GATT 1993 AND
THE FUTURE AGENDA
Prepared by Pierre Touchette
THE GATT'S BASIC PRINCIPLES
A. Most Favoured
of Quantitative Restrictions,
Barriers and Tariffs
Reciprocity, Special and Differential Treatment
EVOLUTION OF THE GATT
ELEMENTS OF THE 1993 GATT ACCORD
A World Trade Organization
Textiles and Clothing
GATS (General Agreement on Trade in Services)
Trade-Related Intellectual Property Rights (TRIPS)
Investment Measures (TRIMS)
and Countervailing Measures
I. Dispute Settlement
K. Global Economic
The Safeguard Mechanism and Other Aspects of GATT 1993
THE FUTURE GATT AGENDA
B. Labour Standards
Export Enhancing Strategies, Competition Policy
GATT 1993 AND
THE FUTURE AGENDA
Trade has become progressively
liberalized since the formation of the GATT in 1947, and in most years
it has led to growth in world output over the same period. While economists
will debate whether trade has caused growth or the reverse, it seems
undeniable that trade has been associated with the process of generating
wealth. As for its non-economic effects, it is likely that trade does
as much to structure our wider social order as it did for the ancients
December 1993 saw the conclusion
of the longest GATT negotiations to date. These negotiations had seemed
on the brink of failure more than once, in view of the complexity of the
issues involved. This paper puts these issues in perspective by providing
the reader with some background on the GATT and its evolution over the
years. It also reviews the major elements of the new agreement, emphasizing
its impact on Canada and less developed countries and highlighting the
issues that can be expected to affect future negotiations.
GATT'S BASIC PRINCIPLES
The General Agreement on
Tariffs and Trade (GATT) is a multilateral trade agreement put in place
after the Second World War to prevent the recurrence of the 1930s-style
protectionism which had all but destroyed world trade. The GATT reflects
a liberal view of trade based on the economic theory of comparative advantage;
this holds that the overall level of wealth (or consumption) is increased
when countries specialize in the production of goods for which they have
lowest relative production costs. Each country exchanges its surplus production
for goods that have lower relative production costs in other countries.
According to this theory, a country's comparative advantage is based on
its relative endowments of production factors such as natural resources,
capital and labour.
As is often the case the
case with economic theory, this does not reflect the whole reality. For
example, the comparative costs structure is not always static, as might
be implied by the factor endowment theory. The emergence of powerful new
trading nations in the Pacific Rim, for example, indicates that comparative
advantage does change over time. The evidence also suggests that other
factors, such as knowledge and technology, are also important in determining
a country's comparative advantage. As a result, even in a perfect world
where trade flowed unimpeded, continual adjustments would be needed as
some national economies developed and others declined. The GATT is an
attempt to establish an element of stability by providing rules to govern
trade between nations, even though the nature of that trade may change.
The following paragraphs briefly discuss the basic GATT rules.
A. Most Favoured Nation
The major principle of the
GATT is the "most favoured nation" (MFN) treatment whereby an
advantage accorded to one nation must also be granted to all other contracting
parties. The GATT does, however, permit the creation of customs unions
or free trade areas that introduce a discriminatory element into international
trade. The number of such agreements, a recent example of which is the
North American Free Trade Agreement, is increasing.
Another major principle
is that of "national treatment," whereby goods imported from
another country must receive the same treatment with respect to taxation
and regulation as the same goods produced domestically. Both the MFN and
national treatment principles are related principles of non-discrimination.
The MFN treatment relates to external non-discrimination whereas the national
treatment relates to internal non-discrimination.
of Quantitative Restrictions,
Barriers and Tariffs
Except in certain circumstances,
quantitative restrictions are prohibited under the GATT whereas custom
duties or tariffs are not. Tariffs are considered the lesser of two evils.
They are inherently more transparent than quantitative restrictions or
other types of non-tariff barriers; they do not prevent the functioning
of the price mechanism; and they at least allow the possibility of competition.
A country can theoretically reduce its export price to compensate for
the presence of a tariff. Thus, the first step is to replace quantitative
restrictions and other non-tariff barriers by tariffs, which can then
be reduced on a reciprocal basis through negotiations.
Special and Differential Treatment
Reciprocity, another major
principle of the GATT, is a loosely defined concept whereby concessions
on tariffs and other trade barriers by one party must be matched by concessions
by the other party. The GATT was later amended to allow the "special
and differential treatment" of developing countries to acknowledge
that their level of development does not always allow them to reciprocate
with respect to the concessions of developed western countries.
EVOLUTION OF THE GATT
The five rounds of GATT
negotiations between 1947 and 1961 resulted in a new agreement every three
years or so. The Kennedy Round, which started in 1963, required four years
of negotiations to achieve completion in 1967. The Tokyo Round began in
1973 and was not completed until 1979. A substantial amount of time elapsed
before the Uruguay Round was undertaken in 1986. The final agreement was
reached seven years later, in December 1993, and the Final Act
was signed by participating countries in April 1994. The negotiations
had seemed poised on the brink of failure a number of times on issues
related to agricultural export subsidies, aircraft subsidies, and the
The greater time required
to complete each round of negotiation reflects both the increasingly complex
issues under discussion and the evolution of the bargaining process itself.
