$98 million in 1994. Despite this ruling, deep scepticism remains among EU consumers. The EU has, since
2003, cited new scientific evidence as the basis for its import restrictions in an attempt to make the EU ban
consistent with the WTO’s ruling, and to evade trade sanctions that had been imposed since July 1999. In
October 2008, the Appellate Body permitted the EU to maintain its restrictions but also granted Canada
and the US the authority to impose trade sanctions totalling in excess of US$125 million annually. In March
2012, the EU settled the beef dispute with Canada and the US by agreeing to increase the imports of non-
hormone-treated US beef by 25,000 tonnes (EUbusiness, 2012).
Sources: Bridges Trade BioRes (2009); EUbusiness (2012)
112 Part 3 DYNAMICS

p. 6). Of course, these trends are uneven with some 1 Non-discrimination is enshrined in the most
countries such as Brazil, China and India at the fore- favoured nation (MFN) clause. The MFN princi-
front of the increased growth. In the last decades, China, ple ensures that any concession granted to one
India and Brazil, among others, have emerged as impor- member must be extended to all other members.
tant hubs of economic growth and trade in manufac- Under MFN provisions, all members of the GATT/
turing, services and agriculture and commodities. As WTO are treated in a non-discriminatory man-
the 2013 WTR notes, ‘especially China, but also India ner. A tariff on an import from a GATT/WTO
and Brazil have transformed the balance of power in member had to be placed on all other GATT/
the multilateral trading system’ (p. 268). These changes WTO members in a similar manner, with the
have taken place in both merchandise trade as well as exception of customs unions or free-trade areas.
trade in services. Developing countries’ share in world This principle is therefore at the centre of the mul-
services exports reached 31 per cent in 2012, and their tilateral trading system.
share of service imports was around 37 per cent (United 2 Reciprocity is intended to ensure that when one
Nations, 2014a, p. 51). country lowers its tariffs against the exports of
another country, it will, in turn, be granted equal
trade concessions. The principle of reciprocity that
Changing institutional is applied through multilateral bargaining means
that, in theory, one country’s concessions are paid
arrangements for by a third country, which then passes them on to
another country and the process repeats itself.
The origins of the postwar international trade regime 3 Transparency refers to the fact that any discrimina-
are to be found in Anglo-American cooperation during tion must be clearly visible. The system is based on
the Second World War. The liberal trade regime that was the principle that tariffs are the only permissible
created reflected primarily US interests. American pref- form of discrimination. NTBs such as import
erence for open market arrangements and for the impo- quotas are banned and countries are urged to
sition of a multilateral rule-based system to limit replace them with tariffs.
national action is at the centre of the regime. Two par- 4 Multilateralism is a commitment to the creation of a
ticular issues were of concern to American policy broadly based trade regime including the maxi-
makers – British imperial preferences and the system of mum number of countries committed to coopera-
protection that had developed in Latin America during tion through a rule-based system and engaging in
the war. The US therefore proposed a non- periodic rounds of tariff-cutting.
discriminatory, multilateral system of trade and pay-
ments. In practice, this meant provision for reciprocity, The Conference on Trade and Employment held in
international supervision of tariff and exchange rates, Havana, Cuba in 1948 created the ITO as the institu-
outlawing of quantitative restrictions, freely convertible tional framework of the postwar international trading
currencies and the generalization of tariff reductions to system. However, in the US many business groups
all members of the regime. The trade regime is, to use a opposed the ITO, fearing that it was not sufficiently lib-
term coined by Ruggie (1982), one of ‘embedded liberal- eral and offered too many concessions to countries try-
ism’. In other words, its main features subscribe to lib- ing to protect their own industries. Given the
eral trade principles, but nevertheless recognition is preponderance of the US in the world economy, most
made of deviations from the standard principles to sup- governments delayed ratification until the US Congress
port key domestic goals. gave its assent. In 1951 President Truman, aware of
Thus, the international trade regime is not purely a widespread domestic hostility to the ITO, decided not
laissez-faire system but has many elements of managed to seek congressional assent, thus consigning the ITO
trade. The trading regime is based on four key princi- to history. With the failure of the ITO, the GATT
ples: non-discrimination, reciprocity, transparency and became the institutional focus of the world trading sys-
multilateralism. These have been the guiding principles tem. The GATT was the result of a tariff-cutting exer-
for a series of international institutions designed to cise by 23 nations prior to the Havana conference.
govern postwar international trade: Meeting in Geneva in March 1947, the delegates
 Chapter 6 INTERNATIONAL TRADE 113

Table 6.3 GATT negotiating rounds dominant growth sector. In 1947, at the first round of
Number of countries GATT negotiations, the average tariff on manufactured
Name Dates participating goods was around 40 per cent. By the end of the Ken-
nedy Round, these tariffs had been lowered to an aver-
Geneva 1947 23
age of 10 per cent. The tariffs of the industrial countries
Annecy 1949 13 were reduced by a further 35 per cent as a result of the
Torquay 1951 38 Tokyo Round (Winham, 1986, p. 17). To illustrate the
Geneva 1956 26 significance of tariff reductions to the industrial coun-
Dillon 1960–1 26 tries, tariffs on industrial products in the US declined
from around 50 per cent in 1947 to about 4 per cent in
Kennedy 1964–7 62
1979, and those in the UK moved from around 40 per
Tokyo 1973–9 102
cent to about 4 per cent in the same period (Greenaway
Uruguay 1986–93 123 and Hine, 1991). Industrial countries were willing to
liberalize in sectors that were expanding but reluctant
to do so in those in which they had lost or were losing
decided on a series of tariff reductions, and a temporary comparative advantage and felt most under threat.
mechanism to oversee these cuts. Instead of withering Agricultural protection continued unchecked until the
away as initially envisaged, the GATT was given perma- Uruguay Round, where a start was made on phasing out
nence. The GATT provided a code of rules, a dispute the protection afforded to farmers in the developed
settlement mechanism and a forum for trade negotia- world. Reform of agricultural trade proved difficult and
tions. Its main importance lay in its role as a forum for continued to be a sensitive political issue in future trade
trade negotiations. In eight rounds (see Table 6.3) of talks. Developed countries also devised a series of
multilateral trade negotiations between 1947 and 1994, restrictive measures in relation to textiles and clothing.
it presided over a period of unprecedented growth in Under the guise of ensuring orderly market behaviour,
world trade. in 1974 the GATT sanctioned the Multifibre Agree-
Until the Kennedy Round, negotiations were con- ment (MFA) to regulate trade in textiles and clothing.
ducted on an item-by-item basis, but in that round the This was, in effect, a protectionist device limiting par-
negotiators moved to an across-the-board approach. ticular developing countries’ exports of textiles to
The GATT enjoyed uneven success in its quest to developed states. It was not phased out until 2005 as a
reduce trade barriers. It was most successful in tackling result of decisions made during the Uruguay Round
barriers to manufactured goods but less so in prevent- negotiations.
ing agricultural protectionism. Three main features of Third, whereas trade liberalization was initially lim-
trade liberalization are visible in the GATT period. ited solely to trade in merchandise goods, beginning
First, the GATT achieved considerable success in with the Tokyo Round, additional issues have been
reducing tariffs on manufactured goods. Beginning placed on the agenda. The Tokyo Round negotiations
with the Geneva conference in 1947, significant tariff were conducted during the period known as the ‘new
rounds were negotiated in successive multilateral trade protectionism’, where states prohibited from a recourse
rounds on some 45,000 products, constituting approxi- to tariff barriers through their GATT commitments
mately half of world trade at that stage (Williams, 1994, began to impose significant NTBs. At the conclusion of
p. 150). Progress slowed somewhat between this first the Tokyo Round, negotiators agreed six voluntary
conference and the Kennedy Round, but substantial codes to prohibit the use of NTBs, but implementation
tariff reductions were achieved. The new approach used was poor. They also attempted to develop a framework
in the Kennedy Round yielded average tariff reductions to regulate anti-dumping measures. During the Uru-
of 36–39 per cent, and despite the unfavourable eco- guay Round, the agenda of the world trading system
nomic circumstances, tariff cuts in the Tokyo Round was further expanded to include services, intellectual
averaged 33–38 per cent. property rights (IPR), investment, environment, labour
Second, the process of trade liberalization under standards and domestic (nontrade) policies.
GATT was uneven. Trade liberalization was almost The GATT also provided a normative framework
solely confined to manufactured products – the most and a dispute settlement mechanism. Assessment of
114 Part 3 DYNAMICS

