C the Design of International Trade Agreements

for formal link trade institutions, on the other hand, fail andsystematic oftentimes anexplicit to establish focusing ontheneed Models intrade agreements. third party therole ofto about anindependent say that focus ontherationale are for ty trade agreements far, So mechanisms. wo however, tointegrate attempts suchastherationalemore onissues for trade ag preferences, andhave focused policy trade of incentives driving analysis a narrowly-drawn beyond gone agreements will be used to used illustrate will be agreements of rules. these theexpression Relevant in provisions important. among themost weconsider more include rulesthan those to these, be butwehave typically selected trade agreements International 6). (Section andtransparency 5), enforcement 4), (Section (Section protection contingency 3), of gains from market thepreservation (Section access commitments 2), (Section liberalization conduct of trade policy. conduct Matching theories of trade with agreements theories of institutions Until relatively recently, to attention international paidlittle economics rulesandinstitutions for the (a) pers (IR) relations Moreover, aninternational from forum, amediator, afacilitator, amonitor an assistance, andtrade ofresearch a provider of knowledge, anarchivist, such asarepository administering trade affairs, institution an independent enhanced arange be for of can astofunctions so identify models ofthe existence institutions. These ofexplanations with for trade cooperation models to (politico-economic) need reconcile theestablished assumed away of have trade agreements typically of institutions focusing match. andtheories onthepurpose of tradeEconomists agreements theories of thevariousearlier rationales discussion for trade weshall follows, what In the signatories themselves. INSTITUTIONS OF thatbelief aneutral orinternationalized in governing trading ismore effective relations body than ROLE THE conferSignatories to typically trade agreements 1. 1) by askingwhy institutions (Section begins Section The agreement? instituti of aformal (or organization from cooperation? thecreation Second, howdoes contain astomust benefits so reap theenvisaged trade agreement that arethecore what rules any good First, mainquestions. focusing ontwo design, AGREEMENTS TRADE OFINTERNATIONAL th weextend DESIGN this section In another intrade matters. THE one why with nations of arange reasons may incooperating share aninterest Bwediscussed Section In C 2 1 creating thegeneral conditions for exchange profitable through trade. manage cooperation. Multilateral foster peaceful also relations institutions can amongcountries, thereby thebasisfor orde helpto can establish They parties. shape also can institutions the international system, in agents andindependent site for international active facilitators of orpassive trade. cooperation As realize the benefits of cooperation. Among theprin of Among cooperation. realize thebenefits make upanagreement. We wh thengoonto examine The term “institution” is understood here to refer to a formal institutional body. Note that international relations relations international that Note body. institutional torefer toaformal here “institution” term isunderstood The a political system or a legala system provision. political See Staiger (1995). term the use sometimes lawyers andinternational scholars 2 But starting inthe1990s, of different strands trade agreement literature have Butstarting on) ensure the effectiveness of rules and foster the objectives of an of andfoster theobjectives rules ensure theeffectiveness on) , a surveillance agent andan adjudicator., asurveillance information gatherer anddisseminator, anegotiation GT 94 h T Agreement andregional trade 1994, GATT theWTO reements, substantive obligations, andenforcement obligations, substantive reements, pective formal institutions pective agreements. We start with a discussion of howwell adiscussion with We start agreements. expectations andtherebyinfluence of thebehaviour expectations some authority onanindependent agent inthe authority some the very reasons why institutions are needed. We reasons why are institutions needed. the very rly and constructive trade negotiationsrly andconstructive andactively cipal rules discussed here are those onreciprocal herearethose discussed cipal rules e analysis to examine fundamental issues of treaty oftreaty issues fundamental to examine e analysis attempt to linkinstitution attempt rk in these various areas have been limited. Models Models limited. havebeen areas various inthese rk 111 pically “institution-free”pically –that is,theyhave little differently. There, an “institution” may denote a regime, at specific rules trade agreements must have must rulestrade to agreements at specific 1 may be needed along with therulesthat alongwith needed may be may be more than just a morethanmay just be al necessity backto the al necessity

