General Agreement On Tariffs And Trade Essay

, Research Paper

ELECTRONIC COMMERCE

Washington in duty-free move

The US is seeking to extend the duty-free status of international online

transactions to protect the development of global electronic commerce, the

Clinton administration said yesterday. Susan Esserman, deputy US trade

representative, said the US wanted the World Trade Organization to agree “at

the earliest possible date” to extend the current moratorium on customs duties

for electronic trade.

In testimony to the Senate foreign relations sub-committee on Europe, Ms

Esserman said duty-free cyberspace was particularly valuable to US software

companies that were seeking to distribute their products electronically.

The US is also looking for WTO members to affirm that electronic commerce is

subject to existing rules and agreements, and should not face “unnecessary

regulatory barriers to trade”. However Ms Esserman said “more time and work

are necessary” before electronic goods could be subject to final

classification under WTO rules.

Electronic commerce in the US is forecast to grow to $1,300bn by 2003, while

in India it is expected to grow by $15bn within two years. Richard Wolffe,

Washington

Protectionism, it seems, is always with us and it is useful to examine the

intermittent attempts made to establish rules for its containment. This book

is one such examination, on the conception, birth, and early years of the

General Agreement on Tariffs and Trade (GATT); it is restricted to the years

1940–53. It is the work of an historian but one at the political, rather than

economic, end of the spectrum. The heavy emphasis throughout is on the

American role within an essentially Anglo-American tussle. The argument is

that although trade was a relatively small proportion of US output it was used

for political and diplomatic purposes. The general thrust is that the US was

keen on a new liberal order and determined to break the British empire’s

preferential trading arrangements. However, when we read that the central

argument is that, ‘by liberalizing trade while protecting domestic economies

– a bargain consistent with US trade law, practice, and history …’, we

might reasonably expect to be in for a roc ky ride.

Politics is important and possibly even central in the process of trade

protection, but will always be found to depend on economic forces. The

politics here might well be overdone. The whole story is presented as a

struggle between the US and Britain/British empire. Although this tension is

an old story, Zeiler takes it further and argues that the Commonwealth had ‘a

major hand in shaping the GATT order’ (p.197). It is a complex story of

negotiations taking place under conditions of extreme difficulty, and the

author has worked diligently in the American, British and Commonwealth country

archives.

There is, however, a lot that raises the eyebrows of the economic historian.

Within a few lines of the opening we read that, ‘global business leaders …

seek a commercial regime unfettered by barriers’. This is rather the

antithesis of the conventional understanding of businessmen almost invariably

(and nowhere more so than in the US), seeking protection. And running against

the conventional view (without seemingly noticing) is the idea that America is

the home and inspiration of free trade. The British in the 1930s opted for,

‘Regulated, rather than American style market, capitalism … ‘ (p.20). Or

again, ‘Free trade frightened the British’ (p.39). And richest of all, ‘The

British simply would not accept the free trade doctrine’ (p.24). Zeiler

suggests that free trade was key to the American economy ignoring the fact

that America had been one of the most protectionist countries for most of its

history. This is unfortunate and results in a distortion of the argument, for

of the GATT negotiations Zeiler say s the British were not willing partners in

pursuit of lower trade barriers. At certain times that may have been true but

it did not derive from long-term hostility. Nevertheless, in the closing pages

of the book the author does concede that the US was no unilateral free trader.

Running alongside this idiosyncratic view is an account of the British economy

that is surely at odds with the facts. It is a picture of pathetic feebleness:

‘Great Britain faced a future of decline and hardship. Its once predominant

global position lay in tatters’ (p.2O). ‘Their economy was in a shambles …’

(p.39).

While the book is well written there is a danger of the story being presented

in overly dramatic terms (hinted at in the title), and at times a frivolous

and dismissive tone creeps in — ‘From his perch in the Treasury Department,

Keynes …’. And there are occasional lapses in accuracy such as that the

Commonwealth had moved to a discriminatory trading system in the 1930s (the

Dominions had been giving preferences from the 1890s), or, for example, that

there were tariffs on meat. Too much of the story reads as if the world began

around the time of the study. This is a pity for it is an important subject

and one from which business historians can learn and to which they can

contribute.