The number of participating countries is now 124, compared with the original
25. The first five rounds of negotiations dealt mainly with tariff reductions,
with the exception of the negotiation of an anti-dumping agreement.
During the sixth (Kennedy)
round, the European Economic Community made its first appearance as a
negotiating bloc, though the U.S. remained the dominant world economy.
An important development was the adoption of Part IV of the Agreement,
containing articles dealing with trade and development and the exemption
of developing nations from reciprocating where concessions would be inconsistent
with their development objectives. This was important because it helped
to increase the participation of developing countries in the GATT. Until
then, their participation had been relatively minimal, because the GATT
had been mainly concerned with tariff reductions, where the size of the
reduction is determined by the amount of trade it affects, an area in
which developing countries had relatively little to offer. In the 1980s,
the GATT achieved importance among developing countries as they began
to accept the notion of trade as a vehicle for economic development.
During the Tokyo Round,
the entry of Great Britain into the European Economic Community's trading
bloc resulted in largely bi-polar negotiations between the U.S. and the
EEC on such issues as subsidies, government procurement and customs valuation,
in addition to tariff issues. The developing countries, emerging as a
negotiating bloc during the Tokyo Round, were able to have an impact on
the negotiations and obtain some measure of "special and differential"
treatment, continuing a trend that had begun in the Kennedy Round.
During the Uruguay Round,
to the tri-polar world economy composed of three economic giants (U.S.,
Europe and Japan) was added yet another trading bloc as a result of the
North American Free Trade Agreement, preceded by the Canada-U.S. Free
Trade Agreement. The question now is whether trade multilateralism will
be replaced by managed trade among the world's trading blocs.
The dominance of the Uruguay
Round by the three giants led to the creation of coalitions such as the
Cairns Group, where countries such as Canada and Australia were united
in their objective of ending the U.S.-Europe agricultural trade war with
its devastating effects on international agricultural prices. On the other
hand, the Third World coalition, known as the Group of 77, created in
the mid-1960s, started to show signs of fraying. Although developing countries
continued to act as a negotiating bloc pursuing "special and differential"
treatment, the diverging interests of these countries became more apparent
during the Uruguay Round; in particular, divergence was evident between
very poor countries and so-called newly industrialized countries (NICs).
Quite a number of NICs, including Taiwan, South Korea, Singapore, China,
Brazil and Mexico, are now among the top 25 world exporters. Such countries
are using the export of manufactured products as a development vehicle
and clearly have a much bigger stake in the outcome of negotiations on
investment, services and intellectual property rights than do the least
developed countries, which are highly dependent on exports of raw commodities.(2)
THE MAJOR ELEMENTS
OF THE 1993 GATT ACCORD
A World Trade Organization
Initially, the GATT was
envisioned as a provisional agreement which was to be incorporated into
the charter of an International Trade Organization. It was mainly the
failure of the U.S. Congress to ratify the ITO agreement that left the
GATT standing on its own as an independent legal instrument. In 1955,
another attempt to create an international trade institution also failed.
Thus, the GATT developed a dual nature; it was a legal instrument codifying
a set of international trade rules and thus a means of settling trade
disputes, and it was also a forum for multilateral trade negotiations.
The GATT is often termed an international trade regime, suggesting an
international form of government but without the strong institutional
structure that this implies.
The creation of the World
Trade Organization (WTO) considerably strengthens the GATT as an institution
by providing it with a single institutional framework to replace the GATT
secretariat set up rather informally in 1948. WTO is a considerable achievement
of the Uruguay Round and it is worth noting that Canada played a major
role in proposing its creation.
The governing body of the
new WTO will be a ministerial conference taking place every two years.
A General Council will oversee the operation of the agreement and implement
the decisions of the ministerial conference. Various subsidiary councils
will be established: a Goods Council will oversee merchandise trade issues,
a Services Council will oversee the implementation of GATS (General Agreement
of the Trade of Services), while another council will oversee the implementation
of the agreement on TRIPs (Trade Related Aspects of Intellectual Property
During the Uruguay Round,
there were a number of important developments with respect to agriculture.
The parties agreed to replace import bans and quotas by import duties
and to reduce by an average of 20% any government agricultural supports
that increase production and create surpluses. There was also an agreement
on the reduction of export subsidies.
A major development affecting
Canada will be the replacement, by July 1995, of import quotas with tariffs
in agricultural sectors using supply management techniques. The sectors
affected by the agreement will be dairy, poultry and egg production, where
the tariffs have been calculated on the basis of equivalency of protection.