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS summarises these assumptions. these summarises an institution. reasons for having assume away thevery ontrade agreements theories largely because task, an easy to therationale approaches fo analytical Reconciling literature. relevant the review will of reconciled, trade be institutions andtheories of can and trade agreements showhowtheories we will back to therationale of anagreement the underlying 7 6 5 4 3 Transaction costs are real-life costs of interaction between actors (here: trade negotiators). Strictly speaking, the speaking, Strictly negotiators). trade (here: actors between ofinteraction costs arereal-life costs Transaction approach This to assumption not does rational. suggest that all are political-externality The economic perfectly actors Economic have theories that assumptions made minimize The “trade game” is modelled as an infinitely repeated prisoners’ dilemma between equally between dilemma prisoners’ repeated asaninfinitely “trade game”The ismodelled The models are non-dynamic in their approach to trade; changes inenvironmental in theirapproach changes to conditions, trade; are non-dynamic models The agreement. ofthe course the throughout unaltered toremain areassumed circumstances External Cooperation is sustained bythe“shadowCooperation issustained of thegrimtr powerful (symmetrical) actors. set-up: Game – (i) Assumption assumptions: simplifying of thefollowing maintain set form) intheirsimplest least (at of trade cooperation models Formal forward-looking, self-interested utility maximizers. self-interested utility forward-looking, “players”All are fully They complete andsophistication. rationality (i.e. possess negotiators) Rationality: – (v) Assumption byallparties. known areimmediately (“types”) intentions andMembers’ policies trade-related du asatany aswell intime point negotiations have decision-makers) (trade-policy players All information: Symmetrical – (iv) Assumption not expected to occur. interest group orspecial pressure innovations, aresuch astechnological orsupply shocks, demand circumstances Unchanging – (iii) Assumption indefinitely byceasing cooperation of defection Negotiations, trade flows, anddisput Negotiations, trade flows, supin(i aiu uuldeterrence: mutual Maximum – (ii) Assumption supin(i otascincosts: transaction No – (vi) Assumption o :Cmol tlzdasmtosi xenlt-oeso rd cooperation trade of externality-models in assumptions utilized Commonly 4: Box highlight the logic of agreements. This was made for analy for made was This ofagreements. logic the highlight Bagwell andStaiger,1999a,Bagwell 2002; andEthier, 2006). 2004, of schools externalities thought, which rely on the prisoner’s dilemma as the key rationale for e.g. cooperating (see that institutions do not matter. independent assumption. ofunlimited the environment. rationality and stationarity Nothing however, is lost, as an costs in treating transaction of combination ofthe aconsequence rather but assumption, anadditional isnot costs oftransaction presence trade for agreements, example, on the assu sometimes rests and give more weight to the direct effects of trade policy (see Ethier 2004). Ethier (see policy oftrade effects direct tothe weight more and give for trade, as reviewed in Section B, subsections 2.(a) and (b) (see footnotefor (see trade, above). and (b) B, as 2.(a) reviewed subsections in Section formally of repeated analyzed games”. using a theory This consensus noteBagwell in and the an Staiger literature overwhelming (2002: 40) that “trade may agreements be Note that these assumptions do not underlie any motive for rationales trade cooperation, but only externality-based 3 Most formal models of trade cooperation rest on a set of simplifying assumptions. Box of 4 onaset simplifying of rest formal trade cooperation models Most 4 5 es are cost-freees andfrictionless. 112 ring thegame. Information theenvironment, about and returning to non-cooperation (protectionism). (protectionism). and returning to non-cooperation r trade agreements andfor trader trade institutions agreements isnot the same information at the outset of the information thesame attheoutset (“stationarity” of theenvironment): institutional model. In this subsection and the next andthenext this subsection institutional In model. igger”. threaten mutually to punishany kind Parties 6 undoubtedly applies in the terms-of-trade and political tic convenience rather than motivated by the firm belief mption that domestic importers aremption “bounded that importers domestic rational” the role for trade institut 7 ions since their was goal to This model setup, model inhighlighting althoughbeneficial This therationale for (overcoming an trade cooperation otati ind n uigtepromnepaeof atrade agreement. phase andduringtheperformance issigned) contract (i.e. before the that may phase occur duringthecontracting disregard imperfections economic theories 12 11 10 9 8 of theexistence aninstitution. B cannot justify commonly utilizedinSection these reviewed Under inBox assumptions 4,thesimplemodels listed organization can overcome, can organization mitigate. oratleast Matc of institutions takeModels that of into theestablishment aformal consideration imperfections welfare to the signatories than the ahigherlevelof yield must theirexistence andsustain, that togiven institutions establish are costly 1995; Schotter, (Calvert, 1981). otherwise that could reaped not have other words, been benefits In b andischosen equilibria, –or outcomes bargaining means that This thepresence of assumed, should not aninstitution but be 1990). (North, interaction From aneconomic aninstitution standpoint, is view thatinstitutions this within by formal framework thefact isbelied institutions doexist. revised, amended, or renegotiated. or amended, revised, altered, gainsfrom to andtherefore trade be neverneeds allpossible that exhausts contract a perfect aninternational a“fully called contract”. be First, aswhat can trade agreementefficient isviewed is It consequences. important itthree bringswith problem), externality opportunistic and complete withdrawal of cooperation. This is and complete This of withdrawal cooperation. are enforced through themutual threat of respondi powe equally between dilemmagames prisoners’ repeated multilateral models which asinfinitely agreements B.2.(a), aselaboratedtrade inSection agreements, to concerned be them. with andtrade disputes.disagreement Consequently, have institution nor anindependent neithertheparties terms of theagreement isnot rational –andtherefore other words, In there for isnoroom neveroccurs. toowing the“shadow of thegrimtrigger”, once th from eternal islarger than thesum cooperation. Hence, of allfuture of other parties) pay-offs expense only iftheir“hit-and-run” (theopportunis advantage grim-t everoccur. under because sanctions isso This givenSecond, that theoriginal agreement is both never needs to be renegotiated. A secretariat or a directorate would involve costs andy wouldinvolve costs oradirectorate A secretariat spontaneously. emerges cooperation Welfare-maximizing 1987) helpof any third party. theoutside that agreement without andmaintained isconcluded (Dixit as an“endogenous emerges Third, trade cooperation must be anoutcome be must of of institution amodel interaction. of istherefore An multiple possible part Enforcement C.5 of below. in trade Section is discussed agreements To be sure, the terms-of-trade argument has been formally extended beyond the simple version introduced in Section inSection introduced version simple the beyond extended formally been has argument To terms-of-trade sure, the be A fully efficient contract is also known as a “complete”, or “Pareto-optimal complete contingent” contract inthe contract a“complete”, as contingent” known complete isalso contract “Pareto-optimal or efficient Afully literature. A contract of this sort provides a complete description of every possible state of nature, and prescribes in ofnature, andprescribes state possible ofevery description acomplete provides sort ofthis Acontract literature. formally so as to extended motivate formal institutions. the rules and obligations of trade But this agreements. discussion the links formally that approach only isthe B. It or strategy,face changing circumstances, grim-trigger maximal the from different strategy apunishment use players inwhich developed havebeen models formal Some conclusion. between trade partners (see Shavell 1980). contract first-best isthe –it trade from gains possible all exhausts thereby contract efficient fully The use. may not mayor parties that instruments ofpolicy set the including party, contracting ofeach andobligations rights all detail that actors arethat able to actors coordinate sufficiently on an equ If tradeIf disputes do in occur, fact they are equivalent to the breakdown of the system. It should be pointed out that not all of the above assumptions (i)-(vi) are required concurrently or additively to reach this this toreach additively or concurrently arerequired (i)-(vi) assumptions above ofthe all not that out pointed be should It 11 status quo 10 The agreement represents a stable negotiation equilibriumthat astable agreement represents The . 8 ilibrium outcome without using help the of outside institutions. Take of to approach theterms-of-trade theexample the so-called “grim to deviation. trigger” response the so-called e agreement is concluded deviation frome agreement theoriginal isconcluded deviation ed as an equilibrium outcome asanequilibrium ed of agameof strategic ng to any contractual defection with animmediate with ng to any contractual defection perfect andstable, neitherdeviations norapplied perfect tic gains achieved from a one-time defection atthe defection from aone-time tic gainsachieved ecause it provides contracting parties with distinct distinct with parties contracting itprovides ecause “workhorse” model of trade agreements has not yet been been yet not has agreements oftrade model “workhorse” ield no benefits. In their most basicform, theirmost In therefore,ield nobenefits. rigger enforcement,rigger woulddefect rational parties 113 of the of purpose trade with a agreements of discussion hing theories of trade agreements with theorieshing of with trade theories agreements negotiation equilibrium”.negotiation isatacit contract The have private information. Papers information. have private As aresult, there for isnoroom aninstitution.As rful (symmetrical) actors. Reciprocal tariff cuts cuts tariff Reciprocal actors. (symmetrical) rful 12 But the superfluity of Butthesuperfluity of this kind then assume 9