Prime Minister John Howard can claim a victory at the Commonwealth Heads of

Government Meeting (CHOGM) with the summit embracing his call for a statement

demanding freer world trade.

Mr. Howard had been pushing for the Commonwealth to make a strong stand on the

need to relax trade barriers ahead of this month’s World Trade Organization

(WTO) ministerial talks in Seattle.

Following their weekend retreat, Commonwealth leaders released a declaration

calling on all nations to dismantle trade barriers and enhance export

opportunities for poorer countries.

“We support efforts that would enable developing countries to build up their

skills and manufacturing capacities, including the production and export of

value-added goods, so as to enhance growth and achieve prosperity,” the

declaration said.

“Likewise, we urge that the forthcoming ministerial meeting of WTO launch the

next round of global negotiations on trade to be one with a pronounced

developmental dimension, with the aim of achieving better market access in

agriculture, industrial products and services in a way that provides benefits

to all members, particularly developing countries.”

Mr. Howard, who has announced a series of Australian aid packages for

Commonwealth countries, has argued trade restrictions need to be lifted in the

more globalizes world economy.

Globalization was a fact of life and could not be avoided, he said.

“It’s a question of understanding it and it’s a question of every community in

its own way making certain that its citizens understand and that where we can

even out the bumps and we soften the blow whilst continuing to go forward,” he

said.

The challenge of globalization is the theme of this year’s CHOGM, which is

also considering ways to strengthen democracy in the Commonwealth and what

follow-up action to take against suspended member Pakistan after last month’s

military coup.

Briefing: Maybe It Is Free Trade: It Certainly Doesn’t Cost The Government Very Much

The General Agreement on Tariffs and Trade (GATT), along with the Bretton Woods monetary agreement and the International Monetary Fund (IMF), were the cornerstones of international economic policy created at the end of World War II. All three institutions were designed to promote free trade, economic stability, and an end to the economic policies that led to the Great Depression and contributed to the coming of war.

The World Trade Organization (WTO) is, in effect, the supervising body for GATT, which is not one law, but a complex body of laws and regulations that have accumulated over a period of more than 50 years and covering a great many aspects of world trade and what signatories are and are not allowed to regulate for themselves.

The basic WTO guidelines are that “members should conduct their trade and economic relations with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of development.”

In addition, the charter of the WTO calls for it to enforce the following fundamental principles:

 Trade without discrimination. Members are bound to grant to the products of other members no less favorable treatment than that accorded to the products of any other country. Once goods have entered a market, they must be treated no less favorably than the equivalent domestically-produced good.

 Predictable and growing access to markets. While quotas are generally outlawed, tariffs or customs duties are legal in the WTO.

 Promoting fair competition. The WTO extends and clarifies previous GATT rules controlling “dumping” (selling goods abroad at below-market prices) and subsidies (governments providing money to make local goods cheaper than imports).

 Encouraging development and economic reform. Developing countries are given transition periods to adjust to the more difficult WTO provisions. Less-developed countries are given even more flexibility and benefit from accelerated implementation of market access concessions for their goods.

The North American Free Trade Agreement (NAFTA) has been in place since the beginning of 1994. A pet project of former President George Bush, NAFTA is a three-way agreement among the United States, Canada, and Mexico designed to encourage trade and commerce throughout the three nations of North America.

One World, One Trading Unit

The arguments for free trade vs. protected national economies has been with us since the very beginning of trade between tribes. Drawn with the broadest brush, the argument comes down to how much we perceive ourselves part of the international community and how much we wish to keep our tribe/estate/city-state/country separate from, and richer than, its neighbors.

Most economists agree that, at least in principle, free trade results in the greatest good for the greatest number of people. Suppose Country A grows kumquats better than Country B, but Country B makes widgets more cheaply; if Country A specializes in kumquats and trades some with Country B in exchange for widgets and vice versa, both will be better off.

