The international free trade systems that exist today—under the General Agreement on Tariffs and Trade (GATT) and various regional free trade groupings such as the North American Free Trade Agreement (NAFTA) and the European Union —developed in large part from the experience of the Great Depression and World War II. The prevailing belief at the end of World War II was that war had found its roots in the Depression, and that the dire economic conditions of the Depression had been exacerbated, if not caused, by national policies that placed protectionist trade barriers between nations. Protectionist policies before the Depression had, at the very least, ignored the economic wisdom of comparative advantage through free trade, a theory advanced by, among others, English economist David Ricardo (1772-1823) in Principles of Political Economy and Taxation, published in 1817.
After World War II, the victorious Allies envisioned a global system of institutions—including the United Nations, the International Monetary Fund, and an International Trade Organization—to promote and protect global security, development, and trade. The International Trade Organization (ITO) never came into being; the 1947 General Agreement on Tariffs and Trade (GATT) served for many years as an organization and set of treaties promoting tariff reductions among member nations.
In the 1990s the shift toward free trade made another important stride when the Uruguay Round of Multilateral Trade Negotiations, a major revision of GATT, was concluded among 124 nations in 1993 and ratified in 1994. The Uruguay Round produced a new and fairly aggressive schedule of commitments among participating countries to reduce or even eliminate certain trade restrictions. The GATT framework also led to important new service liberalizations under the General Agreement on Trade in Services (GATS), which addressed the long-neglected issue of international competition in service industries. Another provision of the new GATT called for creation of the World Trade Organization (WTO), founded in 1995, which has many of the powers originally conceived for the ITO. As with GATT, the overall purpose of the WTO in theory is to promote free trade, with each participating nation making some economic trade-offs in order to assure greater global economic prosperity overall.
The foundation of global free trade since World War II has been GATT. GATT has been the only global and multilateral agreement on terms of trade, and functions as a forum for the member nations to negotiate reductions in trade barriers and discuss trade distortions affecting the free flow of goods among member nations. GATT's provisions are now administered in part through the World Trade Organization, which in its quasi-judicial function has significantly greater power than existed previously to resolve trade disputes among signatory nations.
The major purpose of GATT has been to liberalize world trade according to three basic principles. First, international trade should be conducted on the basis of nondiscrimination. Second, governmental restraints on the movement of goods and capital should be kept to a minimum. Third, the conditions of trade should be agreed upon within a multilateral framework.
The principle of nondiscrimination was articulated in Article I of GATT, which requires that member states grant each other most-favored nation status, such that any bilateral tariff reduction between member countries is automatically extended to all other GATT members.
The second manifestation of GATT's nondiscrimination principle was the obligation of contracting parties, once an imported product has cleared customs, to treat both foreign and domestic products equally. Article III stated the national treatment principle, in which contracting parties agree to treat foreign and domestic products equally if they have met tariffs and other import requirements. This second principle—keeping governmental restraints to a minimum—has as a corollary the notion that governmental restraints should in general be reduced over time.
The third principle—multilateral trade action—was realized in negotiations under Article XXVIII. GATT's tariff structure developed through a series of negotiating rounds in which member countries lowered tariffs through reciprocal concessions. In the first 20 years of GATT, six general negotiations were held. The seventh round was formally initiated in 1973; this so-called "Tokyo Round" of Multilateral Trade Negotiations focused on the elimination of nontariff barriers and ended in 1979. This round produced a series of specialized codes dealing with subsidies and countervailing duties; discrimination against foreign goods in government procurement and product quality specifications that hindered the importation of foreign goods; and unified rules on dumping. In 1986 preparations were begun for a new round of multilateral trade negotiations that would address restraints on trade in services such as insurance, banking, and transportation. This new round become known as the Uruguay Round of Multilateral Trade Negotiations, as the 1986 negotiations began in Uruguay, at Punta del Este. This round, concluded after eight years of negotiating, made important advances in further reducing tariffs by about 40 percent, extending intellectual property protection worldwide, and tightening rules of investment and trade in services.