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS its signatories save costs by providing accurate byproviding andti signatoriescosts save its facilitator, costs. reduces aninstitution transaction of anegotiation assuming thefunction anddisp By aswe costs, bargaining costs, gathering information with disputes inacentralizedwith fashion. in multiplefora andaccording (s to procedures different (2001), for for asinglebody. example, thecase argues endeavour, Ludema areacostly defection) unilateral after (renegotiation disputes Since trade litigations. to trade disputes connected and vein, costs institutions helpto thesame can In reduce transaction andefficiency-enhancing. iseconomical andtake decisions negotiate information, andshaping compromise.points convene, Acentral can negotiation forum parties exchange where invo theparties andbargainingwith meeting partners, trade andinstitutional of information trade data (potential) about thecollection substantial. include Costs During ongoing trade rounds, orduri During ongoing negotiations for anddisputes asaforum institution The matters. intrade internationally cooperate they when incur must that states costs “Transaction real-life termherefor asageneral allthose isused costs” information asnegotiation forum, institution the costs: of presence transaction The (i) disputes. Trade contribute institutions can to facilitating trade negotiations, enhancing andsettling transparency Expanding the traditional models of trade cooperation: the economics (b) for trade cooperation. fi auseful whole, from mouldingaunified itseems cry successfully for atfusionmodified this totheneed inorder isafar institutions. attempt Although explain rationale nowconsider wewill for howthis framework tradebe agreements, can the externality-driven theconfines within approach. of staying While andstructured of trade institutions requires asystematic 14 13 transparency. andincreases costs reducestransaction institution editing, retrieving, archiving, –storing, memory” for made to theinformational be as an “institutional case is astrong role of acting theinstitution. By of Keohane, theworks with (usually 19 associated re ofinternational astrand Consistent with emerges. aretaken into consideration, costs transaction Once asinformation repository institution The non-signatories with information. with non-signatories so ongoing trade negotiations anddisputes between individually extract the same data, unnecessary du unnecessary data, thesame extract individually to alone. generate andprocess could Even country ifthat were for not thecase, andMembers every Early work on transaction costs dates back to Coase (1937) toCoase back dates (1979; costs andWilliamson 1975). transaction on work Early negotiations. for further abasis to provide inorder positions negotiating andsummarizes background data provides routinely negotiations and ongoing litigation. Thus, in addition to act andInstitutions make collect available information on Memb of institutions in trade agreements based on externalities disseminator, facilitator trade and ng negotiations with accession candidates, transaction costs may be costs transaction accession candidates, with ng negotiations 114 processing andpublishingcrucialinformation processing –the 84, and Oye, 1986 – see Section B.4 above), there B.4 above), andOye, 1986 Section 84, –see plication wouldoccur.plication Thus a second role for an independent trade institution role for asecond anindependent ute forum, aninformatio lations literature called “neoliberal institutionalism” called literature lations mely information. Over and above the support of thesupport information.mely andabove Over 13 rst step inlinking step institutions backto therationalerst vereign states, the organization can also provide also can theorganization vereign states, Instead of having to renegotiate/litigate bilaterally bilaterally torenegotiate/litigate ofhaving Instead lved until consensus vantage isreached, assessing ivities such as translation and duplication, the organization ll as litigation, enforcement and policing costs. ll aslitigation, enforcement costs. andpolicing Such costs include sorting and searching costs, costs, andsearching sorting include Such costs o-called “forum itisrational shopping”), to deal o-called ers, sectors, multilateral and rules, processes current sectors, ers, 14 This vital information may be too costly costly too maybe information vital This n disseminator, andtrade the organization helps theorganization In order to forestall this kind atrade war.trigger of opportunisticincentive from to thetermsof deviate theoriginal and Rocke, 1995; Klimenko etal., 2002; Furusawa, incentive inorder to returnto table thenegotiation sizeable gainsfrom inte foregoes the punishingvictim costly istoo strategy grimtrigger is not credible. The argument above. isthat The avictim’sthus challenging assumption (ii) threat forever to cooperation cease r defection one-time have whether authors questioned 18 17 16 15 verdict. undueinfluence onits ableto not exert be must parties to ruleandthatKlimenko theauthority with vested etal. (2002) be must showthat this neutral body from theterms of theinitial adefection agreement whenever occurs. andSnidal 2005), (Thompson “honest broker” or asaconciliator toact “externala neutral empowered institution” maybe legal punishment –that possible themaximum involves Many of formal assume trade cooperation models as “grim the institution the of assumption trigger” enforcement: Questioning (ii) andservices. promoting of theprices be goods trade byreducing may also international trade in this manner, contributing be formation will to theinstitution and human capital through ontheinternet publication asatrade facilitator. function for example, transmitted, may Information be andanalysis effectively can theorganization etc.), of associations, commerce, consumers, chambers industry exporters, importers, officers, countries (customs insignatory ofthetrade agreement to variousstakeholders and implications of international costs theintricacies explaining trade through By assistance. technical reduce transaction of add In governments. informed theactivities about to remain theclaims of theprivate not sector onlysatisfies agents “Opening to thebooks” non-state facilitator astrade institution The impose ( impose enforcement has noactual to body delay judgement ability settlement overcountries, power andto its as conciliator forces parties to make a trade-off between undisturbed beneficial cooperation and costly andcostly cooperation beneficial undisturbed between tomake atrade-off parties forces conciliator as occur with a delay, implying time costs (lost cooperat adelay,occur with (lost timecosts implying To be sure, dispute settlement need not necessarily be carried out by a formal dispute settlement institution. Other Other institution. settlement dispute byaformal out carried be necessarily not need To settlement sure, dispute be A few formal models may count as exceptions here: Ethier (2001); Rosendorff (2005); Rosendorff and Milner (2001); (2001); andMilner Rosendorff (2005); Rosendorff (2001); Ethier here: exceptions as maycount models formal Afew In this model, absent a neutral body, countries would not resolve the dispute among themselves, as they would they as themselves, among dispute the resolve not would body, countries aneutral absent model, this In (partially) defect from the defect initial agreement. can This prevent(partially) the contract from concluded being place. in the first rules where one-time deviation for exceptional reasons is tolerated (see subsection 4 below on contingency). on 4 below subsection (see istolerated reasons exceptional for deviation one-time where rules i.e. contingency clauses, ofescape possibility the assume models Some (2005a). andStaiger andBagwell (2004); Herzing independent dispute will settlement help countries condition th contend 2001).Ludema, They by for instance, assumed, (as defections following agreements ofpossible sets ofsmaller existence the or country, defecting ofthe power bargaining ofreduced assumption the on doubt cast They choices. ofpolicy history tothe outcomes link renegotiation (Klimenko et al., Countries 2002: 4). back be would at always to areunable countries the because precisely is valuable renegotiatealways disciplines to restore cooperation more qu over time. towane assumed be can neutrality ofactors, number alimited with setting However,and neutral. inarepeated-game areindependent they –given task this over take could dispute inthe involved arenot who agreement to the signatories Note that if the grim trigger is response a non-credible ex ante honest broker and conciliator and broker honest unknown) costs on both parties can serve as a credible punishment. asacredible serve can parties onboth costs unknown) , public symposia, and seminars. In cutting the transaction costs of costs thetransaction cutting In andseminars. , publicsymposia, behaviour and the detrimental dynamics itmay entail, dynamics andthedetrimental behaviour is, the grim trigger strategy of strategy enforcement. is,thegrimtrigger that enforcement contractual against misdemeanour to access the benefits of future cooperation (Downs (Downs cooperation offuture benefits the to access to apply and uphold. By returningto protectionism, to anduphold.By apply ition, can providing information to economic actors agreement, that hoping such not behaviour does 1999). With this knowledge, parties mayhavean parties thisknowledge, With 1999). ion) that parties cannot control. that parties thedisputeion) While eally leadsto acomplete breakdown of thesystem, threat, the dominant strategy for all countries may be to maybe countries all for strategy dominant the threat, rnational has an trade. country Hence, thevictim 115 manipulate the parameters of the enforcement process”. square approaches one. reject that authors The explicitly their agreements and future policies on past actions. actions. past on policies andfuture agreements their ickly. In the words of the “external authors, enforcement at bargaining power is history-invariant and that only andthat is history-invariant power at bargaining 17 Importantly, dispute resolution will dispute Importantly, resolution 18 The institutionThe 15 Some 16