GATT’s impact as a normative framework is difficult dairy and bovine products, but the acceptance of these
but two issues can be examined. It is undeniable that agreements is not mandatory for membership.
GATT made a major contribution to the development While the GATT was essentially a contractual agree-
of international economic law (Jackson, 1969; Kock, ment among its member states, the WTO is an interna-
1969). The GATT treaty is a legal document, and it tional organization with a legal personality akin to
provided a code of rules that set the framework for other intergovernmental organizations such as the IMF
international commercial transactions. Additionally, and the World Bank. The sole formal actors in the WTO
governments used the existence of GATT disciplines as are the member states and the principal decision-
a mechanism to resist domestic demands for protec- making body is the Ministerial Conference, which
tion. One of GATT’s major failures was its dispute set- meets every two years. To date, eight Ministerial Con-
tlement mechanism. Because the recommendations of ferences have been held. The Ministerial Conference is
the dispute panel required unanimous consent, con- empowered to make decisions on any issue covered by
tracting parties could block the decisions of GATT the WTO agreements. Since it only meets every two
panels. years, it has delegated its competence to the General
At the end of the Uruguay Round of negotiations, a Council. The General Council, consisting of all WTO
new trade organization, the WTO, was created and offi- members, is the highest decision-making body in the
cially commenced on 1 January 1995. The WTO is the interval between Ministerial Conferences. The General
successor to the GATT and owes its existence to per- Council also acts as the Dispute Settlement Body and
ceived deficiencies of GATT. Dissatisfaction with the Trade Policy Review Body. The organizational
GATT grew because of the organization’s failure to structure of the WTO is completed by three councils,
reverse the growth of protectionism, the weakness of its each with a functional area of specialization: the Coun-
dispute settlement procedures and the uneven nature of cil for Trade in Goods, the Council for Trade in Services
its trade liberalization process. In an effort to reverse and the Council for Trade-Related Aspects of Intellec-
protectionism and bolster trade liberalization, the tual Property Rights; and by various committees and a
WTO was created as a permanent international organi- number of working groups and working parties.
zation with greater scope than the GATT. The WTO is In an attempt to improve the functioning of the
the legal and institutional foundation of the world trad- world trading system under the WTO, the procedure
ing system. It is a legal agreement specifying the rights for settling trade disputes was considerably strength-
and obligations of its members. The WTO consists of a ened. The Dispute Settlement Understanding provides
series of interlocking legal agreements and member- the machinery for settling members’ differences on
ship requires acceptance of these agreements as a single their rights and obligations. It consists of a first-stage
undertaking. On accession to the WTO, a state must panel adjudication followed by an appeals process (the
adhere to the following agreements: Appellate Body), and a clear schedule for the processing
of disputes. Moreover, decisions from the dispute settle-
◗ the agreement establishing the WTO ment process are based on a negative consensus, that is,
◗ GATT 1994 and other multilateral trade agreements they can only be overturned by the General Council if
for goods, including the SPS Agreement, the Agree- all members are in agreement. As a centre for the settle-
ment on Technical Barriers to Trade, and the Agree- ment of disputes, the WTO contributes to the stability
ment on Trade-Related Investment Measures and further evolution of the world trading system, since
(TRIMS) liberalization will not take place in the absence of effec-
◗ the General Agreement on Trade in Services (GATS) tive dispute settlement procedures.
◗ the Agreement on Trade-Related Aspects of Intel- Furthermore, compared with the GATT, the WTO
lectual Property Rights (TRIPS) has transformed the management of world trade in
◗ the Understanding on Rules and Procedures Gov- three crucial respects:
erning the Settlement of Disputes
◗ the Trade Policy Review Mechanism. 1 It engineered a shift from trade liberalization based
on tariff concessions (shallow or negative integration)
The WTO also consists of plurilateral agreements to discussions of domestic policies, institutional prac-
governing civil aircraft, government procurement and tices and regulations (deep or positive integration).
 Chapter 6 INTERNATIONAL TRADE 115

Table 6.4 World merchandise trade (billion US dollar, current prices)

1948 1953 1963 1973 1983 1993 2003 2013

Exports 59 84 157 579 1,838 3,684 7,380 18,301
Imports 62 85 164 594 1,883 3,800 7,696 18,409

Source: WTO (2014a, pp. 24–5)

2 It constructed a new agenda expanding the scope – relaxation of the rules on public stockholding of food
through the inclusion of services, TRIPS and because the existing regulation meant that the domestic
domestic (nontrade) policies – and changing the support policies of many developing countries could be
character of negotiations from a focus on bar- in breach of WTO regulations. At the Bali meeting a
gaining over products to negotiations over poli- ‘peace’ clause was agreed which effectively shielded
cies that shape the conditions of competition. government action from legal challenges. Second, an
3 It initiated a movement towards policy harmoniza- agreement has been reached on trade facilitation
tion, for example in the areas of subsidies, trade- (WT/L/940) to expedite the movement, release and
related investment measures and services. clearance of goods; make provision for special and
differential treatment for developing (and least
The WTO’s extensive powers have given it a much developed) countries; and lead to the creation of a trade
higher profile than its predecessor. facilitation committee in the WTO (additionally
Trade liberalization since 1947 has been accompa- members must create national committees to ensure
nied by a rise in international trade (see Table 6.4), coordination and implementation). July 2015 was the
which supporters of further liberalization claim is a date set as the deadline for agreement on the work
result of the process of removing restrictions to trade. program agreed at the Bali Ministerial Conference.
They argue that the institutional framework creates lib-
eralization and this in turn enhances increased trade
(Finlayson and Zacher, 1981). Structuralist critics, on
the other hand, claim that trade expansion would have KEY ISSUES
taken place without these governing arrangements since
the growth of trade has principally been a response to There are numerous trade issues on the contemporary
structural change in the world economy (Strange, 1985). international agenda. However, the future of the liberal
Prior to an examination of key underlying issues in trading system and the role of the WTO as the key insti-
the international trading system we will conclude this tutional node of the trade regime lie at the centre of
review of changing institutional arrangements with a current discussions. The long delays in concluding the
brief discussion of the state of the Doha Round of mul- Doha Development Agenda (DDA) is a pertinent
tilateral trade negotiations as of June 2015. Some reminder of the central crisis of the multilateral trade
observers fear that failure to arrive at a satisfactory out- system. Here, we discuss three broad issues that are rel-
come of the Doha Round will lead to the collapse of the evant to the lengthy Doha negotiating process and the
WTO. The extent to which the stalled Doha negotia- future of world trade. The first is the place of developing
tions will be concluded and development concerns countries in the world trading system, and the second
addressed remains unclear. The Ninth Ministerial concerns the significance of regional trade agreements.
Conference of the WTO in Bali (3–7 December 2013) The third issue is the question of the legitimacy of
brought signs of hope that the long drawn out regional trade agreements.
negotiations were eventually heading to a successful
conclusion (McClanahan, 2013). This resulted in two
important decisions taken by the WTO in the post-Bali Developing country interests
period. First, a decision was reached on the thorny issue
of public stockholding for food security purposes Although the economic structures of developing coun-
(WT/L/939). The G33 coalition had called for a tries are diverse, a set of interests specific to them have
116 Part 3 DYNAMICS