As a result, Canada will impose tariffs in the order of 235% to 350% on
dairy products and from 180% to 280% on poultry products. These tariffs
are to be reduced by a minimum of 15% over a six-year period, during which
adjustments may be made to the agricultural sectors affected. One question
is whether the introduction of these new tariffs will contravene the NAFTA,
which prohibits Canada from introducing tariffs on trade with its continental
trading partners. The U.S. is a major source of competition for Canadian
dairy and poultry products.
The other important development
for Canada is the agreement whereby the amount of agricultural export
subsidies is to be reduced by 36% and the volume of subsidized exports
is to be reduced by 21%. Over the past 10 years, the U.S. and EC
have been engaged in a export subsidy war which has profoundly depressed
world wheat prices and considerably affected Canada's wheat exports. The
higher world prices expected as a result of the new agreement will benefit
Canada and other wheat exporters but will negatively affect those developing
countries that are net food importers. The possible negative effects of
reform of agricultural trade on such countries was acknowledged in the
agreement and an understanding was reached on specific alleviating measures,
including increased food aid and better access to IMF and World Bank financing
The agreement on agriculture
has been characterized as providing a framework for the long-term reform
of agricultural trade and related domestic policies. A committee will
monitor the implementation of the agreement, including actions to counter
its possible negative effects on net food importing countries. The results
of the agreement are to be assessed in five years and further negotiations
on agriculture are to be undertaken in the fifth year.
Textiles and Clothing
In the textiles and clothing
sector, restrictive quotas (voluntary export restraints or VERs), have
been used by developed countries like Canada to limit textile and clothing
imports from developing countries. These quotas, negotiated under the
Multi-Fibre Arrangement or MFA, have enabled developed countries to circumvent
the GATT to protect their labour-intensive industries from goods originating
in developing countries with low labour costs. This was supposed to lead
to more rapid adjustment in these sectors but adjustment has been characterized
by more capital-intensive modes of production, which have slowed down
the displacement of workers from these industries but have not prevented
it. The textiles and clothing sector is a good example of how a comparative
advantage in an industrial sector with a low capital-labour ratio can
change over time.
Over the next 10 years,
after restrictions have been phased out gradually in three stages, trade
in such products will be governed by the general rules of the GATT and
may be the subject of future tariff reduction negotiations. In the meantime,
the agreement provides for a Textiles Monitoring Body to oversee the implementation
of the agreement and for a specific safeguard mechanism.
(General Agreement on Trade in Services)
The three-part General Agreement
on Trade in Services is the first agreement to bring trade in services
into the framework of the GATT; it applies the MFN and national treatment
principles to the service markets of contracting parties. The agreement
spells out the basic obligations of the parties; for example, the members
are committed to apply to trade in services the principles of non-discrimination
(both internal and external), transparency (e.g., publication of relevant
regulations), and reciprocity. Annexed to the agreement are countries'
specific obligations and rights with respect to financial services (banking
and insurance), telecommunications, the movement of labour for the provision
of professional and business services, and air transportation. There are
specific commitments to eliminate regulations restricting access to a
nation's services market and discriminating against foreign service providers;
examples include limitations on the number of foreign service providers,
on the maximum value of services transactions carried out by foreign providers,
and on maximum levels of foreign participation in joint-ventures. Measures
such as those to ensure the financial soundness of foreign services institutions
establishing themselves in a market would not be prohibited, however.
The agreement stipulates progressive liberalization in the services industries
through negotiations and the development of national schedules. Countries
will have the right to withdraw from the commitments in these schedules,
subject to compensatory adjustments in other areas.
Trade-Related Intellectual Property Rights (TRIPS)
This agreement sets out
the obligations and rights of the contracting parties with respect to
intellectual property rights for such things as copyrighted audio-visual
products, computer software, trademarks, indications of the geographic
origin of goods, industrial designs, patents and so on. The application
of national treatment and MFN to intellectual property rights, the latter
being a novel aspect of international intellectual property agreements,
is included. The agreements build on various international conventions
already dealing with this subject, such as the 1967 Paris Convention on
patents and the Berne Convention for the protection of artistic works
such as books and films. The contracting parties undertake to implement
and enforce domestic laws related to the protection of copyrights, trademarks
and patents. Countries will have various amounts of time to implement
the agreement, depending on their level of development; developed countries
will have up to one year, while the previously centrally planned countries
will have five. The 11-year transitional period for the less developed
countries recognizes their special need for maximum flexibility in the
implementation of intellectual property rights laws and regulations, in
light of their objective of developing a viable technological base.