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS The institution can deter defections against agreed-upon rulesof trade, thereby against agreed-upon institution deter contributing can defections The to an games. The longer successful trade carries on, the expectations ofsignatories converge. will Reciprocity on, theexpectations trade carries successful longer The games. therelevance Keohane of (1984) questions also Robert (characterized by contingency protection andequiva protection by(characterized contingency achieve and maintain that trust in the system. inthe thattrust andmaintain achieve eachother. players trust when trigger responses institution helpto Aneutral can dispute settlement The presence of private (asymmetric) information isanot of (asymmetric) private presence The asinformation institution the information: of presence asymmetric The (iii) incentive to honourcommitments. a priori trade disputes. an Hence, with themere presence of parties agent aneutral provides dispute settlement 20 19 institutions are apt discouraging ininternationalenvironment defections, trade. of stability effectively By monitored awareofbeing injurers, Potential affairs. toClosely therole of asinformation aninstitution connected isthat disseminator of amonitor of trade trade organization. this case, In theinstitution ac into the system by acting as a disseminator of info asadisseminator by acting into thesystem additional transparency inject can informed body aneutral by party, dispute thebetter settlement reality information, thepresence ofIn asymmetric andthe spiral can outofwhich control ifco conditions contingency about may leadto strategic misrepresentation andconsequently to disputes has itiscovered andifso, occurred asava whether crisis) event (e.g. ornot thealleged whether conclusively abalance-of-payment to assess or impossible for itisdifficult by whom theaction, informed than affected isbetter those party This (Copeland, 1990). co behaviour may occur iftheparty Opportunistic de atemporary would justify circumstanc special ornotinformed these whether about Assump in traditional (see trade models cooperation the to contrast in However, contingency). trade envisaged in an agreement (Articles XIX, or XX of XXI the GATT may count as examples in relation from thei surveillance. countries to Sometimes, depart enforcement of negotiated through agreements infringement, parties can proceed to self-enforce proceed can infringement, parties The value of a lengthy (and therefore costly) adjudication pr adjudication costly) therefore (and ofalengthy value The Ethier assumes that parties are able to punish a defection instantaneously, but choose but instantaneously, adefection topunish able are parties that assumes Ethier See Maggi (1999),See Kovenock (1992), and Thursby Hungerfo the agreement punishment. without Reinhardt the DSU sees as a mechanism to maintain and Reinhardt (2000) – for albeit and Reinhardt different reasons. (2000) Both the see institution authors as a “tool” rather than an agent. lengthy procedures are a disadvantage of dispute settlement. settlement. ofdispute areadisadvantage procedures lengthy according to present relationships. power contrast, By Ludema (2001) and Kovenock (1992) and Thursby argue that early tosettle parties motivates ruling the over ofuncertainty lack the since iscounterproductive, ruling A speedy settlement. agreed inamutually cooperatively end conflicts international that chances the increase costs) transaction procedures provide for breather an (tempora unsanctioned (e.g. Milgrom et al., 1990, Greif et al., 1994). al., al., et et 1990, 1994). Greif Milgrom (e.g. facilitati through cooperation supported providers to uninformed parties has long been recognized recognized been long has parties touninformed providers of an institution in trade disputes. the In field of instit role andtransmission gathering information ofthe foranelaboration (2002,Chapter 6) andStaiger and Bagwell the enforcement actual power of the institution.Due to this uncertainty, lengthy adjudication procedures (high information repositories for traders (notably on each other’s credentials) who had never interacted before. They thus They before. interacted never had who credentials) other’s each on (notably traders for repositories information example, of neutral explains a system intermediaries within disseminator and monitor parture from obligations. obligations. from parture untries retaliate andcounter-retaliate. retaliate untries ng the use of a bilateral reputation ofabilateralreputation use ng the 19 116 providing parties with relevant information. relevant with parties providing r commitments on account on of“specialr commitments circumstances” rmation. Once aware of being affected byacontract affected aware ofOnce rmation. being assumption of symmetrical informationassumption of symmetrical maintained subsequent danger of strategic misrepresentation of misrepresentation of strategic danger subsequent ts asaprovider of infots ncerned stands achance discovered of not being ncerned stands lid exception in the agreement. Private information Private agreement. inthe lid exception utional the economics, role of institutions as information their claims. Thus, the institution facilitates the theinstitution Thus, their claims. by a“trade watchdog”, likely to deviate. areless tion (iv) above), parties are often asymmetrically asymmetrically areoften parties above), tion (iv) lence in retaliation) can effectively replace grim effectively can lence inretaliation) the grim-trigger punishment scenario in repeated inrepeated scenario punishment grim-trigger the merchant guilds in medieval Italy. as merchants Law acted her factor that provides arole for that anindependent her factor provides ry escape) during which an injurer can de facto violate violate facto de can aninjurer which during escape) ry and documented. The literature on law merchants, for lawmerchants, on literature The and documented. es have really occurred and to what extent they andto extent what have occurred es really ocess inocess trade disputes is also derived by Ethier (2001) rd (1991), Ozden (2001), Bütler and (2002), Hauser mechanisms andmultilateralenforcementmechanisms rmation andanagent forrmation to delay instead. Lengthy Lengthy instead. to delay bilateral uncertainty over uncertainty bilateral 20 enacted a