emerged within the world trading system. Central to coincided with the adoption of ‘integrative’ or ‘value-
this development has been the self-identification of creating’ negotiating strategies, which involve ‘actions
developing countries, and the limited political influence designed to expand rather than split the pie’ (Hurrell
they exert in international trade negotiations. While no and Narlikar, 2006, p. 423).
single developing country coalition exists in the context Two issues have consistently emerged at the centre
of the WTO, developing countries have identified com- of the debate. The first concerns the benefits of a liberal
mon interests (Narlikar and Tussie, 2004) and have at trading order, and the second relates to the continua-
times created formal negotiating groups (see Box 6.3). tion of protectionist forces in the postwar trading sys-
Issue-based coalitions amongst developing countries tem. In relation to the first issue, a debate exists between
those who contend that trade promotes development
and those who maintain that industrialization is best
Box 6.3 Developing country coalitions achieved behind protectionist barriers. A related debate
in the WTO exists between those who argue that the reform of trad-
ing arrangements will benefit developing countries and
Individually, many developing countries are too those who contend that the trading system is inherently
small and have limited bargaining power in exploitative. We will not revisit these debates here.
international trade negotiations. Coalitions Instead, we will examine the ways in which developing
frequently arise on a specific issue or emerge at a countries have articulated their interests and the
particular conference. Some major developing response to these concerns.
countries seek to enhance their bargaining power In the debates on trade liberalization since the
through joining a coalition and other smaller
creation of the WTO, the developing countries have
countries join groups for defensive purposes.
Examples of developing country coalitions
attempted to define and promote specific sets of inter-
include: ests. In November 2001, the first major round of multi-
lateral trade negotiations since the Uruguay Round was
◗ The Like-Minded Group of developing coun- launched at the Doha Ministerial Conference of the
tries was formed in 1996. It has been active in WTO. The DDA was specifically targeted at the inter-
opposing progress on the so-called new issues, ests of developing countries. As the Doha Ministerial
such as TRIPS and GATS, and insists on imple- Declaration stated: ‘The majority of WTO members are
mentation of the Uruguay Round agreements. developing countries. We seek to place their needs and
Its main members are African and Asian coun-
interests at the heart of the Work Programme adopted
tries.
◗ The G20 emerged in response to the Cancún
in this Declaration’ (WTO, 2001, para. 2). The hopes
agenda in 2003 and was initiated by Brazil and and aspirations enunciated in 2001 have been frus-
India. The G20’s core membership is influential trated by a tortuous negotiating process that remains
developing countries such as Brazil, China, unfinished. The failure to make significant progress on
India, South Africa, Pakistan, Egypt and Nige- the talks reflects both the inability of developing coun-
ria, and spans the various regions of the devel- tries to impose their will and the continued veto power
oping world. The focus of the G20 is possessed by the EU and the US in trade negotiations.
agricultural negotiations. Agricultural trade liberalization has been an issue of
◗ The G90 was created at the Cancún conference central concern to the developing countries during the
and brings together some of the poorest Doha negotiations. Many developing countries remain
developing countries. Its membership is made
dependent on the export of agricultural commodities,
up from the least developed country (LDC)
group, the African, Caribbean and Pacific
and even in those countries in which agriculture is not
Group of States, the Small Island Developing the major export sector, agriculture remains a signifi-
States Group and the African Group. cant employer of labour (see Table 6.5).
◗ The Cotton-4, formed prior to the Cancún con- Whereas the industrialized countries have embraced
ference in 2003, brings together the main Afri- liberalization in manufactured products, they have
can cotton producers – Benin, Burkina Faso, been reluctant to fully liberalize agricultural trade.
Chad and Mali. Indeed, until the Uruguay Round, agriculture was kept
off the negotiating agenda. Despite the progress made
 Chapter 6 INTERNATIONAL TRADE 117

Table 6.5 GDP composition by sector: the volatility of international prices. The persistence of
agriculture, 2014 (per cent) impediments to market access in agriculture therefore
Country Share of GDP in agriculture remains a major policy concern of many developing
countries. The persistence of subsidies on major agri-
Somalia 60.2
cultural exports from the developed countries, contin-
Central African Republic 55.1 ued domestic support to agriculture and high tariffs
Comoros 50.4 resulting from tariffication (the process whereby NTBs
Ethiopia 47.7 are converted to tariffs) have conspired to restrict the
Sierra Leone 42.5 gains made by developing countries. The issue of agri-
cultural protection is also of interest to some developed
Congo, Democratic Republic 40.4
country exporters and has given rise to a grouping of
Burkina Faso 38
developed and developing country producers. The
Mali 38 Cairns Group (see Box 6.4) is an intergovernmental
Niger 37.7 pressure group for agricultural reform linking develop-
Burma 37.1 ing countries and developed countries.
Rwanda 32.5
Although agriculture was prioritized as a key issue
in the Doha talks and WTO members were committed
Cambodia 32.1
to a significant reduction in trade-distorting subsidies
Benin 31.8 and other forms of agricultural protection, the negotia-
Malawi 30.1 tions were characterized by countless disagreements,
Nepal 30 shifting deadlines and eventually a failure to reach
Kenya 29.3 compromise. The slow pace of the agricultural negotia-
tions prompted the development of solidarity among
Mozambique 28.9
developing countries (Clapp, 2006). It also led to an
Madagascar 28.1 unprecedented move by four West African cotton pro-
Togo 27.6 ducers and the reshaping of the agenda to meet their
Tajikistan 27.2 specific interests (see Box 6.5).
Tanzania 26.9
Sudan 26.8
Papua New Guinea 26.3
Box 6.4 The Cairns Group
Cote d’Ivoire 25.9
Largely an Australian invention under the Hawke
Pakistan 25.1 government, the Cairns Group comprises 19
Source: CIA (2014) agricultural exporting countries. Formed in 1986,
the Cairns Group has effectively put agriculture
on the multilateral trade agenda after decades of
during the Uruguay Round, agriculture in the industri- stalemate over the reduction in the protection
alized countries continues to enjoy high levels of pro- received by agricultural products. It was largely as
tection. The agricultural support policies of the a result of the group’s efforts that a framework for
developed countries have an overall negative impact on reform in farm products trade was established in
developing countries. This is an area in which the devel- the Uruguay Round and agriculture was, for the
first time, subject to trade liberalization rules.
oped world abandons its support of comparative advan-
These rules are set out in the WTO Agreement
tage and, for a number of economic, political and social on Agriculture. Membership of the Cairns Group
reasons, implements discriminatory policies. When comprises Argentina, Australia, Bolivia, Brazil,
protection leads to excess domestic production, this Canada, Chile, Colombia, Costa Rica, Guatemala,
results in lower world prices, thus reducing the incomes Indonesia, Malaysia, New Zealand, Pakistan,
of producers in the developing world. Protection, in the Paraguay, Peru, the Philippines, South Africa,
form of import levies and quotas, removes a large part Thailand and Uruguay.
of agricultural trade from the world market, increasing
118 Part 3 DYNAMICS