Investment Measures (TRIMS)
This agreement concerns
measures to limit imports contravening the principle of national treatment
and the prohibition of quantitative restrictions. Such measures, which
include domestic sourcing requirements (the requirement to use locally
produced goods in manufacturing operations) as well as import substitution
policies and trade balancing requirements (where the amount of a company's
imports is contingent on the level of its exports), are used mainly by
developing countries to stimulate their economic development. Such measures,
which are protectionist in nature and distort trade flows, are to be eliminated
over a two-year period in developed countries and over a five-year period
in developing countries. The agreement provides for later consideration
of more broadly based negotiations on investment and competition policy.(3)
The TRIMS agreement has been criticized as a hindrance to developing countries
seeking to control their development. It has also been described as a
minimalist type of agreement that may lead to further negotiations on
more complex issues. According to one commentator, the TRIMS agreement
"has shown that many governments are simply not ready to accept new
limitations on their ability to regulate foreign investment without some
counterpart regulation of multi-national companies. In the future, interested
governments may push for more far-reaching negotiations on this subject."(4)
G. Subsidies and
The 1993 GATT agreement
established a more precise definition of a "subsidy," depending
on whether it is made available to a firm, a group of firms or to all
firms in an industry. The agreement establishes three categories of subsidies
and makes them subject to certain disciplines. The first category covers
prohibited subsidies, i.e., those contingent on export performance or
import substitution. Prohibited subsidies must be withdrawn immediately
or else be the subject of countervailing measures whether or not the complainant
has been injured. Varying timetables are set out for the elimination of
such subsidies depending on a country's level of development. The second
category consists of actionable subsidies (those that cause injury to
a party to the agreement). The third category includes non-actionable
subsidies, including subsidies for regional development and research.
The 1993 GATT agreement
includes a more precise definition of "dumping" (exporting below
cost) as well as more stringent guidelines on how to determine whether
dumping is actually taking place. The complainant is required to establish
a clear relationship between the dumping and injury to its industry. These
new definitions and procedures for investigations represent an attempt
to eliminate frivolous complaints intended to harass foreign suppliers.
I. Dispute Settlement Mechanism
The 1993 GATT agreement
includes an Understanding on Dispute Settlement (DSU) which strengthens
the GATT's present mechanism. To this effect, it provides for shorter
dispute settlement timetables; this should limit the use of delaying tactics
by the offending parties. Panel arbitration decisions on disputes should
carry more authority, which should limit the use of unilateral sanctions
by the injured contracting parties as a result of their own interpretations
of the GATT.
A Dispute Settlement Body,
acting under the authority of the General Council and it subsidiary councils,
will implement the DSU. An offending party must consult with the complainant
within 60 days, barring which the complainant may request the establishment
of a panel. If within 20 days there is no agreement on the composition
and terms of reference, the DBS will decide on these. The panel will rule
on the dispute within six months and its report will be adopted by the
DSB within 60 days, unless it rejects the panel's findings by consensus
or one of the parties gives notice that it intends to appeal to an appellate
body, a new possibility under the GATT. The decision of the appellate
body is to be unconditionally accepted by the parties unless the DSB rejects
it by consensus.(5)
The 1993 GATT agreement
also addresses the question of government procurement. Consultations between
present members and new applicants will make it easier for developing
countries to become part of the existing agreement on government procurement.
(Countries become members by agreeing to open their government's procurement
to international competition, subject to review by existing members.)
Negotiations are taking place on extending the existing agreement to services
and applying it to sub-national levels of government.(6)
K. Global Economic Policy-Making
One of the by-products of
the Uruguay Round was a ministerial declaration "Achieving Greater
Coherence in Global Economic Policy Making." At the onset of the
Uruguay Round in 1986, some countries were calling for negotiations on
what was perceived as a growing disequilibrium in world trade. These concerns
were related to the value of the U.S. dollar and the size of the U.S.
deficit at that time. Also, European countries expressed concerns about
the volatility of exchange rates.(7)
Some economic theorists claim that the full benefits of free trade depend
on equilibrium exchange rates, which international speculation, in which
short-term capital constantly chases the highest returns, makes nearly
impossible to achieve. They therefore argue that it is totally non-productive
to pursue trade liberalization through the GATT in total isolation from
the activities of the IMF, which manages balance-of-payments problems.(8) While it is doubtful that the world will ever
again see widespread fixed exchange rates, the closer integration of world
economic institutions such as the GATT and the IMF may become increasingly
The Safeguard Mechanism and Other Aspects of GATT 1993
The GATT contains a mechanism
whereby, as a safeguard against injury to its domestic industry, a member
country is allowed to place temporary restrictions on imports, irrespective
of their source. Under the new arrangement, such measures cannot be prolonged
indefinitely and the conditions under which a determination of injury
can be made are stricter. Safeguards cannot be applied to developing countries
with a relatively small share of the injured party's domestic market.
On the other hand, developing countries are allowed to extend safeguard
measures for a longer period than developed countries.(9)
Other aspects of the 1993
GATT agreement are related to non-tariff barriers, phyto-sanitary measures
and regulations, rules on the origin of goods, etc. The Uruguay Round
also led to the elimination of tariffs in pulp and paper products, pharmaceuticals,
beer, steel, construction and agricultural equipment and office furniture.
Tariffs in remaining sectors are to be reduced by an average of one third
by the end of the decade.