prohibited NTB. aprohibited enacted trade flows, but where each party has anincentive to eachparty butwhere trade flows, Textual ambiguities,for instance, may thenleadto response to which the NTB may be legitimately taken) or whether the Member in question hasinstead inquestion Member the whether or taken) legitimately maybe NTB the towhich response (in occurred has indeed shock outcome. anexternal findoutwhether can It true nature of anobserved information the about by extracting members support can body dispute settlement as anindependent policy responses that may prove desirable. responses policy uncertaint accept way, governments this In contract. leave andto contingent agreement gapsinatrade contractual afully refrain fromdeliberately writing to rational worlditisboth for parties contracting andefficient non-stationary show that inadynamic, etal. (2005, Horn 2006) andMaggi(2002), byBattigalli developed on a methodology Based contract. future over uncertainty subsection), last inthe (iii) possibly, the need to re-negotiate. Whereas under subsection (iii) above the institution functions asan functions theinstitution above (iii) possibly, subsection under to Whereas theneed re-negotiate. 24 23 22 21 disrupt environment, acontracting In shocks exogenous where (NTBs). barriers non-tariff non-observable form of inthe emerges information Asymmetrical shocks). (exogenous impacts demand import random Consider Hungerford of dispute theexample settlement. isrelaxed. future about assumption of events) anunchanging environment hence complete (and certainty also can wasconsidered,disseminator aneutral body of therole above and(iii) (i) insubsections Whereas aninformation gatherer for need The contracts. are outthat pointed incomplete repeatedly trade agreements has been It information asactive Trade theinstitution asincomplete agreements contracts: (iv) Staiger, 2002: 39). negoti liberalization to facilitate another function of namelyanother theinstitution emerges, function of rationality trade negotiators, yetover thefuture isallowedbytheassumption relaxing of perfect an unchanging environment hence complete (and cert information, had theyanticipated in thesituation. contract When inamanner that correspondsreached) supposedly to cont the mayhavetointerpret adjudicator independent information (not just to distribute it). In addition, since not all relevant situations have been foreseen, an isincomplete, thecontract Whenever anindependent brokerinformation thatba Kovenock (1992: and Thursby 167) a similar ascribe role According to the authors, trade can agreements be called “rationally incomplete contracts”. costs transaction The See Dunoff andTrachtman andRocke (1995), Dunoff Ro Downs See (1999), parties find it too difficult to find it tooanticipate, difficult parties detail that evaluate the possible future may and every down write bring. consequently the incompleteness of the contract – without having to give up the assumption of rationality. Even rational is overof that future et Horn al. derive endogenously the contractual authors – events (2005, and uncertainty 2006) contingencies, asof well low-probability as a great variety the potentialoutweigh gains fromthat withcomplex trade. feature the contracts case is This a typically large number involved costs The impractical. completeness make contractual simply conditions environmental ofpossible full range and writing inresearching, involved it themselves. would do job than a parties better the affected like (1991) Hungerford how the do a authors not specify deviations true between distinguish[es] contingencies are privately revealed to some parties (thi parties tosome revealed areprivately contingencies with coupled isoften contingencies future over Uncertainty (2005), Hauser and Roitinger (2004), Horn et Horn al. (2006). and Hauser Roitinger (2004), (2005), gatherer, adjudicator, arbitrator, of game of rules the the andgate-keeper 23 the institution may also function as an arbitrator and calculator of damages. If uncertainty asanarbitrator theinstitution may function and calculator uncertainty also of If damages. 24 lances informational asymmetries in the system, the case isdifferent here.lances thecase informational inthesystem, asymmetries That way,That he gatherer information the ations and to reduce power asymmetries among parties (Bagwell and (Bagwell amongparties ations andto asymmetries reduce power bargaining over treaty obligations and permitted policy instruments under the under instruments policy andpermitted obligations overtreaty bargaining ...... perceptions and mistaken that su 22 contingencies will then reflect incompleteness of thecontingencies thenreflect will that of a gate-keeper of the rules of of thegame. therules that of agate-keeper s is tantamount to dropping Assumption (iv) above). s (iv) is tantamount to Assumption dropping how the contracting parties wouldhave wanted it, parties howthecontracting completeness is coupled with private revelationof private iscoupled with completeness y overfutureconditions intheworldandpossible neutral body manages to extract such information managesneutral to body and extract why of possible responses to such events. The major contribution contribution major The events. tosuch responses of possible inefficiencies, misunder inefficiencies, ainty about future events) is relaxed (Assumption (Assumption isrelaxed events) future about ainty an institution as an information repository and asaninformation repository aninstitution 117 defect by secretly enacting NTBs, theinstitution NTBs, enacting by secretly defect institution may be called upon to actively gather to upon actively called mayinstitution be ract (unless or until a new negotiated solution is solution oruntil anewnegotiated (unless ract to independent dispute as a settlement “device that (1991) models uncertainty over future events as events future over (1991) uncertainty models act as an active information asanactive gatherer ifthe act private information. In reality, previously unforeseen reality, In information. previously private sendorff and Milner (2001), Ethier (2001), Rosendorff (2001), andMilner Ethier (2001), Rosendorff sendorff lps to limit undesirable (and unfair) (and lps to limitundesirable ch a deviation has occurred”. has ch adeviation However, standings, disputes and, disputes standings, 21 If theassumption If of