Box 6.5 The cotton initiative textile industries in their area might close as production
is concentrated in China. Several sub-Saharan African
countries are particularly vulnerable (Dinesh and Little,
The slow progress of the agricultural negotiations
2004). With the ending of MFA protection, Taiwanese
frustrated many LDCs who were aware that failure
further weakened their fragile trading positions.
or Hong Kong businesses that invested in Africa to find
In June 2003, prior to the WTO Ministerial a way around import quotas are now able to close down
Conference in Cancún, four West African their African plants and locate production in the
countries – Benin, Burkina Faso, Chad and Mali Chinese mainland.
(the Cotton-4) – submitted a paper to the WTO’s The expansion of the multilateral trade agenda dur-
Trade Negotiations Committee calling for the ing the Uruguay Round to include new issues has
abolition of developed country cotton subsidies, remained controversial and has created difficulties for
and financial compensation to be paid to the four WTO trade governance. It has been argued that three
countries while the subsidies remained. The issues – trade in services, IPR and investment
proposal was submitted to the Cancún measures – separately and together limit the policy
conference in September 2003 but no agreement
autonomy of developing country governments (Wade,
was reached. There were objections by various
states to both parts of the draft document –
2003). The most frequently discussed services – tour-
treating cotton as a separate issue, and the ism, business services and finance – provide greater
provision of financial compensation. These returns for the developed world. However, in some
disagreements were overshadowed by the cases such as business services in publishing and data
disdainful attitude of the US delegation to the processing, developing countries have been able to
proposal. In the charged atmosphere of Cancún, build up exportable services. This is particularly the
the cotton initiative became a key symbol of case in India. The concern is that in the overall trade in
developing countries’ anger and disappointment. services, developing countries are at a disadvantage.
In the discussion post-Cancún to get the While developing countries were able to safeguard
multilateral trade negotiations back on track after some of their interests by insisting that the GATS be
the ‘failure’ of two successive Ministerial
based on a positive list, that is, countries must list the
Conferences, the cotton initiative was placed on
a separate negotiating track. A cotton
services to be liberalized, the impact of liberalization
subcommittee was created in November 2004 in services on developing countries remains a hotly
under the framework of the agricultural debated topic (Wiener, 2005).
negotiations. Along with the rest of the Doha The issue of IPR is also of great importance to devel-
Round, negotiations have stalled and no further oping countries (also see Chapter 13). Until the Uru-
progress has been made. guay Round, copyrights, patents and other forms of
intellectual property were not treated as trade or even
trade-related issues. They were brought into the Uru-
guay Round on the insistence of US TNCs, who insisted
The varying interests of developing countries were that exports of counterfeit goods, especially from
visible in the scramble for export markets following the South-east Asia, were responsible for large revenue and
end of the MFA on 1 January 2005. The phasing out of profit losses (Sell, 2000). Moreover, pharmaceutical
the MFA has had a differential impact on developing companies had long complained that their profits and
country exporters. The limited research available on the research and development were harmed by the local
post-MFA textile industry has produced inconclusive production of their products without payment of a
findings. An analysis of the export performance of licence, and usually justified under national health
Asian countries post-MFA argues that the short-term guidelines. The TRIPS Agreement gives greater influ-
impact of the end of restrictions has been small (Whal- ence to foreign investors and provides increased inter-
ley, 2006). Another study argued that while a small national patent protection to a range of products and
number of countries will benefit, a large number of processes previously exempt from patent protection
(smaller) developing countries will be significantly (Hoogvelt, 1997, p. 136). It requires countries to accept
worse off (Heron, 2006). Inevitably, a number of other the substance of existing international conventions on
developing countries have expressed concern that the copyright (Berne Convention) and patents (Paris
 Chapter 6 INTERNATIONAL TRADE 119

Convention). Bringing these agreements under the Another issue of interest to developing countries
WTO subjects them to WTO dispute settlement proce- relates to their special status in trade negotiations.
dures and enforcement mechanisms. The agreement Developing countries have been concerned since the
forces two kinds of costs upon middle- and low-income 1960s with ensuring that their participation in interna-
countries: revenue losses due to the increased cost of tional trade meets with their development needs. The
drugs, and the administrative costs of introducing rel- demand for special and differential treatment (S&D)
evant legal frameworks to protect patents. was based on the claim that the demands of develop-
The likely detrimental impact of the TRIPS Agree- ment are incompatible with the free operation of mar-
ment has been most clearly visible in the area of public ket forces. The demand for S&D was first formally
health, where drug companies holding the patents to accepted in 1965 with the addition of a new chapter to
medicines can dictate the price of essential drugs. Con- the GATT. Part IV of the GATT, ‘Trade and Develop-
cerns of developing countries over the availability of ment’, gave legal sanction to the principle of S&D and
generic (cheaper) drugs led to the Declaration on the provided the developing countries with a specific focus
TRIPS Agreement and Public Health at the Doha Min- from which to mount further campaigns for reform.
isterial Conference. This concession was an attempt to While the Tokyo Round extended S&D, the creation of
meet the concern many developing countries felt about the WTO has seen a move away from treating develop-
the price of medicines. However, it has been argued that ing countries as a special case. Within the WTO,
the declaration has made no significant difference to increased emphasis is given to the trade needs of the
either importing countries or those with the capacity to LDCs; and developing countries, while given some con-
manufacture pharmaceuticals (May, 2005, p. 173). cessions, are expected to conform to the general rules.
Moreover, pharmaceutical companies can take out new S&D under the WTO can be classified into five main
patents and thus deprive developing country producers groups:
of revenues. In other words, local knowledge that is cur-
rently free will cease to be so if a foreign company takes 1 provisions aimed at increasing trade opportunity
out a patent on that knowledge. The costs of introduc- through market access
ing the required legal and administrative mechanisms 2 provisions requiring WTO members to safeguard
will be highest for LDCs. It has been claimed that ‘the the interests of the developing countries
main beneficiaries will be the core group of less than a 3 provisions allowing flexibility to developing coun-
dozen seeds and pharmaceuticals companies which tries in rules and disciplines governing trade
control over 70% of the world’s seeds trade’ (Hoogvelt, measures
1997, p. 136). The issue of drug patents and HIV/AIDS 4 provisions allowing longer transitional periods to
is discussed in greater detail in Chapter 13. developing countries
Some critics are worried that the move towards giv- 5 provisions for technical assistance.
ing foreign investors unfettered access to global markets
will undermine the sovereignty of host governments. Within each of these groups, additional provisions
The issue surfaced in the negotiations on TRIMS (Trade- are made specifically for the LDCs. The aim of the WTO
Related Investment Measures). TRIMS is designed to is to include developing countries as full participants in
limit the ability of governments to set performance the system, that is, to move to a position where it will be
requirements for FDI. Although an agreement with the possible to withdraw any special and differential status.
potential to override national law does not exist, it is The provisions noted above with regard to the S&D of
believed by many that it is only a matter of time before developing countries have largely been ineffectual. For
such an agreement is signed. The attempt to create a example, the developed countries are not taking the
regulatory code for foreign investment in the OECD special needs of developing countries into account in
met vociferous opposition from critics in the developed preparing and applying sanitary and phytosanitary
world, and also from groups claiming to speak for the measures, technical regulations, standards and con-
developing world. Opposition to the Multilateral Agree- formity assessment procedures. Moreover, the transi-
ment on Investment from social movement activists was tional periods do not always give sufficient time to deal
instrumental in the failure by governments to agree on with specific shortfalls in capacity that are faced by
it (Goodman and Ranald, 2000). individual members or those with precise development
120 Part 3 DYNAMICS