THE FUTURE GATT AGENDA
While most analysts agree
that the emergence of trading blocs is very important for the future evolution
of the GATT, there are three different views of their effect.
The first view, which we
can describe as optimistic, is that the forces pushing towards multilateral
liberalization of trade are irreversible and that the GATT can only be
strengthened by the new regional free trade arrangements, which have quite
a different basis from similar arrangements set up in the protectionist
1930s. The preferential trading arrangements of that period, such as the
British Commonwealth tariff of 1932, were designed to counter the United
States Smoot-Hawley tariff increase of 1930, rather than to liberalize
trade; they thus tended to exclude the possibility of inter-regional trade.
The current free trade arrangements can be seen as complementing multilateral
Although European countries
do 75% of their trade with one another, external markets are still important.
North America and Asia send two thirds of their exports outside their
respective regions. Overall, only 40% of all world trade is intra-regional.
The U.S., Europe and Japan know they must preserve extra-regional trade
because it represents 11% of the U.S.-Canada GNP, 13% for Western Europe
and 22% for Japan and Asia.(10)
Indeed, the new regional
arrangements generally go beyond the GATT with respect to liberalization
of trade and thus complement multilateral trade.
A second view of the new
regional trading blocs, which we can describe as pessimistic, is that
they are a prelude to greater protectionism linked to a slower-growing
world economy. In a slow-growth context, the competition for export markets
becomes fiercer and the use of export enhancement strategies increases;
the creation of regional trading agreements can be seen as such a strategy.
The proponents of this view contend that regional trading arrangements
between countries of similar development levels (for example the European
Community) are motivated by the desire to gain the benefits of free trade,
such as economies of scale, while avoiding its disruptive effects, such
as the readjustment of wage levels. This view contends that trade between
regional blocs will increasingly be managed through the use of non-tariff
barriers, while intra-regional trade becomes freer. Examples of internationally
managed trade to date are the Multi-Fibre Arrangement in the textile and
clothing industry, the agricultural sector, the automobile industry, and
agreements in the semi-conductors sectors. According to this view, such
trade, managed intra-regionally, will become the norm rather than the
exception in world trade, notwithstanding the achievements of the latest
GATT round. As mentioned earlier, the GATT did achieve progress in the
textile and clothing sector and in some sectors of agriculture, by replacing
non-tariff barriers by tariffs.(11)
In a number of sectors, such as automobiles and semi-conductors, non-tariff
barriers remain, however, and will need to be dealt with in the context
of the GATT.
The third view, which can
be described as neutral, is that, although regional trading arrangements
are generally inward-looking, their impact on multilateral trade will
largely depend on whether they divert existing trade or create new trade:
will make the world better off in the short-term if the amount of trade
created exceeds the amount diverted. A regional arrangement creates
trade if it encourages a member to import from any other member what
it previously would have made at home. Regional arrangements divert
trade to less efficient producers if one member imports from another
what it previously bought from an extra-regional country. The GATT rules
on this point are weak; it would be better if GATT insisted that regional
members set a common external tariff at the lowest level applied by
any one of the members before the union was formed.(12)
This would minimize the
trade-distorting effect of regional trading arrangements. The GATT may
have to address such questions or risk becoming irrelevant in the new
world trading system.
In a fast-growing world
economy, the proponents of protectionism are few. In a slow-growing economy,
however, the reverse is true. Yet, ironically, it is in the context of
slow growth, where more efficient allocation of resources can have most
impact on raising incomes, that liberalization of trade becomes most important.
During the preparatory discussions
of the Uruguay Round, the U.S. Administration raised the question of labour
standards and workers' rights; however, developing countries objected
The call arose for a social
clause in GATT that would link respect for international human rights
in the workplace, as laid down by the UN or the International Labour
Organization, to access to the World's free trade market. ... In 1995,
the UN will hold an international social summit at which these questions
will be discussed. David Hunt, the British Minister of Labour, has gone
on record saying that the time has come for what he calls a "World
Social Charter" to cover basic health and safety standards.(13)
In developed countries,
labour issues are intrinsically linked to trade and protectionist measures
are often the result of a desire to protect jobs and wage levels at least
during a so-called adjustment period. On a more general level, opponents
to protectionism often argue that free trade results in the equalization
of wages by reducing them in developed countries and increasing them in
developing countries. In theory, free trade will, however, equalize only
the difference not reflected in productivity levels. As a result, it is
generally accepted in developed countries that free trade, while producing
an overall increase in wealth, may negatively affect the less qualified
segment of the labour force.
Developing countries oppose
linking labour standards to trade. They fear that this might harm their
own competitive position, while giving developed countries a very effective
means of protectionism, since they could impose trade sanctions on goods
produced without consideration of minimal labour standards. Moreover,
developing countries are reluctant to accept infringements on their sovereignty.