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS when negotiating complicated contracts: They omit crucial details, write down contradictory clauses or clauses contradictory down omitcrucialwrite details, They negotiatingwhen complicated contracts: Ethier, 2001). this simpleruleof If punishment were followed, theimplementation of such atemporary damage”, “unforeseen developments”, “like or“best efforts”. products” tothat interpretation, are subject such as“appropriate countermeasures”, “serious injury”, “material of their regulations. In effects thedynamic neglect 2007; gaps(Mavroidis, Ethier,inadvertent make errors Parties 2001; 2006). MacLeod, Lawrence, 2003; Second, inadditionto “efficiency these gaps” created policy specific orwhether clause ambit of anescape acontin whether itisnotclear many instances In andMilner, andRocke, 1995; 2001). Rosendorff (Downs thepr require measure wouldnot necessarily escape theycould inprincipleagree response, andto to defect conditions that have oneparty led theoccurrence of the ableto were observe thelatter always If parties. onaffected effects adverse – This increase). (say, atariff or measure ahealth higher initialspiralling liberalization tradewar and secures commitments. into aretaliatory provisions allowing parties to respond to unforeseen to unforeseen to respond parties allowing provisions Two valve circumstances. unforeseen remain, above, problems however. safety previously asdiscussed First, all future therefore contingencies. They create prov ofdisputesettlement, thedesign negotiating When anadjudicator for need The itislikely that by tr thedamage caused effect, In to adaptto thenewco maypromptasignatory events information, andasymmetric may aninstitution fulfil yetanother role. Unforeseen of uncertainty case In of calculator and damage anarbitrator awards for need The affe to those crucialevidence byproviding punishments 28 27 26 25 2005). andSykes, 2002; Rosendorff Schwartz andto calculate thetruedamages the disputingparties to arbitrate isneeded and theincentive between aneutral to body of misrepresent affairs, thetruestate information thepresence claimed of offered. In andthecompensation thedamage asymmetric between the byameasure arelikely to overstate affected alike byallparties observed be cannot damages Both theconditions information to thevictim(s). unambiguously. contendassessed authors that Some th ultimate punishment can only be determined determined be only can punishment ultimate know thesame possess evenifallparties institution Ethier (2001) lengthy specifies dispute procedures. settlement Parties would likely be willing tomake far-reaching tr willing more likely be would Parties Interestingly, Kaplow and Shavell (1996) find that an flawlessly. long judgement as its As is biased, not the systemically organization’s will verdict be acceptable to parties In otherIn words, an unconditional clause emerges escape endo commensurate compensation for damages incurred emerge as a negotiation outcome. of payment voluntary andthe shocks, andeconomic topolitical flexibly toreact possibility the Both agreement. to the direction of the ruling in order to ensure certain costs are incurred from using an escape clause. Arguably,this clause. usinganescape from areincurred costs certain toensure inorder ruling ofthe direction to the expense. attheir defecting from parties other deters body aneutral if Equally, pote shocks. toexternal foradapting punishment (voluntary) compensation and multilaterally endorsed retaliation. For a notable exception see Bown (2002). Bown see exception anotable For retaliation. endorsed andmultilaterally compensation (voluntary) of remedy enforcement bilateral the between make distinction not do the models Most 2005). Rosendorff, also (see requirement is necessitated more by mathematical constraints than economic intuition (Rosendorff, 2005: 398). requirement more is 398). by necessitated constraints mathematical than 2005: economic intuition (Rosendorff, ex ante ex post, 28 118 oncommensurate (tit-for-tat) (Sykes, 1991; punishments gency has occurred, whether theevent has falls occurred, whether the under gency legitimate or illegitimate – trade-related policy causes causes policy –trade-related illegitimate or legitimate (Herzing, 2004; Bagwell andStaiger, Bagwell Parties 2004; 2005a). (Herzing, damage caused. Dissent will follow will from amismatch Dissent caused. damage ledge about unforeseen events, arguingthat since the events, unforeseen about ledge ade-related policies of partner countries cannot of policies partner be ade-related measures taken violate theterms of theagreement. leading to temporary defection andtheresulting defection leading to temporary independent arbitrator need not be omniscient or operate esence of an independent dispute settlement body body dispute settlement ofesence anindependent monitor the effects of themeasure ithas taken in monitor theeffects isions that allow themto adequately respond to theinvolvement isrequired. of aneutral entity addition, contracting parties may on termsaddition, agree contracting parties circumstances are often difficult to operationalize. difficult areoften circumstances ntial victims are more likely to make greater commitments commitments tomake likely greater aremore victims ntial by contractual fallback rules, treaties may contain contain may treaties rules, fallback contractual by ntext by enacting an appropriate domestic policy policy domestic anappropriate byenacting ntext negotiators areawarethat foresee theycannot negotiators suffered astheresult of ameasure (Sykes, 2000; cted by a measure. This prevents the system from byameasure. thesystem prevents This cted e size private of suffered isoften trade damages Rosendorff requires asuffic requires Rosendorff ade liberalization commitments if they do not risk to notrisk do they if commitments liberalization ade genously of at the the outset negotiations of a trade 26 Yet arole for the ascribe several authors ient level of uncertainty as ofuncertainty level ient 25 27 to the contract. The victim party (which may or may mayor (which party victim The contract. to the The veil of ignorance will prompt contracting parties to write a trade agreement that is geared towards atradeagreementthat to isgeared write veilof ignorance parties promptThe will contracting regarding adherence toregarding obl may of to wish conflicts defer thesolution not they do renegotiate) (if rational parties contracting adownward may counter-retaliate. off disputemay set The thisparty andpunished, accused wrongly original isconvinced measures that were its inline theinitial with agreement andthereforeparty feels “vigilant as to referred usually reprisal, of measures applicability of theworldandits thetruestate about to agree disagree Either ways. parties intwo with information andprivate cr of uncertainty presence The opportunistic behaviour. that information private the fact may provoke strate not fully does correspond what theyac with text its complete Signatories contract. andflawless knowthat enforced cannot thecontract be since aswritten, contracting information, andasymmetrical uncertainty 30 29 of atrade agreement “behind to thedetails negotiate assumed aveilofbe 1971). ignorance” (Rawls of therules game. thepresence In gate-keeper rationality of trade negotiators, yetanother for role emerges theinstitution, namely thatand perfect of a of overthefuture theenvironment theassumptions isallowedby relaxing of stationarity uncertainty If agent and“gate-keeper” asasurveillance of rules institution The unscientific. an“errorswhy theyoccur andwhat theconsequences are. rejects He happen” and approach asarbitrary occur, errors when andhuman rationality ableto error specify shouldbe of bounded that any theory may have to renegotiat parties orelse possible, where required to adjudicate, be may always body anindependent from thisperspective, Seen above). (v) theycease to “rational”language) be –Assumption of trade agreements models assumed intheoretical (as ambiguous theyuse leave when contractual gaps(including may argue parties thatSome whenever the trade agreement isperceived theroad (Sykes down 1991, decades position Ethier 2001). Undertheinfluence of theveil of ignorance the common general welfare ofallsignatories to the they stand and what is best for them. they Thus, is best andwhat they stand countries from diluting, di “rules of thegame”. asasu acts organization The Signatories thenwant will to of confer agreed thepreviously therole ontheinstitution of agate-keeper guidelines for the future. for the guidelines rulings. Interpretationsits rendered by such accepted may aninstitution be andgeneral asprecedents up thecentral tenetof rationality. asinthe Thus, agreement andhave anincentive to skew, or bend is lifted and reality is exposed to thesignatories. isexposed andreality is lifted spiral warsi andendinatrade of mutual reprisal the assumption of rationality in the absence of a theory of “boundedthe assumption ofrationality”. of rationalityintheabsence atheory authorcontends The A veil of ignorance means that contracting parties do not know the future distribution of gains and losses from an from of gainsandlosses distribution future the know not do parties contracting that means ofignorance Aveil and that an adjudicating institution exists toand that help them an adjudicating institution exists haveThey taken it as “given” that contractin (exogenous) However, (1999). MaskinandTirole also lawandecon See going on to signatories’ impact and economic political well-being. trade infuture parties ofcontracting role the (iii) future; countries; acceding offuture identity the of;(i) ignorance initial agreement with certainty. Negotiations among pr perspective (Bhandari andSykes, Duno 1998; (Bhandari perspective this from (treaties) contracts international far haveapproached so authors afew only Unfortunately, contracts). relational (so-called relations contractual their continue parties tohelp strategies court toassess seeks literature this 29 Horn et al. (2005, 2006) derive therole for giving derive evenwithout institutions adjudicators etal. (2005, Horn 2006) sregarding and reneging ontheoriginal andreneging sregarding igations to an independent dispute sett igations to anindependent ex ante as fair and efficient to every participant. as fair to every andefficient ff and Trachtman,ff Posner, 1999; 1988). Ex post facto, post Ex may experience regret over theoriginal regret termsof themay experience tually want. The contracting parties are also awareof are also parties contracting want.tually The previous two subsections, under theassumptions under of subsections, two previous gic misrepresentation of thetruth, andconsequentlygic misrepresentation not be a “true” victim) may decide to take unilateral totake maydecide a“true” be not victim) tuation (Schwartz andSykes,Alternatively, 2002). tuation (Schwartz e justice” or self-help mechanisms. If the targeted e justice” thetargeted If mechanisms. orself-help evenchange therulesof theagreement to their rveillance mechanism that can effectively prevent effectively that mechanism can rveillance agreement, since no party knows with certainty its its certainty with knows agreement, since noparty disputes, and (iv) generally of how future contingencies are contingencies future ofhow generally and(iv) disputes, remedy any unplanned situation. With quite some success success some quite With situation. any unplanned remedy g parties regularly make errors when negotiating contracts contracts negotiating when make errors regularly g parties ospective signatoriesospective to a trade agreement take place in e. However, up (1994) giving Tirole warnsagainst of uncertainty over thefuture, then countries can of uncertainty 119 parties are conscious of their incapacity to write a to write of areconscious theirincapacity parties eates the potential for conflicts that can be dealt be that can thepotential foreates conflicts (ii) the economic significance of(ii) in a the country distant omics scholars have scholars omics frequently disregarded this advice. all parties know with certainty where certainty knowwith allparties agreement once the “veil of ignorance” lement bodyand commit to accepting 30