needs. Finally, many developing countries emphasize

Box 6.6 Australia and its regional
the critical and continued need for technical assistance.
They call for better coordination of technical assistance trade agreements
from all sources, and have asked for increased funding
of technical assistance in the core WTO budget. Taking Existing free trade agreements (FTAs)
cases before the dispute settlement mechanism usually
◗ Australia–New Zealand Closer Economic Rela-
requires the payment of large fees for specialist legal
tions (1988)
advice. ◗ Singapore–Australia FTA (2003)
The special emphasis of the DDA on development ◗ Australia–United States FTA (2005)
brought increased prominence to S&D. The Doha ◗ Thailand–Australia FTA (2005)
Ministerial Declaration reaffirmed ‘that provisions for ◗ ASEAN–Australia–New Zealand FTA (2009)
special and differential treatment are an integral part ◗ Australia–Chile FTA (2009)
of the WTO Agreements’ (WTO, 2001, para. 44). ◗ Malaysia–Australia FTA (2013)
Moreover, it was agreed that ‘all special and differential ◗ China–Australia FTA (2014)
treatment provisions shall be reviewed with a view to ◗ Korea–Australia FTA (2014)
strengthening them and making them more precise, ◗ Japan–Australia Partnership Agreement (2015)
effective and operational’ (WTO, 2001, para. 44). To
FTAs under negotiation
date, there has been limited progress in meeting these
objectives. ◗ Australia–Gulf Cooperation Council (GCC) FTA
◗ Australia–India Comprehensive Economic
Cooperation Agreement
Regional trade agreements ◗ Australia–Indonesia Comprehensive Economic
Partnership Agreement
The past two decades have witnessed an avalanche in ◗ Pacific Agreement on Closer Economic Rela-
the creation of regional trade agreement (RTAs). There tions (PACER) Plus negotiations
are currently over 260 RTAs in force, with most of these ◗ Regional Comprehensive Economic Partnership
Agreement (RCEP)
created since the establishment of the WTO. Between
◗ Trans-Pacific Partnership Agreement (TPP)
1948 and 1995, the GATT received notification of 124
RTAs, but the WTO received notification of 449 RTAs
between January 1995 and April 2015 (WTO, 2015).
Box 6.6 provides an example of the evolution of RTAs on behind-the-border regulatory measures, such as
as part of the trade strategy of a middle power with a technical regulations, standards, conformity assessment
strong commitment to multilateral trade. An accelera- systems, sanitary and phytosanitary regulations, ser-
tion in the creation of RTAs seems to be concurrent vices, investment, intellectual property, state aid and
with the slow pace of multilateral negotiations. Recent state-owned enterprise (SOEs), public procurement,
major RTA developments include the launch of nego- competition policy, environment, or labour market
tiations on a Trans-Atlantic Trade and Investment Part- regulations.
nership (TTIP) between the United States and the EU, Nevertheless, whether trade liberalization is a cen-
and continued negotiations on the Trans-Pacific Part- tral objective or the means towards an end, the devel-
nership Agreement (TPP) (see Box 6.7). opment of regionalism is a crucial feature of the trading
Regional economic organizations have multiple system. Central to discussions of RTAs is their likely
objectives, of which the promotion of trade liberaliza- impact (positive or negative) on global welfare. Since
tion is frequently only one aim. Other aims can include members of RTAs are also members of the WTO,
investment liberalization, the managing of economic implicitly national governments are indicating com-
conflict, domestic economic restructuring and political patibility between the pursuit of regionalism and
integration. Current RTA negotiations o%en involve multilateralism.
multiple parties and/or parties accounting for major Analysts tend to place the development of regional-
shares of world trade; they aim at high-standard inte- ism into two phases. It is widely agreed that the creation
gration through WTO-plus or WTO-extra provisions of the European Economic Community (EEC) in 1957
 Chapter 6 INTERNATIONAL TRADE 121

Box 6.7 The Trans-Pacific Partnership Agreement (TPP)

The first round of TPP negotiations was held in Melbourne in March 2010. As of 2015 there were 12
negotiating parties: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru,
Singapore, the United States and Vietnam. Together these countries make up 11.2 per cent of world
population, 36.2 per cent of world GDP and 25.5 per cent of world trade (DFAT, 2015). Envisaged as a
comprehensive trade agreement, the TPP has the aim of addressing inter alia traditional trade issues such
as trade in goods and services, and new issues such as investment, competition and state-owned
enterprises, regulatory coherence, and transparency.
The political and economic elites supporting the TPP have argued that it is vital in securing future eco-
nomic prosperity. As the delegates to the November 2011 meeting on the TPO stated,

We are confident that this agreement will be a model for ambition for other free trade agreements in
the future, forging close linkages among our economies, enhancing our competitiveness, benefitting
our consumers and supporting the creation and retention of jobs, higher living standards, and the
reduction of poverty in our countries.
(TPP Leaders’ Statement,
November 2011)

However, the TPP has been opposed by various groups including environmentalists, labour unions and
health professionals. The scope of the treaty and the secrecy of the negotiations have drawn extensive criti-
cism from civic groups and elected officials in various legislatures. An issue of particular concern is possible
investor protection provisions which would allow companies to sue states in the event that public policies
hinder their pursuit of profits. The TPP negotiations were successfully concluded on 5 October 2015. It now
remains for national legislatures to ratify the agreement in order for the provisions to be implemented.