In addition to the three basic principles described above, the GATT contains two important subsidiary restrictions: (1) no prohibitions or restrictions other than tariffs are allowed, and (2) subsidies on exports, while not entirely prohibited, are discouraged and limited. This second subsidiary principle is in accordance with generally accepted economic theory that export subsidies may have a distorting effect comparable to a tariff on the import side.
The first subsidiary principle means that quantitative restrictions such as quotas—or complete bans—are inconsistent with GATT; Article XI makes this prohibition plain. Quotas and bans—along with discriminatory tariffs—are seen as inconsistent with the free flow of goods, the operation of comparative advantage, and an efficient allocation of global goods.
Other than quotas or bans, however, a variety of nontariff barriers may impede global free trade. National governments may generate performance standards or specifications; grant government contract preferences for domestic suppliers; impose health or safety standards, language requirements, or country of origin labeling; or require elaborate customs inspections. The Uruguay Round was to have addressed such issues, and, in part, did so, but much room for negotiating remains.
GATI allows four exceptions to the general rule prohibiting the use of quantitative import restrictions. A nation may impose restrictions in order to protect domestic agricultural support systems, to help a serious balance of payments problem, for economic development, or for reasons of national security. The balance of payments and economic development exceptions are designed primarily to aid developing nations, for whom strict application of free trade principles may be a developmental disadvantage.
Limited exceptions to GATT's basic and subsidiary principles are provided for in Article XX. Two of the exceptions, Articles XX(b) and XX(g), permit measures necessary to protect human, animal, or plant life or health, or to conserve exhaustible natural resources. In GATT panel disputes however, these exceptions have been read narrowly, and panels have been wary of barriers that may be used to disguise protectionist impulses.
In a major GATT panel dispute, Mexico and the European Union challenged the United States' quotas on imported tuna. Under the U.S. Marine Mammal Protection Act, the Mexican tuna fishing fleet could not catch yellowfin tuna using purse seine netting techniques, which tend to inadvertently kill dolphins, or export to the United States more than one and one-half times the amount of such "dolphin unsafe" tuna than the U.S. tuna industry. Mexico argued that the United States could not discriminate against Mexico's tuna based on an environmentally unsound production or processing method, and the GATr panel agreed. Moreover, the panel noted that the attempt by the United States to use trade barriers to preserve dolphins or anything else outside U.S. territory was impermissible under GATT obligations. Neither the GATT nor the subsequent WTO treaty mentions the word "environment," nor do their provisions make any allowance for member countries to impose any tariffs on imports to ensure better conservation of a natural resource or to compensate domestic industries for the imposition of costs for environmental protection.
Trade disputes between GATT nations have sometimes been serious enough that a GATT dispute resolution panel has been necessary. Yet nations are free to effectively veto GATr panel rulings. The WTO set up a more powerful dispute resolution system—with three-person arbitration panels, expedited hearing schedules to be strictly adhered to, and automatic adoption by the WTO. For signatory nations such as the United States, the new procedures are a double-edged sword: while the United States could block or delay implementation of the GATT panel ruling on the U.S.-Mexico tuna/dolphin dispute, it could not obtain effective relief through GATT after winning a panel's decisions against European subsidies for soybeans and other produce, since the European Union managed to block the decisions.
Dispute resolution under GATT or the WTO begins when one nation believes that free trade benefits are being nullified or impaired by the policies of other signatory nations. If a panel determines that an offending nation has interfered with another nation's benefits under GATT, the panel may authorize the petitioning nation to take defensive action (trade sanctions) on its own, or the nation may be authorized to withdraw or suspend a concession previously made to the other party. Nations that impose trade sanctions in retaliation for benefits impaired will, under the WTO, risk a reprimand as well as remedies authorized by the WTO.
Within the GATT regime, it is permissible for signatory nations to have some safeguards for protecting domestic industries. Under the guise of free trade, businesses from one nation may penetrate another nation's markets either by "dumping" goods below cost in order to gain a foothold in the market, or by offering subsidized goods at injuriously competitive prices. Under U.S. law, a countervailing duty may be levied to raise the price of an imported good that has benefited from a government subsidy, bounty, or grant in the country of origin. But the duty can only be imposed where the U.S. International Trade Commission (an independent federal agency) has determined that there is "material injury" to a U.S. industry or "material retardation" to establishing an industry in the United States.