According to this widely-accepted theory, both countries are better off under free trade rules even if one country is better at everything. In this case, the less efficient country will have lower wage rates than the more efficient one, but will specialize in the goods it produces most cheaply relative to others–and both will wind up richer through trade than through isolation.

However, free trade does have a disadvantage: Even if it works for the benefit of everyone in the long term, in the short term there are often dislocations. If America opens its textiles market to cheaper imports from Mexico, American textile workers lose jobs. Of course, American consumers benefit from cheaper clothes, and spend the money they save on other goods, thus creating jobs in other areas–but in the short term, a lot of textile workers have lost their jobs and have a hard time finding new ones. And the pain is concentrated, while the benefits are diffuse; the people who lose their jobs will complain bitterly, while the people who find slightly cheaper clothes at the mall may not even realize why prices have dropped.

The argument for free trade has another disadvantage: It’s counterintuitive. People seem comfortable believing that exporting is good, while importing is bad. Of course, this is oversimplified; if the Japanese make better stereos, we do ourselves no favor if we force Americans to buy inferior American hi-fi equipment. And we do the American hi-fi industry no good, because it will grow fat and happy in its protected market and will never develop into a viable competitor for Japanese manufacturers.

What’s the alternative? In 1929, the United States passed the Smoot-Hawley Act, which drastically increased tariffs on imported goods, in the name of protecting American jobs. Many historians and economic theorists believe that the Stock Market Crash of 1929, the Great Depression, the rise of Hitler can be directly attributed to that one law.

Proponents of GATT and NAFTA need only point to these economic and historical arguments to make their case.

One Trading Unit, No National Sovereignty

The principles of free trade may be hard to argue with, but the implementation of what we call free trade in the 1990s is another matter. NAFTA and GATT are extremely controversial among Americans, despite being perhaps the only thing Bill Clinton and George Bush agreed upon in the 1994 presidential election. The WTO, a whole new international entity with some of the powers of a government, is viewed with even more suspicion.

Before the passage of NAFTA in 1993, opponents warned that corporations would flee to Mexico for the cheaper labor and less restrictive laws. While that does not seem to have happened at the level people feared, many individual examples can be cited (including a 100,000-job transfer by IBM directly from the United States to “less expensive labor markets”). Do we really want, 10 years from now, to be buying Fords and Cheerios and IBM computers all made in Mexico, or Thailand? (To a large extent, we already are.) If our big corporations all move out of the United States, will Americans have any money left to buy Fords or Cheerios or computers? Or, as the free trade proponents argue, will we get better goods along with higher incentives to improve our domestic industries?

The second major criticism leveled at these treaties and the bodies that govern them is that they undermine the ability of signatory nations, including the United States, to make their own laws. This causes concern across the political spectrum, with the American left expressing serious concerns about our ability to keep and enforce our environmental laws and the American right seeing not only American sovereignty but the traditional concept of “states’ rights” in jeopardy.

Decisions made in the Uruguay Round of GATT talks permit the WTO to intervene in:

 Local agriculture subsidies (which can include programs like “Buy Oregon” or “Minnesota Grown”)

 Governmental purchasing, such as the federal government?s “Buy American” policy

 Federal and state environmental regulations that favor some products over others (such as the California higher emission controls for motor vehicles)

 The rights of Indian tribes, guaranteed by Federal law, to fish waters that are otherwise protected.