initiated the first phase. The second period is dated the internal nature of regions and the relationship
from the mid-1990s. The impact of the two phases of between regions. Internally, political struggles have
regionalism on world trade is different. In the first been waged over the degree to which specific regions
phase, regionalism was relatively inward. In the devel- should have strong or weak institutions and the scope
oping world, the aim of regional economic arrange- of policy-making that should be considered at the
ments was to stimulate industrialization, which meant regional level. These struggles have influenced the dif-
that such organizations were more concerned with ferent nature of the regions. For example, the EU has
trade diversion than trade creation. Trade diversion some supranational institutions that oversee common
refers to the process where low-cost suppliers from rules. It also has provisions for regional development
outside the union are replaced by high-cost suppliers funding and labour rights. Most of its members have
within the regional grouping. Trade creation refers to gone even further and adopted a single currency. In
the situation where, as a result of dismantling barriers contrast, the North American Free Trade Agreement
within the region, trade is stimulated. In Europe, the (NAFTA) tends to enforce existing national legislation,
scene of the two most successful early attempts at has no development funding and very weak provisions
regional integration (the European Free Trade Associa- for the respect of labour and environmental standards.
tion and the EEC), regionalism was concerned with Whereas in Europe there is discussion about eventual
dismantling barriers among the participants. In the political union, this subject is of little interest in North
second phase, many of the new associations have America. Moving to the Asia-Pacific area, we encounter
adopted a policy of open regionalism, making the an even looser regional organization – Asia-Pacific
reductions to trade more compatible with multilateral Economic Cooperation (APEC). APEC is more of a
commitments. coordinating body between countries on the Pacific
Although regionalism can be seen in most parts of Rim than an attempt to build strong regional ties with
the world, specific regional agreements vary greatly in robust institutions. Asian states’ fears that a more devel-
their goals and terms. This has led to some debate about oped institution would allow the US to influence their
122 Part 3 DYNAMICS

domestic economies or political regimes have led to a various segments of civil society in many states (Wil-
minimalist structure and trade liberalization agenda. liams, 2005a). A wide range of issues has attracted
Some economists have raised fears that increasing attention. Some groups worry that regional and global
regionalization will undermine the multilateral trading institutions are insulated from democratic control.
system (Baldwin and Thornton, 2008). It is argued that They contend that business and political elites have
these regional agreements are inherently inefficient and considerable input into the structure of such agree-
discriminatory. RTAs will erode the MFN principle, ments, but citizens find it difficult to hold their govern-
increase barriers to products from other regions and ments accountable for the decision-making authority
divert the natural flow of free trade. Such actions could transferred to international institutions. It should be
cause economic damage and undermine political sup- noted, however, that firms are also formally excluded
port for a multilateral system. For example, Europeans from the WTO. The influence of the corporate sector
and Americans disagree about how much risk should comes from its influence at the national level (and
be accepted in the production of food. This has led to inclusion on national delegations) rather than directly
conflicts at the WTO over the EU banning the imports at the multilateral level. Nevertheless, the democratic
of products such as cattle that the Americans have credentials of the WTO and RTAs have been a subject
injected with growth hormones. Other observers have of considerable debate. It has become widely accepted
argued that RTAs can be compatible with the multilat- that democracy is a universal norm and in the context
eral trading system (Griswold, 2003). The issue is some- of a debate on democratization, a focus has arisen con-
times phrased as a debate between those who see cerning the representative nature of multilateral trade
regions as building blocks for global free trade and agreements.
those who see them as stumbling blocks that create This issue has been raised most vociferously in rela-
incompatible areas of regional economies. tion to the WTO but it has also surfaced in relation to
A final issue is the fate of those areas of the world existing regional institutions such as the EU and
that are left out of the prominent regional trading areas. NAFTA, and proposed RTAs such as the TPP. At the
Regional integration is proceeding with some speed in European level, support for further integration has
Europe, North America and East Asia through the been diminished in a number of member countries,
activity of governments and firms. This excludes large and nationalist sentiments gathered around right-wing
areas of the world such as Africa, Latin America and parties have made some electoral gains. The so-called
South Asia. Developing-country non-parties with lim- ‘democratic deficit’ in the EU became a topical issue in
ited capacity may run risks of marginalization and the mid-1990s and has remained so ever since. The
damage to their competitiveness, particularly if they do debate on the WTO has focused on issues related to
not substantially participate in world trade or are una- transparency, accountability and participation (Wil-
ble to conform to higher standards embedded in RTAs. liams, 1999, pp. 158–60). Essential features of this
There have been several responses. In Latin America, debate are summarized in Box 6.8. The WTO has been
Chile has lobbied for admission to NAFTA. In contrast, responsive to criticism but this has not silenced its crit-
Brazil has put its energy into building MERCOSUR, the ics. In efforts to bolster its legitimacy, the WTO has
common market of several South American countries. derestricted documents, held consultations with NGOs,
Sub-Saharan Africa and South Asia have a series of and accepted submissions from outside parties (known
regional agreements, but these are underdeveloped as amicus briefs) during disputes. Nevertheless, critics
because they lack a powerful motor economy such as maintain the WTO is undemocratic, claiming that deci-
Germany, the US or Japan. Their efforts at successful sions are frequently made in secret and that the visible
regional integration face large obstacles. part of proceedings is a mere masquerade with little
relation to the real exercise of power that takes place
outside the public gaze (Kwa, 2003). Moreover, they
Legitimacy argue that access to information on which decisions are
made should be more readily available. In response,
As trade agreements at the multilateral and regional supporters of the WTO point out that the organization
level have proliferated and influenced domestic politi- is an intergovernmental forum in which decisions are
cal economies, increasing concern has been voiced by based on consensus and subject to ratification by
 Chapter 6 INTERNATIONAL TRADE 123

Box 6.8 Democracy and the WTO

Is the WTO an undemocratic organization? The scale and ferocity of protests against the international
trading regime in general and the WTO in particular suggest that the organization is undemocratic and
therefore illegitimate. What are we to make of such claims?
First, we can observe that no consensus exists on the definition, meaning or practice of democracy. It
can be argued, however, that the WTO (with its 157 members and 27 observer governments) is one of the
most democratic international organizations, because:

1 Its large and diverse membership represents most of the trading nations in the world and a variety of
economic and political systems.
2 The consensus method of decision-making in the WTO gives each country a voice, and goes some way
towards providing small, poorer countries with some source of influence.
3 The WTO is relatively transparent in terms of making access to its documents easy to obtain. Insofar as
negotiations are conducted in secret, it should be recalled that trade negotiations do involve complex
and often controversial trade-offs.

Critics of the WTO reject these points and argue that the organization fails to provide sufficient access
for civil society groups in its deliberations. Increased participation of social movement representatives will,
it is claimed, provide high-quality information, balanced input into policy-making, public education, and
increased public support for the organization. These steps are needed to counter the alleged influence of
transnational capital.
At the centre of the debate, therefore, is the intergovernmental nature of the WTO. But the solution is
not a simple one. On the one hand, if we accept the intergovernmental character of the WTO, the repre-
sentative nature of national governments can be questioned. How legitimate are the agreements entered
into by states that are themselves authoritarian? Another issue relates to the size of population. Is a system
that gives China and Norway the same formal representation democratic, given the vast differences in pop-
ulation? On the other hand, if we agree that an intergovernmental organization fails to capture the range of
stakeholders affected by developments in the global trade regime, it does not follow that increased repre-
sentation of NGOs necessarily makes the WTO more democratic, since it cannot be assumed that NGOs
are more representative than national governments. Indeed, developing countries are hostile to increased
representation of (largely northern) NGOs from social movements because they see them as representing
narrow privileged interests.