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS Therefore, mainstream IR turned to the conduct of conduct tothe turned IR Therefore, mainstream War, researchers gradually lost interest in studying them. The gulf between international politics and international politics gulfbetween War,The them. instudying interest gradually lost researchers However, andSnidal, of 1998). remaining relevant intheCold facing thechallenge given IOs (Abbott much atthecentre Th attention. of academic very functioning – is surprisingly sparse. In theearlypost –issurprisingly In sparse. functioning IOs were not the main actors inthegameof international andRuggie, werenot governance themainactors (Kratochwil 1986).IOs questions”. “surprisingly, international scho 4), contemporary (1998: andSnidal Abbott of words the In attention. little relatively –received consultation and informal forms –such cooperat asdecentralized of organization (international organizations in IR pa inIR organizations (international important provide also framework can analytical IR centred by formal around supported approaches onan theories modelsof based choice. Non-economic considerations ofof in atrade took aformal centre agreement. Efficiency organization insupport stage in th andto participate tradingstronger partners andmayencourage weaker ofnegotiating, countrcosts institutional negotiating commitment environment, reduces transaction to arules-based further which liberalization ongoing andfacilitate stimulate will theonehand,On it confidence inthesystem. sustain role of will theinstitution gate-keeping This overnegotiated rights market access claims. environment property andsecure of reasonably stable instru procedures, an eyeonfixed i Relative oninternational lack of organizations research or international on research relations International (i) to approaches formal institutions Non-economic wasconcerned explorin with subsection previous The (c) may to therefore inclined confer be resp significant enhance can They transparency, asnegotiating trade disputes. fora Trade andhelpsettle serve negotiators for functions trade institutions emerge. various important onexternalities, based formal trade models formal trade organization. features real-life Once of worldtrade are taken into consideration by enhancing matter of institutions economics the Summary: confer of trade agreements models role to afleeting anindependent, traditionalThe politico-economic (v) to commitment ensure agreed ongoing to apreviously change anagreement, inthefo itmay be or otherwise theface byeconomic In ofsignificant pressure benefit. 31 were design) (regime forminstitutional andstructure surrounding Questions andSnidal, 1998). (Abbott asthecentral study and values under variables of resulted emphasis towards inashift rules,norms moveaway fromasactors This consideration of IOs to open began formal organizations explaining the existence of a neutral party to oversee international trade affairs. The discussion mainly discussion The international to trade affairs. oversee of aneutral theexistence party explaining to neglect questions of organization. questions to neglect could andother formal attributes design Organizational Morrow, 1994). Thus issues such as why IOs matter at all and what sets them apart from alternative This is This of not course to that say there was no wo academic subject of serious some researchsubject throughout the post-World War era. II the remained IOs that 1970s example inthe 1973) ofCox is agood Cox (e.g. work andJacobson andJacobson, The ments andtimelines, may theinstitution ments contribute inupholdingan rlance) matter in international trade. ininternational matter rlance) in ways that were not easy tore thatwerenoteasy in ways 31 120 e negotiations (see Bagwell andStaiger, Bagwell (see e negotiations 2002: 69). onsibility and authority to aformal organization. andauthority onsibility international relations –re relations international ganizations (IOs) –interms of theirrationale and (IOs) ganizations rounds. On theother,rounds. On an with parties itprovides larship has no clear theoretical answers to such answers larship has nocleartheoretical g theeconomic rationality behind theestablishment is early work on IOs was largely legal-descriptive legal-descriptive waslargely workonIOs is early overlooked (Young, 1994; Koremenos etal. 2001; -war years, IOs (such astheUnited were (such Nations) IOs years, -war insights intoinsights thequestion ally and politically influent andpolitically ally rules-based negotiating rules-based environment. keeping By rk during done the on time IOs of the Cold War and after. unding parties’ interest to instruct theinstitution to interest instruct unding parties’ ion, alliances, treaty rules, or ad-hoc contracting ion, rules,orad-hoc alliances, treaty not explain what IOs really did. It wasclearthat did.It really IOs what not explain ies toies overcome by theirfear ofexploitation concile (Simmons and Martin, 2002). andMartin, concile (Simmons gime theory –andtended gime theory why formal institutions ial players to renegotiate ial players cooperation. As noted in Section B.3, constructivi noted inSection cooperation. As constructivists grant to IOs, its proponents still have still proponents grant its to IOs, constructivists theauspices of oftime within rules” aset (Simmons role ininternational abigger theory,ontheother hand, IOs grants cognitivist) (or Constructivist they become salient, and how they then connect wi salient, andhowtheythenconnect they become incentives to collaborate. Krasner’s (1983) definition States’ hegemony, ofUnited re continuing decline and ofdesign questions fromtechnical detached to theo aneffort movement regime represented The and values. Thus, IOs “canand values. IOs Thus, asaresult of over of theirinteractions states alter theidentities andinterests inte with “chief states that instil agents” socializing Finnemore andideas. the shaping processes of those social of ongoing choice. areflection areboth They organizat International ofinteractions. complexity the more amongstates. than arrangements lubricate cooperative dolittle then, IOs institutionalists, monitoring, arbitrating, orinformation (Glase provision as of institutions (not assites of cooperation understanding functional This of violations. the costs for redu facilitating theycan interaction, role. As issimilar approach to to This institutions that play IOs ofaction. neorealism, a passive for functionalists to of problems collective –aresolutions 1989: 3) (Keohane expectations” andshape constrain activity, behavioural roles, …that of rules prescribe as“persistent sets andconnected understood – broadly Cooperation Institutions inthis framework states. sovereign istheresult of arational between contract of institutionalism neoliberal school giveslitt The cannot fulfil.that itself ahegemon toorder theconclusion of atreaty. Moreover, assume can it is not entirely anIO clearwhat functions isbroad, however, of economic aliberal from theestablishment theory anything encompass andcan of autonomy. degree acertain of definition “institutions”the IO The by stability hegemonic advocated to signal to other nations that the not itwill abuse bydo established areconsciously claimthat IOs They prop account hasA morenuanced been neorealist of IOs influence rather pointless. wouldseem and purpose with actors asindependent of framework, IOs thestudy this analytical Within 1994). countries andhave inthehandstools of powerful power shareofworld their maintain can thatthey so powerful isthemost It relations” 189). 1964: (Carr through operate institutions, sometimes butIOs states In terms of contemporary 2002). andMartin, (Simmons andmethods agenda IR theories of thought schools end, defined“institutions” thevarious IR that inways suited research theirown reviewed in morecompr tosought explain Section B.3, buthardlyencompassing, workable. Hence, of movedonto “institutions”, scholars thestudy which realists inte regarding expectations thatfocus procedures and neorealists recognize that construction and diffusion. There isnocleartheo There anddiffusion. construction inexplanations yetlacking into states, system the travel howideas from from “monocausality” ondescribing –that muchfocused suffers is,itistoo literature. inthe arehighlighted shortcomings Three place. in thefirst constructivists tend to stress the impact that IOs ha that IOs theimpact tend to stress constructivists actors) precludes any sensible operational activity for any operational activity sensible precludes actors) ehensibly just how rules of cooperation affected state behaviour. state ehensibly just howrulesof cooperation affected To that le consideration to IOs (Simmons and Martin, 2002). andMartin, (Simmons le consideration to IOs sts emphasize the primacy of social construction and construction of social emphasize theprimacy sts ry of how ideas and new norms emerge in IOs, how inIOs, andnewnormsemerge of howideas ry institution opportunistically, the hegemon must grant must thehegemon opportunistically, institution rnational behaviour” was seen as canonical andall- rnational ascanonical behaviour” was seen ce transaction costs, improve information andraise costs, ce transaction states in the system that create institutions andshape inthesystem states in regard to the mechanisms and processes of social to andprocesses themechanisms in regard r-subjective meaningsintheformr-subjective of common norms minimal influence behaviour onstate (Mearsheimer, gime theorists sought to explain why states found why to states sought explain gime theorists minant powers during periods ofhegemony. duringperiods minant order powers In trouble explaining why IO ve on individual state behaviour without explaining without behaviour state ve onindividual of regime defined as“rul and Martin, 2002: 198). Despite the active role that theactive Despite 2002: 198). and Martin, processes and prevailing ideas and participants in andparticipants andprevailingideas processes organization. During theCold War the andwith rize international about governance morebroadly, IOs that may motivateIOs such theirestablishment, as First, CheckelFirst, (1998) contends that constructivism or even increase it. Inte or evenincrease ions are thus seen as more than purely objects of asmorethan objects purely ions arethus seen 121 are basically seen as“arenas seen are basically outpower for acting and Sikkink (1998), for example, describe IOs as IOs forand Sikkink(1998), example, describe r, 1995). Seen from the perspective of neoliberalr, from 1995). theperspective Seen th agents (but see Lumsdaine, see 1993). (but th agents Second, osed by theorists advocating hegemonic stability. hegemonic advocating by theorists osed rnational organizations are organizations rnational s are created bycountriess arecreated es, norms,principlesand