Antidumping duties may be imposed in a similar manner. The International Trade Commission will make an injury determination as to whether the goods are being sold at less than fair value or below cost. If the answer seems to be that they are, then sales of those goods in the United States are suspended. The importer must then post a bond equal to the estimated antidumping duties.
Trading partners of the United States have often been critical of the extent to which U.S. government and industry has imposed countervailing and antidumping duties. Quicker action on trade dispute resolution by the WTO will likely challenge some below-cost conclusions and subsidy calculations used in the process of imposing countervailing and antidumping duties.
Separate from GATT, which provides an overall international trading framework that is generally leading toward freer trade, there are a number of important regional free trade regimes that have created largely unrestricted trade among participating countries, usually neighboring states. These include the European Union and the North American Free Trade Agreement (NAFTA), which includes Canada, the United States, and Mexico. In South America, the Cartagena Agreement of 1969 began the Andean Common Market (ANCOM) which includes Bolivia, Venezuela, Colombia, Ecuador, and Peru. Chile withdrew from ANCOM in 1977, but has been interested in joining with the United States in a "Western Hemisphere" free trade zone. In the 1990s four other South American countries—Argentina, Brazil, Paraguay, and Uruguay—initiated the Mercosur customs union. In 1999 the United States began talks on the Free Trade Agreement of the Americas (FTAA), which portends the extension of NAFTA provisions over the entire western hemisphere.
The purpose of these agreements is to lower tariff and nontariff barriers to the free movement of people, goods, and services among the member states even more than is required under GATT. This seemingly contradicts the most-favored-nation provisions of the WTO, since granting additional trade concessions within a regional free trade group by definition entails not granting those concessions to countries outside the group. But Article XXIV of GAIT seems to allow the formation of "a customs union" or "free trade area" among a small number of GATT members with the sole proviso that the "parties to such union or agreement" may not impose duties and other regulations on nonparties that are "higher or more restrictive" than existed prior to the union or agreement.
With the formation of the WTO, global free trade has entered a new stage. The WTO's more binding dispute resolution mechanisms will sooner or later test the limits of national sentiments in major trading nations. Dispute panels have the power to assign trade sanctions against losers in WTO arbitration. In significant cases, nationalist sentiment may find much to quarrel with, and occasional calls for a nation's withdrawal from the WTO are inevitable. In the past, GATT cooperation relied largely on consensus; to move from consensus to confrontation and binding resolution poses a stronger legal order with which many will feel uncomfortable. Notably, the U.S. Congress saw fit to make clear that it reserved the right to withdraw from the WTO on six months' notice, and the United States is setting up its own panel of judges to review WTO decisions.
The Uruguay Round was finally able to establish a forum for negotiations geared toward trade in the service industries. The General Agreement on Trade in Services (GATS), considered a sub-agreement under GATT, provided a framework within which the increasingly fluid trade in services (thanks in large part to developments in computers and telecommunications) is liberalized and regulated in an international context, in accordance with the other major trade agreements. While a firm multilateral agreement on a set of specific rules regarding these matters remained elusive, the GATS did initiate a general outline for establishing such rules in the future, and included some industry-specific commitments, notably in the telecommunications industry, which has already begun a major transformation as a result. The primary function of GATS was to implement a set of standards whereby the trade in services may proceed across borders relatively unfettered and to provide a framework for confronting policy issues that may affect trade in services. These points are detailed in the GATS provisions for transparency in financial and legal matters related to services, as well as provisions covering the regulation within domestic markets of ownership, labor and capital mobility, and market access.
Labor leaders in the United States and elsewhere continue to express concern that minimum standards were not set in such areas as child labor, convict labor, wage scales, and labor union protection. For developing countries, where workers generally do not enjoy the same rights as in the industrialized countries, these complaints ring of potential trade barriers or discrimination against nations that depend on providing low-cost labor to compete in the global market. Yet human rights activists are alarmed at the growing number of laborers—many of them children—who work in conditions comparable to slavery, and insist that trade under such conditions may be "free" in some technical sense but is not fair. Among some Asian countries, the countercharge by free trade advocates has been that the developed West was seeking to impose its own cultural and ethical norms on other countries.