national parliaments. In this sense, the organization is lach and Woodall, 2004). Attention to global and
fully representative of its membership. A report by One regional trade organizations has developed as citizen
World Trust, an independent British NGO, on the attention has turned to the increasingly influential role
accountability practices of five intergovernmental these organizations play in a globalized world economy.
organizations, six TNCs and seven NGOs investigated The opposition to international economic agreements
the decision-making practices of the WTO. Although (including trade agreements) grew in the late 1990s and
the report placed the WTO second in its category, it the first two years of the 21st century. The 1997 APEC
argued that ‘the reality is that some members lack the meeting in Vancouver was marked by Canadian police
capacity to engage meaningfully in decision-making’ pepper-spraying protesters, while the 1999 Seattle
(Kovach et al., 2002/3, p. 14). In respect of access to WTO Ministerial Conference was also disrupted by
information, the report noted that ‘Information on the public protests. As one activist noted in the wake of the
WTO’s trade activities is excellent’ (Kovach et al., Seattle protests: ‘What civil society, North and South,
2002/3, p. 15). should be doing at this point is either pushing for the
Other groups concern themselves with the detri- abolition of the WTO or overloading or jamming it so
mental effects of these agreements on social policies, that it cannot function effectively’ (Bello, 2000). In
environmental degradation and labour standards (Wal- Europe, citizens expressed concern about the direction
124 Part 3 DYNAMICS

of integration through a number of referenda and the reason why protectionism remains a central feature of
support given to nationalist, especially right-wing, the world economy is that all economies need some
political parties. In the US, President Clinton and degree of protectionism in order to develop in ways
initially President Bush found it difficult to secure that they value.
negotiating authority from the US Congress to con- One of the major changes in the international trad-
tinue the liberalization process. Under President ing system since the end of the Second World War has
Obama, trade liberalization was not a priority area. been the expansion of the trade agenda beyond a con-
Increasingly, publics are concerned about further cern with market access and market expansion to pro-
economic integration and trade agreements. Multilat- vide coverage of issues such as intellectual property
eral and regional trade organizations face a legitimacy rights, government procurement, investment protec-
problem because they are seen to place the values of tion, and labour and environmental regulations. This
liberalizing economic activity or protecting private expanded agenda has brought increased scrutiny to
interests above other values and interests. Some critics trade policies.
perceive the projects sponsored by such bodies as pro- In this chapter we have examined some of the key
moting economic globalization and social injustice. We controversies attendant on the globalization of trade. In
will return to these issues in Chapter 15, which exam- Chapter 7 we turn our attention to transnational pro-
ines governance in the global economy. duction, an equally controversial issue in the global
political economy.

CONCLUSION Further Reading

Experience with tariff negotiations has led to the obser- For a spirited defence of trade liberalization see
vation that most countries favour trade liberalization in Anne O. Krueger (2004), ‘Wilful Ignorance: The
principle but are reluctant to undertake unilateral Struggle to Convince the Free Trade Skeptics’,
reduction of trade barriers because it would open their World Trade Review, 3(3): 483–93. For a wide
markets, leaving them vulnerable to international firms. ranging text that examines the legal, political and
Therefore, protectionism remains a prominent issue in economic aspects of the WTO see Amrita Narlikar,
the world economy. Protectionism is an attractive pol- Martin Daunton and Robert M. Stern (eds) The
icy for domestic markets, and it is here that pressing Oxford Handbook on the World Trade Organiza-
demands originate. The demands for protection reflect tion (2012). Lisa Martin (ed.) The Oxford Hand-
structural changes bound up with the growth of trans- book of the Political Economy of International
national capitalism. It can also be seen as part of a pro- Trade (2015) provides a comprehensive introduc-
cess of structural change in the global economy, which tion to key aspects of contemporary trade politics.
may reinforce the strength of social forces favourable to A succinct introduction to the importance of
the maintenance of open trade. The demand for protec- regional trade can be found in David A. Lynch,
tion comes from rational actors in the economic pro- Trade and Globalization: An Introduction to
cess that are concerned with their nations’ interests, Regional Trade Agreements (2010).
which would suffer from free trade. The most obvious
### Regional Trade Agreements (RTAs)

In recent decades, the world has seen a significant increase in the creation of **Regional Trade Agreements (RTAs)**, with over 260 agreements currently in
force. Most of these agreements were established after the creation of the **World Trade Organization (WTO)**. Between 1948 and 1995, the **General
Agreement on Tariffs and Trade (GATT)** received notifications of 124 RTAs. However, from January 1995 to April 2015, the **WTO** was notified of 449
RTAs. This rise in RTAs corresponds to the slow pace of multilateral negotiations within the WTO. Major recent developments in RTAs include the launch of the
**Trans-Atlantic Trade and Investment Partnership (TTIP)** negotiations between the United States and the European Union, and ongoing negotiations regarding
the **Trans-Pacific Partnership (TPP)**.

RTAs often serve multiple purposes beyond just promoting trade liberalization. These purposes can include **investment liberalization**, managing economic
conflicts, domestic economic restructuring, and political integration. The goal of modern RTA negotiations typically involves high-level integration that goes
beyond WTO agreements, often addressing areas like **technical regulations**, **standards**, **sanitary and phytosanitary measures**, **services**,
**investment**, **intellectual property**, **state aid**, **state-owned enterprises (SOEs)**, **public procurement**, **competition policy**, and **environmental
or labor market regulations**.

Even though trade liberalization is often a central objective, the broader development of regionalism is a significant aspect of the global trading system. A key
point in discussions of RTAs is their **impact on global welfare**. RTAs are seen by some as complementary to multilateral trade under the WTO, since nations
involved in RTAs are also WTO members, signaling compatibility between regionalism and multilateralism.

### Two Phases of Regionalism

The development of regionalism is often categorized into two phases:

1. **First Phase (1950s - early 1990s)**:

- This phase began with the establishment of the **European Economic Community (EEC)** in 1957.
- Regionalism in this phase was more **inward-focused** and aimed at stimulating industrialization in developing countries.
- In the developing world, regional arrangements were more concerned with **trade diversion** than **trade creation**. **Trade diversion** occurs when low-
cost suppliers from outside a region are replaced by higher-cost suppliers within the region. On the other hand, **trade creation** happens when barriers within a
region are removed, encouraging trade.
- In Europe, the goal was to dismantle barriers among member states, with the **EEC** and the **European Free Trade Association (EFTA)** as the key
examples.
2. **Second Phase (Mid-1990s - Present)**:
- From the mid-1990s, the nature of regionalism shifted towards **open regionalism**, with an emphasis on making trade liberalization compatible with
multilateral commitments under the WTO.
- Many new RTAs from this period aim to create open trading regions while minimizing barriers to non-member countries, aligning their trade policies with
broader global trade principles.

### Variations Among Regional Agreements

Regional agreements around the world have different goals and structures, reflecting the unique political, economic, and social contexts of each region. There has
been significant debate regarding the **internal nature of regions** and the **relationship between different regions**. Internally, political struggles have shaped
the strength of institutions and the scope of policymaking at the regional level.