The differences in wages
and labour standards between developing and developed countries are, however,
generally so great that setting minimal standards on such things as child
labour and minimal worker health conditions would not seriously damage
the competitive position of labour-intensive industries in less developed
countries. Wage levels are a separate issue, since they are subject to
adjustment in all countries as a result of the economic forces brought
into play by the liberalization of trade. However, even if labour standards
were to include minimum wage standards, the purchasing power of such wages
would be greater in less developed countries; thus, minimum wages could
be much below those in developed countries yet still provide an acceptable
standard of living. It is also generally agreed that the use of trade
sanctions to enforce labour standards would be counter-productive as it
would discourage development.
Currently, the only link
between labour issues and the GATT is that countries are permitted to
ban the import of products made by prisoners.(14)
The GATT will eventually, however, have to deal with the question of worldwide
labour standards. According to one author, labour and environmental concerns
have become trade issues just like unmanaged subsidies, intellectual property
and competition policies, all of which were eventually the focus of a
coordinated international approach.(15) It is now more a question of when rather
than whether the GATT will deal with labour issues and the solutions will
have to satisfy the developing countries.
One possibility would be
the development of an international labour standards code for multinational
corporations. A trendsetter in this area is Levi Strauss, which has adopted
codes for the treatment of its workers in poor countries.(16)
This example shows that the interests of transnational corporations and
the local labour markets in developing countries need not necessarily
Another possibility would
be to strengthen the ILO (International Labour Organization) and to integrate
it more closely with GATT. The creation of the WTO offers new opportunities
in this area, since it could make fair labour standards an objective of
the trading system and, and jointly with the ILO, develop minimum standards
applying to goods produced for trade. A moratorium on trade sanctions
to enforce such standards could be put in place for a fairly long period
to allay the concerns of developing countries and encourage their participation.(17) The U.S. Administration, which raised the
subject of workers' rights during the preparatory discussions in 1986,
is likely to keep pressing for the inclusion of labour standards under
the WTO, notwithstanding the objections of developing countries.
Environmental issues will
be a, if not the, major issue in a future round. GATT's interest in
the environment is recent, dating primarily from the 1991 GATT panel
decision which condemned U.S. restrictions on imports of Mexican tuna
caught by methods which endanger dolphins (a protected species in the
Currently, Article XX of
the GATT specifies situations in which trade controls can be used for
the protection of human, animal or plant life or health (phyto-sanitary
measures) and for the conservation of exhaustible natural resources. Such
measures must not, however, discriminate among foreign trading partners
or be disguised non-tariff barriers. Also, trade control measures for
the conservation of exhaustible natural resources must be implemented
in conjunction with domestic production or consumption controls. Article XX
of the GATT was written in 1947, when environmental protection and sustainable
development were not issues of the day. However, over the 40-odd year
history of the GATT, the notion of protection of life and exhaustible
resources has come to encompass environmental measures. Its effectiveness
with respect to environmental issues depends on its interpretation in
the case law.
There is the danger that
Article XX will be eviscerated through interpretation and that this
makes the GATT appear to be an obstacle to environmental progress. If
the greening of the GATT means that the Contracting Parties should respect
environmental objectives in administering Article XX, then greening
is a good idea. But if it means that the contracting parties should
subordinate economic goals to ecological imperatives, then greening
is a bad idea, both for the GATT and for the environment. It is a bad
idea for the environment because the GATT does not have the scientific
expertise to judge what ecological measures are appropriate. It is a
bad idea for the GATT because environmental policy would be too divisive
for the GATT's current decision-making structure.(19)
In this respect, the creation
of the WTO may offer the opportunity for aligning the GATT and international
trade to the imperatives of ecological policy and sustainable development.
In 1991, the GATT revived its Environment Working Group, which had been
created a number of years before but had never actually met. It was given
the task of examining the relationship between the trade provisions of
multilateral environmental agreements and the GATT, the transparency of
national environmental regulations affecting trade, and the effect of
pro-environmental packaging requirements.(20)
The GATT will eventually have to balance the ecological and trade imperatives
outlined in the following paragraphs, which summarize current debate on
Environmental matters raise
much the same problems as labour standards. On the one hand, developing
countries fear they could be used to justify restrictions on their trade
and development. On the other, environmental concerns have made much headway
in developed countries, where businesses increasingly accept environmentally
sound practices as a cost of doing business. Environmental issues have
two advantages over labour issues as far as trade is concerned: first,
domestic environmental policies, or lack of these can affect global conditions;(21) second, environmental concerns carry increasing
weight in industrial democracies.
free trade because it generates growth, which can lead to environmental
degradation. In a nutshell, because countries with low environmental standards
do not take into account the cost of polluting, their production costs
are lower. There are also transnational effects when pollutants are carried
by a river through more than one country or when dangerous wastes are
exported or dumped on the high seas. Environmentalists argue that compensatory
tariffs on countries whose industries do not bear pollution costs are
acceptable. Free trade proponents argue that use of trade sanctions to
enforce the environmental standards of developed countries would not only
be unfair but would threaten the stability of the international trading
system, which is a major objective of the GATT.