Similar clashes have developed in the area of environmental protection. In 1992 a global summit on environmental sustainability took place in Rio de Janeiro (the Earth Summit), and numerous countries declared their allegiance to the concept of sustainability. Yet for some developing countries, the need for hard currency and the hope of further development seem to hinge on the rapid depletion of natural resources within their boundaries or the degradation of their natural environment. Some environmentalists in the industrialized nations have proposed debt-for-nature swaps and the imposition of a tariff on rain forest timber, proceeds from which would be dedicated to buying and preserving rapidly dwindling rain forest reserves. Such notions have been denounced as invasions of sovereignty or self-determination and as barriers to free trade.
Debt in itself remains a troubling issue for nations attempting to develop in the arena of free trade. Much of the third world remains riddled with debt that began to escalate as these countries tried to find their feet after colonization. The payment on this debt, according to many activists, prevents effective domestic investment for broad infrastructure development, thereby keeping these countries at the mercy of the dictates of the WTO and other international financial institutions. This, in turn, keeps them dependent on the labor and environmental conditions discussed above. To resolve this problem, many activists have called for third world debt forgiveness.
On legal grounds, the GATT tuna/dolphin dispute panel made clear that tariffs placed on imported items based on their production or processing methods would be hard to defend under GATT principles. But the issue of sustainable business and economic practices will remain, given the growing economies in a world with finite resources.
In general, free trade proponents see the unfettered drive for profit as not only fair but ultimately beneficial for all parties involved, characterized by a rise in the standard of living as a result of job creation and incentive for productive investment. Critics counter that free trade provisions promote a "race to the bottom," in which domestic interests are compelled to compete for outside investment and trade on the basis of the profitability they offer to foreign firms. As such, countries must seek to minimize potential costs and maximize potential profit by lowering painstakingly implemented environmental and labor standards.
The value differences on issues of labor and environment are accompanied by value differences on issues like intellectual property and nontariff barriers. A large and enduring trade dispute between the United States and Japan over automobiles and auto parts highlights, among other things, very different approaches to marketing and distribution systems. U.S. automakers contend that the Japanese market is effectively closed because of traditional ways of doing business, methods allegedly supported by the Japanese government. But proving state action may be difficult. In the early days of GATT, finding specific tariffs and setting goals and timetables for their reduction was relatively easy. The process of focusing on subsidies and legal structures that impede free trade is proving far more difficult and contentious. In matters such as these, as well as the labor and environmental questions that remain, it can be fairly said that the continued success of free trade depends to a great extent on the gradual emergence of some global consensus over what kinds of business activities are both economically and ethically appropriate.
Between 1995 and 1998, negotiations were underway within the Organization for Economic Cooperation and Development (OECD), a collection of most of the world's industrialized, market-based economies, that were kept well below the public radar. The talks centered on the creation of the Multilateral Agreement on Investment (MAI). Participants included business representatives and officials of the 29 OECD countries. When details of the proposed treaty leaked onto a French Internet site in spring 1997, it quickly became clear why public awareness had been skirted; the MAI would eliminate domestic governmental or regulatory provisions, such as environmental protection laws, labor safety and benefit laws, governmental subsidies to small business, or trade sanctions against countries with dismal human rights records, that were judged to be in interference with or restrict profit-making. The Clinton administration sought to bypass the House of Representatives, which is traditionally more divided over trade agreements, and submit the MAI directly to the Senate to be ratified as a treaty.
A massive campaign resulted among a broad, informal, international coalition of activist groups (largely over the Internet), and significant pressure was applied to force domestic representatives to criticize the treaty. In the United States, some congressional leaders were further incensed over the MAI because it would force the elimination of the Helms-Burton Act, by which the United States administers its politically motivated trade embargo against Cuba. In April 1998, negotiations at the OECD fell apart when it became clear participants could not muster enough popular support in their domestic constituencies to pass the treaty. However, the international business community expects to regroup and work toward a new treaty that would liberalize investment flows.
[ Joan Leotta ]
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Srinivasan, T.N. Developing Countries and the Multilateral Trading System: from the GATT to the Uruguay Round and the Future. Boulder, CO: Westview Press, 1998.