- **European Union (EU)**: The EU has highly integrated institutions with common rules, regional development funding, and labor rights provisions. Most EU
members have adopted a **single currency** (the Euro).
- **North American Free Trade Agreement (NAFTA)**: NAFTA, in contrast, is less integrated and enforces existing national laws. It lacks development funding and
has minimal labor and environmental protections.
- **Asia-Pacific Economic Cooperation (APEC)**: APEC is a much looser organization aimed at coordinating economic activity between countries in the Pacific Rim.
It does not have strong institutions or a detailed agenda for regional integration, primarily due to fears among Asian nations that a more powerful organization
could allow the U.S. to exert too much influence.
### Debates on the Compatibility of RTAs and Multilateralism

There is significant debate regarding whether increasing regionalism will undermine the **multilateral trading system**. Some economists argue that RTAs are
inherently inefficient and discriminatory because they can erode the **Most Favored Nation (MFN) principle**, increase barriers to trade from non-members, and
divert global trade flows. Such developments could undermine political support for a multilateral system like the WTO.

For example, the EU and the U.S. have had conflicts at the WTO over differing standards for food safety, such as the EU's ban on U.S. beef treated with growth
hormones. Critics fear that RTAs could exacerbate such disputes and create **fragmented trading zones**, undermining global free trade.

On the other hand, some argue that RTAs can be **complementary to multilateralism**. They may act as **building blocks** for global free trade by creating
trading zones that eventually expand to include broader multilateral agreements, rather than creating fragmented economies.

### The Exclusion of Some Regions

A significant issue in the growing prevalence of RTAs is that many parts of the world remain excluded from prominent regional trading areas. Europe, North
America, and East Asia are heavily involved in regional integration, while regions like **Africa**, **Latin America**, and **South Asia** are not as integrated into
global trade systems through RTAs. This exclusion may marginalize developing countries and weaken their competitiveness, especially if they do not participate in
world trade or fail to meet the higher standards set by RTAs.

Several responses have emerged:

- **Latin America**: Chile has sought to join NAFTA, while Brazil has focused on building the **MERCOSUR** (the common market of South American countries).
- **Africa and South Asia**: These regions have regional agreements, but they are less developed due to the lack of powerful "motor economies" (like Germany,
the U.S., or Japan) to drive regional integration. These regions face significant obstacles in achieving successful regional economic integration.

### Conclusion

In conclusion, regional trade agreements have become a key feature of the global trading system. While they promote economic integration within regions, their
potential to either complement or conflict with global trade principles is still debated. The increasing dominance of RTAs in certain regions, while leaving others
behind, raises concerns about global trade fragmentation and the marginalization of less integrated areas. How RTAs evolve, both internally and in relation to
multilateral trade agreements, will significantly shape the future of global trade.
### Legitimacy of Trade Agreements

As trade agreements—both **multilateral** and **regional**—have proliferated, concerns about their legitimacy have become increasingly prominent,
particularly within **civil society**. These concerns center around the **democratic accountability** and **transparency** of trade institutions, with various
groups criticizing the way trade agreements are structured and negotiated. Some argue that **business and political elites** have significant influence over
these agreements, while **citizens** find it difficult to hold governments accountable for decisions made by international institutions. This is especially
concerning because the **corporate sector** is formally excluded from organizations like the **World Trade Organization (WTO)**. Instead, its influence
comes from its connections at the **national level** and through participation in national delegations.

Despite these criticisms, the **democratic credentials** of the WTO and **regional trade agreements (RTAs)** like the **European Union (EU)**,
**NAFTA**, and the proposed **Trans-Pacific Partnership (TPP)** have been hotly debated. The rise of nationalist and right-wing parties, especially in
Europe, reflects growing discontent with further regional integration. In the EU, this has been described as a **democratic deficit**, a term coined in the
mid-1990s to highlight the perceived lack of democratic legitimacy in the EU’s decision-making process. Similarly, concerns have been raised about
**accountability, transparency, and participation** in the WTO.

### Criticism and Responses Regarding Legitimacy

1. **WTO and Democratic Deficit**:

The WTO, in particular, has been a focal point for discussions about **democratic legitimacy**. Critics contend that the organization makes decisions in
secret, with little regard for public participation or transparency. These critics argue that much of the WTO's decision-making is a "masquerade," with
power being exercised behind the scenes and out of public view. They demand greater access to information on the decisions that are being made.

In response, supporters of the WTO point out that it is an **intergovernmental forum** where decisions are made by consensus and require ratification
by national parliaments. Thus, they argue, the WTO is **representative of its members** and operates according to democratic principles at the national
level, despite its lack of direct democratic participation in the process.

An independent report by **One World Trust**, an NGO, assessed the accountability practices of intergovernmental organizations, including the WTO.
The report ranked the WTO second in accountability but acknowledged that some countries—especially smaller or developing ones—**lack the capacity**
to meaningfully participate in decision-making. While the WTO’s **access to information** was deemed **excellent**, the report raised concerns about
unequal participation.

2. **Criticism Regarding Social and Environmental Issues**:

Beyond the question of democratic legitimacy, another major concern involves the **social** and **environmental impact** of trade agreements. Critics
argue that trade agreements, particularly those overseen by global and regional trade organizations, often promote **economic globalization** at the
expense of **social justice**, **labor standards**, and the environment. These concerns gained momentum as citizens worldwide grew more aware of the
increasing influence of international trade bodies on domestic policies.

The **late 1990s** and early **2000s** saw widespread public opposition to trade agreements. Notable events, such as the **1997 APEC meeting** in
Vancouver and the **1999 WTO Ministerial Conference** in Seattle, were marred by large-scale protests. In the aftermath of the Seattle protests, one
activist called for either the **abolition of the WTO** or for overwhelming it to the point that it could no longer function effectively.

In Europe, concerns about the direction of **EU integration** led to increased support for **nationalist** and **right-wing** political parties, and several
**referenda** reflected the growing skepticism about further integration. In the U.S., presidents like **Clinton**, **Bush**, and **Obama** faced difficulties
in securing **negotiating authority** from Congress for trade liberalization, signaling increasing resistance to **trade liberalization** within the public.

### Legitimacy Crisis and Public Concerns

Increasingly, publics around the world are questioning the legitimacy of **multilateral and regional trade organizations**. These institutions are often
perceived as prioritizing the values of **economic liberalization** and the protection of **private interests** over **social values**, such as **labor rights**,
**environmental protection**, and **economic equity**. Critics argue that trade agreements, in effect, promote **economic globalization** at the cost of
**social justice**, exacerbating inequality and environmental degradation.

The legitimacy problem faced by organizations like the WTO and RTAs like the EU, NAFTA, and TPP stems from the perception that they are
**undemocratic** and often **inaccessible** to ordinary citizens. While trade agreements are negotiated by governments, many argue that these decisions
disproportionately favor business and political elites, while failing to address the needs and concerns of the broader population. This **democratic deficit**
has led to **public protests**, **political backlash**, and **increasing opposition** to further integration.

### Conclusion

In conclusion, the legitimacy of **multilateral** and **regional trade agreements** is a key issue in the global debate on **economic governance**. Critics
argue that these agreements often lack democratic accountability, transparency, and broad public participation, while prioritizing economic interests over
social and environmental concerns. While institutions like the WTO have made some efforts to address these issues, many critics continue to argue that
trade agreements exacerbate global inequalities and fail to reflect the values of ordinary citizens. These legitimacy concerns will continue to shape the
future of global trade and governance, as public dissatisfaction with economic integration grows worldwide.