Proponents of free trade
argue that the best way to ensure environmental protection is through
the liberalization of trade. More wealth would be generated and would
eventually result in the upward harmonization of environmental standards
with those of the developed countries. International harmonization itself
presents difficulties such as securing and enforcing an international
agreement when there is such diversity in existing regulations and in
the absorptive capacity of environments.
the suggestion that growth will lead to higher environmental standards
to be wishful thinking. They argue that the world ecosystem has not the
capacity to sustain such growth, particularly in light of expected population
increases. In the meantime, they claim, international investment would
focus on countries with the lowest environmental standards, which would
lead to competitive deregulation and to irreversible damage to the global
Free traders counter that
this is unlikely, chiefly because the cost of complying with environmental
regulation is not a sufficiently high proportion of total cost to be the
crucial determinant of location. They believe that, in a world of rising
environmental standards, transnational corporations will become aware
of the potential liabilities of ignoring such standards (e.g., as in the
Bhopal disaster in India).(22)
Environmentalists, on the other hand, suggest that the combined savings
from lower labour costs and lower environmental standards may together
be sufficient to determine location and constitute a recipe for environmental
This endless debate highlights
the difficulties involved in reconciling trade and environmental imperatives.
The chances of a single international blanket agreement on upward harmonization
of environmental standards within the context of the GATT are virtually
nil. What may be possible is the negotiation, outside the GATT, of a number
of more limited agreements on urgent issues. An example of such an agreement
is the Montreal Protocol which bans the import and use of virgin chemicals
(such as chlorofluorocarbons) that deplete the ozone layer. Within the
context of the new World Trade Organization, the best that can currently
be hoped for is the "greening" of the GATT. The revival of the
Environmental Working Group gives some hope that the WTO will be sensitive
to environmental issues and acquire the expertise to deal with them effectively.
Enhancing Strategies, Competition Policy
This segment of the paper
describes the trends in international trade strategies employed by various
countries over the past two decades.(23)
These strategies have been a major cause of the shift from multilateralism
to regionalism and of other developments that have affected the GATT.
New or strategic international trade theory challenges traditional views
or even contradicts them, particularly as they relate to comparative advantages.
The theory of comparative advantage still underlies the thinking of most
economists, but strategic international trade theory envisages comparative
advantage as "man-made" or "policy-based," rather
than based on natural endowments:
New international trade
theory suggests that a nation can significantly alter its comparative
advantage and hence its world trading position. As determinants of comparative
advantage, this theory stresses R&D and technology, product life
cycles, economies of scale, and the strategies pursued by enterprises
possessing oligopolistic and monopolistic market power. The ability
to manipulate these levers, according to the advocates of new international
trade theory, allow nations to shape and amend their comparative advantage.(24)
In essence, strategic trade
is the application of national policies similar to those used by individual
companies to obtain a greater share of the national marketplace. These
national policies are, of course, competing for a bigger share of the
international marketplace. Japan provides a classic example of how a national
strategy, such as government targeting of the development of high-tech
industries, can be used to bolster international trade performance:
During the late 1940s,
a heated debate took place within the Japanese government over industrial
development strategies. Bank of Japan economists argued that Japan should
take advantage of its abundant low wage labour and emphasize the production
of textiles and ceramics. Ministry of International Trade and Industry
representatives argued that if this route was chosen, Japan would remain
underdeveloped and that only by embracing new advanced technologies
in which Japan had no immediate comparative advantage could Japanese
industry develop and join the ranks of the leading industrialized nations.
The technology-forcing strategy was chosen and the rest is history.(25)
Strategic theory holds a
highly competitive view of international trade, with the objective being
to obtain an advantage over one's trading partners. This often leads to
use of countervailing strategies by other countries, which in turn prompt
adjustment or strengthening of the initial strategy. Examples of particular
strategies used by nations to enhance their international trade performance
include: subsidizing exports of particular commodities, export financing
and insurance, allocation of scarce resources to successful export-oriented
industries, protecting the home market to achieve initial economies of
scale, industrial and/or commodity cartels, dumping, provision of government-owned
raw materials at low costs, and R&D subsidies. One can see that such
policies may impact on competition policy, which is concerned with the
behaviour of firms, as seen in the formation of cartels, public monopolies
and so on. One can also see that it would be difficult to achieve a multilateral
agreement in such an area because the issues of national sovereignty and
the extra-territoriality of national laws are very directly involved.
