International Trade: GATT, WTO, and Effects

Posted on Mar 17, 2025 in Economy

Unit 4 – The World Trade System

1. International Trade: History of the Regulatory Framework of International Trade: GATT and WTO

1.1 The GATT

After the stock market crash of 1929, governments, lacking mutual trust, implemented protectionist measures to restrict imports. Consequently, trade experienced a 66% reduction in the following four years.

In 1948, 23 countries approved the General Agreement on Tariffs and Trade (GATT) at the Conference on Trade and Employment in Havana, following the agreement on tariff reductions at the Geneva Conference in 1947. The GATT aimed to expand trade under specific conditions:

  • Reciprocity
  • Non-discriminatory treatment
  • Most Favored Nation (MFN) clause, with exceptions:
    • Regional integration processes
    • Manufactures from developing countries: Generalized System of Preferences

The GATT provided a code of rules and served as a forum for trade negotiations. Eight rounds of negotiations took place between 1947 and 1994. These resulted in a reduction in average tariffs from 40% in 1947 to 5% in 2011 and addressed various topics, such as non-tariff barriers, anti-dumping measures, and service liberalization.

The GATT led to the creation of a new trade organization, the World Trade Organization (WTO), at the end of the Uruguay Round negotiations in 1995.

1.2 The World Trade Organization

In 2001, the Doha Conference was held, where the Doha Development Agenda was implemented.

The Doha Conference topics were:

  • Agricultural and textile goods liberalization
  • Reduction of exports and domestic subsidies
  • Addressing tariff escalation and tariff peaks
  • Services liberalization (as requested by developed countries): telecommunications, finance sector, transportation, and service suppliers

1.3 Static Effects of International Trade

  • A country’s ability to produce a particular good or service at a lower marginal (relative prices) and opportunity cost.
  • Movement of production factors to more efficient products.
  • Changes in consumer behavior (wider possibilities of consumption due to opening trade).
  • Increase of international trade volume (surplus of production).
  • Increase of welfare (wider possibilities of consumption not accessible domestically).

1.4 Dynamic Effects of International Trade

When trade is based on liberalism, it gains efficiency by:

  • Moving production factors.
  • Achieving economies of scale.
  • Increasing competitiveness, quantity, and quality of products.
  • Gaining access to new and innovative technology.
  • Interindustry trade (Heckscher-Ohlin): Based on comparative advantage, stemming from different relative prices of products (Ricardo), different relative production efficiencies, and varying availability, accessibility, and quality of production factors between two countries.
  • Intraindustry trade (Krugman et al.): Based on similar accessibility to factors in two countries. It distinguishes between products from a sector with different qualities (vertical differences) and similar products with similar qualities but other specific characteristics, e.g., the brand (horizontal differences).

These differences arise from economies of scale, product differentiation without extra cost, and varied consumer tastes.