 Regulations controlling food quality, such as outlawing Red Dye #2 (a proven carcinogen), or bovine gonadotropic hormone (a suspected carcinogen)

To those who say such fears are groundless, opponents of the free trade agreements point out that before the WTO was in place, the Netherlands and the European Union brought a complaint against the United States’ Marine Mammal Protection Act, which allows us to forbid the importing of tuna which is caught in ways that harm dolphins. The Netherlands claimed that this law interfered with their ability to export tuna to America. The GATT body ruled against the United States, which allows the WTO to impose sanctions if that law is enforced. A similar suit was brought by Mexico under NAFTA in 1991

Some Americans are deeply concerned about the fate of dolphins in Dutch and Mexican waters; others, to whom the health of dolphins is entirely irrelevant, nonetheless do not like to see U.S. law overturned, or presumably expensive sanctions imposed, at the whim of an international body. Many people point out that the NAFTA and WTO decision-makers are not elected by anyone and are thus only responsible to their own organizations. If we do not like the rulings they make, or the sanctions they impose, we have no recourse within the organizations–secession is the only appeal.

Leaving the Alphabet Soup Behind

The WTO, GATT, and NAFTA are generally seen to be flawed compromises among various concepts of free trade. They could be scrapped, and “real” unregulated free trade among nations could take their place. On the other extreme, they could be scrapped and America could block imports and largely turn its back on the rest of the world, concentrating on building American wealth and American jobs. The two ends of the spectrum are easy to visualize: it’s the murky middle where the greatest problems arise.

Virtually no one without a vested interest in the organizations would hold up the WTO or the NAFTA governing body as ideal, but do they threaten the existence of the United States as an independent nation or are they vital to the peace and prosperity of the Free World?

Briefing: How Free Shall Our Free Trade Be?

The Optimum Strategy

The vote to pursue the current trend toward open trade under multi-country regulations has been viewed by many commentators as a vote to stay in NAFTA (the North American Free Trade Agreement) and to continue our participation in GATT (the General Agreement on Tariffs and Trade) and the newly-formed World Trade Organization (WTO), which was created in the last round of GATT talks in Uruguay.

Both NAFTA and GATT have been incorporated into U.S. law in the past five years, over the strident objections of people who feared the famous “giant sucking sound” as corporations moved millions of U.S. jobs to Mexico and Asia. In fact, however, the wholesale migration of jobs has not come to pass. Many individual instances can be cited, but it is clear that U.S. industry as a whole has not packed up and crossed the border, or the ocean.

However, not all proponents of international agreements believe that regional alliances such as NAFTA and the proposed Trans-Atlantic and Trans-Pacific groups are the right approach. Such alliances have the potential to turn into their own protectionist units (much as the European Union is doing) and to work against free trade between alliance and alliance, while they help foster free trade within a given alliance.

Economists and other interested parties who want to see the world move as close to a pure free-trade policy as politically feasible recommend minimizing or ditching regional alliances and giving more and more power to the WTO to oversee genuine worldwide trade, rather than region-by-region agreements. This allows some regulations to protect the environment, the quality of the workplace, etc., without reforming the current set of nations into a smaller and more powerful set of trading partners, working generally in the interest of their richest and most powerful member nations.

Proponents of the overall world model fear, for example, that NAFTA can become an “extended U.S.A.” when trading with the European Union, so that the United States will use the added economic clout of Canada and Mexico as a club to beat the Europeans. (And, in fact, the ability of the European Union to do precisely the same thing in reverse was one of the major factors which convinced the United States to accept NAFTA.)

Nationalists, on the other hand, frequently prefer the benefits of managed alliances, feeling that their own country is more likely to have global interests in common with its neighbors or specific trading partners than with a truly worldwide system. Also, pulling out of a worldwide system in case of local war, shift in national policy, or for any other reason, is much harder than pulling out of one, or even a group, of regional alliances–another reason for people who put “my country’s interest” first to be inclined toward the regional alliance route.

Which Areas to Cover

When most Americans think about international trade, they think about stereos, cars, computers, VCRs, packaged foods, liquor, jewelry–the things you can buy in a duty-free shop in an airport, or an import store in this country–and these things are all covered by the current free trade agreements.

But so are many other things.