Nevertheless, this is an area that the GATT may eventually have to address,
A common approach is needed
given the increasing globalization of markets. As long as the world
lacks credible rules on competition, governments will continue to resort
to grey area measures to protect industries. A global competition policy
can prevent protection before it starts. For example, many Americans
believe that Japan's keiretsu system [companies with interlocking
ownership] could be among the first subjects for investigation under
a global competition policy, in the hope of increasing their access
to the Japanese market.(26)
National export enhancement
strategies have proliferated over the past two decades and have contributed
to the distortion of trade flows. This problem must be dealt with within
the context of the GATT, as tariff barriers become less important than
non-tariff barriers. The recent GATT round has succeeded in dealing with
some of these issues, for example, the Euro-American agricultural subsidy
war, and also, to some extent, with non-traditional trade issues, such
as trade in services, intellectual property, and trade-related investment
measures. These agreements are, however, so far initial steps based on
the lowest common denominators. The future of the GATT will depend on
its ability to deal further with such non-traditional trade issues:
definitions must be provided for what constitutes dumping when there
is substantial learning by doing and when a recession induces industry
participants to set prices below fully allocated unit costs.
The progress achieved
in limiting agricultural and R&D subsidies must be extended.
What comprises "subsidy"
in the provision of government-owned natural resources must be defined
with greater precision.
There must be strenuous
efforts to reduce non-tariff barriers such as buy-at-home preferences,
the establishment of trade-distorting product quality standards, and
the closure of distribution channels. Some of these may best be resolved
in the context of broadly agreed-upon multilateral competition policy
policy agreements should delimit the permissible operating bounds for
cartels and other restrictive agreements with trade distorting effects.
National policies governing
foreign direct investment must be harmonized.
The coverage of multilateral
trading rules must be extended to service and financial industries.(27)
While the conclusion of
the Uruguay Round was greeted with tremendous enthusiasm worldwide, a
review of the unresolved issues may temper that enthusiasm. Much of the
analysis of the recent round was devoted to identifying winners and losers
but there was also a feeling that "any agreement is better than no
agreement" since another outcome would have led to the further deterioration
of the multilateral trading system. It should be stressed that the new
agreement succeeded in many areas where other negotiating rounds had failed,
not the least being in its creation of the WTO. The agreement also succeeded
in bringing into the context of the GATT a number of new areas, such as
services (GATS), intellectual property (TRIPS), investment measures (TRIMS),
and agriculture, clothing and textiles. Much remains to be done for the
liberalization of trade in some sectors, particularly agriculture; here
further subsidy cuts and rationalization of domestic support policies
are needed to prevent international trade problems. Negotiations must
also be pursued in the area of services. The GATT will have to tackle
increasingly numerous, complex and new issues, such as labour standards,
the environment, and competition policy. Since many of these new issues
will be seen as impinging on national sovereignty, the road ahead could
(1) Gilbert R. Winham, The Evolution of International
Trade Agreements, University of Toronto Press, Toronto, 1992, p. 10.
Jock Finlayson, The End of the South? Developing Countries and International
Trade Regimes in the 1990s, Centre for Trade Policy and Law, Carleton
University, Ottawa, 1992, p. 10.
GATT Secretariat, "Final Act of the Uruguay Round - Press Summary,"
Reprinted in The World Economy, Vol. 17, No. 3, May 1994,
Nicholas Hopkinson, Trading Blocs and the Future GATT Agenda, Wilton
Park Paper No. 76, HMSO Publications, London, October 1993, p. 12.
GATT Secretariat (1994), p. 389-391.
Ibid., p. 392.
Hopkinson (1993), p. 12.
Maurice Allais, "Free Trade Policy, GATT and the European Construction,"
Revue d'économie politique, 104(1), January-February 1994, p. 17.
GATT Secretariat (1994), p. 382.
Hopkinson (1993), p. 6.
Lester C. Thurow, "GATT is Dead," Journal of Accountancy,
Vol. 170, No. 3, September 1990.
Hopkinson (1993), p. 6.
Denis MacShane, "Now We Have Trade Rules for Everything but People,"
The Toronto Star, 19 December 1993.
Article XX of the GATT provides for a number of general exceptions, including
one that asserts the right of the contracting parties to implement non-discriminatory
measures related to the products of prison labour. See General Agreement
on Tariffs and Trade, Basic Instruments and Selected Documents,
Geneva, March 1969, p. 37-38.
Steve Charnovitz, The WTO and Social Issues, Paper for a Conference
on "The Future of the Trading System," University of Ottawa,
Charnovitz (1994), p. 22.
Hopkinson (1993), p. 13.
Steve Charnovitz, "Exploring the Environmental Exceptions in GATT
Article XX," Journal of World Trade, October 1991, p. 55.
C. Thomas and G. Tereposky, "The Evolving Relationship between Trade
and Environmental Regulations," Journal of World Trade, August
1993, p. 23.
Charnovitz (1991), p. 5.
World Bank, International Trade and the Environment, Patrick Low,
ed., Washington, 1992.
F.M. Sherer and R.S. Belous, Unfinished Tasks: The New International
Trade Theory and the Post-Uruguay Round Challenges, British North-American
Committee, Issue Paper No. 3, May 1994.
Ibid., p. 7.
Ibid., p. 25.
Hopkinson (1993), p. 21-22.
Sherer and Belous( 1994), p. 44-45.