Provisions of GATT, some of them involving all signatories and some of them “plurilateral agreements” involving some signatories, cover the following controversial areas:

 Intellectual property, such as books, movies, and computer software

 Agriculture and dairy products, including whether it’s legal to ban imports of beef where the cattle have been fed hormones or vegetables that have been dusted with DDT

 Civil aircraft, an industry often considered crucial to military preparedness

 Government procurement, an area where many feel that nationalism is particularly appropriate

 Timber and other non- (or too-slowly) renewable resources, which can be depleted by low prices abroad and become insufficient to meet local needs

Intellectual property is, in some senses, the least threatened of these areas, because language and culture are such dominating factors in terms of what intellectual property customers want to buy. Given Americans’ traditional resistance to foreign films and translated books, we are at no threat of having our citizens prefer foreign intellectual property to the home-grown variety, though of course there is little, except perhaps for the language barrier, to stop the Hollywood movie studios (one of the country’s two largest export industries) from moving over the border to Mexico and running the film industry from there, hiring Mexican workers for all, or most, off-screen jobs.

Software, another area where the U.S. exports far more than it imports, is once again subject to linguistic and cultural pressures. While it’s hard to imagine foreign software taking significant share away from Quicken or Microsoft, it is easier to believe that a foreign company could displace Netscape or America Online (which is both an intellectual property company and a service company).

The agriculture and dairy products controversy touches primarily on the question of food safety versus efficiency. How much should a country be allowed to set its own food safety standards? Both of these issues have already been hugely affected by NAFTA and GATT.

Despite the complaints of many environmentalists that our laws are not strong enough, the United States probably has the strongest pesticide and chemical restrictions for food and food products in the world. Under existing world trade treaties, other countries cannot be prevented from bringing in their produce and meat, which can freely contain substances banned in this country as carcinogens (such as the pesticide DDT, or bovine growth hormone, or BGH, in beef and milk). If it is legal to sell these products in the United States, how can we continue to tell our own farmers and ranchers that they may not use them? And isn?t it the government?s job to protect Americans from ingesting them?

Presumably, DDT-free or BGH-free products can be labeled as such–although if such labeling carries a connotation of “American-and-therefore-better,” it would probably not be acceptable under the WTO guidelines. Of course, many consumers will buy the cheaper or nicer-looking choice at the supermarket, regardless of what’s on the label. While some would call this unacceptable danger to the public, others would call it a simple free choice between two kinds of products.

The argument for protecting the civil aviation industry stems from the fact that, above all, this is the industry most readily convertible to military purposes in time of war. If it is not protected, the chance always remains that it could move out of the country, leaving us without retoolable industries available if and when hostilities recur. In the United States, civil aviation is also one of our two largest exports (along with Hollywood movies) and contributes significantly to our gross national product.

The concept of the federal government being forced to accept bids from foreign companies for everything from toilet paper to major construction products is alien to many Americans, who have grown up in a period of protectionism. When auto workers can change their vote because a politician drives a foreign-made car, elected officials and government functionaries at all levels have spent the last several decades extremely conscious of “buy American” attitudes. An open government procurement process will inevitably bring foreign products into all levels of our government–similarly, of course, it will allow us to offer “American know-how” to governments around the globe.

The U.S. timber industry has changed phenomenally in the past 15 years, largely because Japan doesn?t have enough of its own trees to meet its demand for paper. The cheapest way for the Japanese to meet their paper needs has been to import raw logs from America, a trade which ended in the 1980s because there simply was not enough timber to supply Japan and satisfy domestic U.S. needs. Free trade, of course, demands that traders sell to the customer who offers the highest price; they cannot be required to fill the needs of one market at the expense of another. Should Americans sell to Japan at higher prices even if it means domestic shortages, or is it appropriate to say, “These are our trees, hands off”?

The arguments that apply to protecting timber can also be easily applied to other natural resources, such as coal or copper. On the other hand, free trade agreements work to the benefit of the United States in terms of resources where we cannot fill our own needs, such as oil or gold.

Although each of these arenas has its own specific issues, in each case the essential question boils down to: “Is this important enough to our country that we should protect ourselves against the inroads of foreign traders, thereby cutting ourselves off from the benefits of free trade?”