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS also tends to overlook why IOs are special arrangemen arespecial why tendsto IOs also overlook assume, and “regime iscalled andSnidal, 1998, andSnidal, 2005), Thompson management” (Abbott distribution, and incessant communication suppor communication andincessant distribution, linkage, such asissue strategies, use often will IOs 12). andSnidal, 2005: (Thomspon of theparties considered andcapa be must neutral andimpartial, IO of autonomy. degree a certain The A precondition for this contribution isthat itpossesses from anIO of elaboration anin Box amoretechnical 5provides coordination equilibrium is anoutcome in thecollecti This 1998). outcome (Fearon, onewelfare-improving organization that to selects animpartial authority bargaining,orev to avoidendless order In contract. of thelikely negotiation, under andissues thecomplexity andwith to thenumber of with increase parties clearly overlaps in significant respects with politi with overlapsinsignificantrespects clearly of collective actions. of collective regi trade international the istomanage organization in way, establish states inanexpeditious challenges 1. subsection (see areinevitable costs and transaction incomplete arenecessarily future, contracts the regarding uncertainty considerable oftentimes isalso There agreement. the from temporarily todefect andincentives conflicts topotential rise of details various cooperating, off better is generally of gains islikely overthedistribution discussion to a “mixed Bu B.5 game” motive above). Section (cf. preferences. Different countries for cooperate different reasons. Trade cooperation, inparticular, is in the interest ofallsignatories to acoin theinterest conclude iscomplexandapotential sharingthe contract Despite acommon of vision source why of itis conflict. role of The international tradeorganizations: regime management that istheassumption thenature of effort any for point cooperative examining starting analytical The (ii) andRuggie, constructivism Third, 1986). place (Kratochwil inthefirst intentionally create IOs why states 32 path”.equilibrium central insight The isthat in that animpo contend (2005) andSnidal Thompson partners Brokering cooperation amongheterogeneous in theory IR that havecharacterized to transcend theoldrifts outcomes. Contemporary makesunique cooperative research effort aconscious 1983). (Ruggie, period the post-war su of normsandprinciples, systems inlarger embedded and fortify the aims pursued bytheinitialarrangem theaimspursued and fortify create also organizations International actors. and state enhance prepare efficiency, costs, theground for cooperation, andmonitor both therulesof thegame thinking, recent approaches argue and constructivist that cooperation is generally welfare- isgenerally that cooperation signatories leadto will inevitably ov disagreement in agents areimportant that IOs of study, recognizing rediscover has literature IR mainstream recent More Note that organizational form and the functions assigned identity, and level of ambition of the cooperating parties. 32 Regime management can be broken down into various functions. the past. Striving of thepast. for asynthesis improving, they fail to settle for a specific outcome. Disagreement is is Disagreement outcome. specific a for settle to fail they improving, 122 co-economic analyses of the kind described above. ofthekinddescribed analyses co-economic t by their specialized and experienced staff. andexperienced specialized t bytheir ntract, negotiating parties often have heterogeneous often parties negotiating ntract, a complex contract heterogeneous preferences acomplex heterogeneous contract of arise. As a result, although every party knows that it knows party aresult, althoughevery arise.As When brokering preferences,When amongheterogeneous agenda setting, pooling, information gathering and gathering information pooling, setting, agenda er distributional issues. And although parties know althoughparties And er distributional issues. ternational trade organizatio trade ternational ed international organizations as a worthwhile field field aworthwhile as organizations international ed cooperation are subject to disagreement. This gives This to disagreement. aresubject cooperation stitution’s theequilibrium path. role inattaining that states consciously use IOs to reduce transaction to transaction reduce IOs use consciously that states en a deadlock in negotiations, signatories innegotiations, delegate en adeadlock rtant task of IOs isto ofIOs task rtant ve interest and mutually acceptable to every party. party. toevery acceptable andmutually ve interest me so as to enhance the efficiency and legitimacy andlegitimacy astome so enhance theefficiency t even when states share motivations, thesame states t evenwhen (b) above). In order to deal with these contractual these to with order deal In above). (b) ent. basket This that of IOs roles andfunctions international life that contribute substantively to substantively contribute that life international ble of credibly representing the collective interestble of credibly representing the collective ideas, norms, and expectations, so asto so deepen norms,andexpectations, ideas, ts for norm diffusion and in what ways theyare ways andinwhat for normdiffusion ts ch as the liberal internationalch astheliberal of economic order of individual trade with the regimes nature, may vary rationalist (including neorealist) neorealist) rationalist (including “manage the andstabilize ns. The main task of the maintask ns. The negotiation breakthroughs, IOs fulfiltheirrole of renegotiation breakthroughs, IOs 34 33 to for of take inter-governmental thefunctioning responsibility agreements. to them ofoperations theregime that giveeffect thebasicbargains itisthedetailed areAlthough intrade themselves, forged cooperation by thestates operations over time Manage substantive andresources.”power setting agenda little with aweakbureaucracy andhas only states member byits isdominated the WTO “As note: 20) andSnidal(2005: anorganization, Thompson of theWTO, thecase asawhole. In parties Trade are usually agreements “member-driven”, which expectations. Therefore, theIO’s behave andinteract. rulemanagement backinto feeds howparties expectations. to conform to thecooperat how theyareexpected agreement overtime. meansmanagement theimplementation andoperat often dependency” of the agreement (Thomson and Snidal, 2005: 14). The IO’s actions reflect an attempt to anattempt IO’s 14). reflect andSnidal, The actions 2005: of theagreement (Thomson dependency” interpret the collective cooperation equilibrium. This in This equilibrium. cooperation collective the interpret setting, consider the following Chart. There, the utility of two countries consider ( of thefollowing Chart. two There, theutility setting, delegate the decision of specifying aPareto-impro of specifying thedecision delegate to decide parties contracting for breakdown The anIO. aneed creates of negotiations possible worse-off. Solutions between si welfare-improving, curve possibility of thecontract thedetails understand andthat improve theycan ontheirwelfare is inefficient, theparties Suppose by cooperating. ( the axes helpnegotiating can to howIOs illustrate order In suggests one equilibrium (in this case point point this case (in oneequilibrium suggests pros The (e.g.other resources 1998). Fearon, might dragconflict onfor alongtime, fr which bypoints represented (schematically chosen ov areindisagreement parties thetwo equilibria, point is(preferably point thehigherup agreement increases asfarprefers agreements to theright of Every point onthe point Every o :Terl fIsi tann h qiiru path equilibrium the attaining in IOs of role The 5: Box of interstate bargaining loom large compared to potential gains” (Thompson and Snidal, 2005: 13). 2005: andSnidal, gains” topotential (Thompson compared large loom bargaining of interstate “Leaving these smaller issues to be handled by an IO is much more efficient than direct negotiation, since the costs addressing new issues as they arise. ofbehav sort what (clarifying areunclear issues certain the as agreement ofthe indetails filling include typically Given that the trade agreement cannot about all explicit be U x and 34 U The IO is an important gate-keeper of the rules and has some control andhas of some therules overthe“path gate-keeper isanimportant IO The y PP’ ). Both countries). recognize that thenon-cooperative nce every player is placed in a better position without making player without theother position isplacednce every in abetter -segment (corresponding-segment to aunique cooperation outcome) is mutually P and P’ P in principle are acceptable to both parties. Yet, in principleareacceptable to parties. both party as possible (preferably point C A ) that isthenaccepted outcome. asthefocal , pect of significant bargaining costs andevena bargaining costs ofsignificant pect in specific circumstances. The IO is often authorized isoften IO The circumstances. in specific parties attain the equilibrium pathinacooperative theequilibrium attain parties B gime management in a quiet, steady way.gime management inaquiet,steady Regime , ustrates the gains from cooperation andbinds thegainsustrates from cooperation iour is permissible), handling unforeseen circumstances, or circumstances, handling unforeseen iour ispermissible), ving outcome to an impartial third party. The IO The thirdparty. outcomeving to animpartial ion equilibrium –itcreates shared andmaintains ion equilibrium er which specific cooperative outcome cooperative shall specific er which be turn provides vital information to parties regarding information to vital parties turnprovides regime develops, interpreting and applying its rules when when rules its andapplying interpreting develops, regime C 123 means that important decisions aretaken bythe decisions means that important cooperative details, the tasks of a trade organization may organization ofatrade tasks the details, cooperative , and ion of the cooperative equilibrium created byan created equilibrium ion of thecooperative UU’ D (the locus of all efficient contracts). contracts). efficient all of locus (the ) .Bargaining overthis distributional P ). In thepresence In of multiple). P’ 33 ) , Thus, morethanThus, brokering X while party party while status quo and Y ) is plotted on ) isplotted Y’ (point s welfare SQ X )

It only involves two players who are fully informed arefully who players two involves only It

general efficiency. Whenever states pool resources, pool states Whenever general efficiency. D

process of doing so is perceived asneutral, isperceived fair, so of doing process

the IO as equilibrium setter becomes evenmore becomes setter asequilibrium theIO

tive apparatus (Koremenos et al. 2001, apparatustive (Koremenos and Abbott i s

organization’s ability to affect the understandings, understandings, the toaffect organization’s ability

focal and the welfare-improving equilibrium is equilibrium welfare-improving andthe focal t a passive role for aninternationala passive organization.

tiations onmultiple areas, andahighly issue b e number of possible cooperation alternatives cooperation e number of possible

) u

ies. Hence, in situations of multiple equilibria ofmultiple insituations Hence, ies.

B t ve an interest in creating an institution, the increatinganinstitution, ve aninterest high volatility of party preferences result in result preferences of party high volatility i

A n

i c t P' U' U X Sikkink, 2001). It is important to stress that it is a deliberate choice by countries to commission IOs with environment and thus themselves. IOs can affect the interest and values of states in ways that be cannot inways of states andvalues theinterest affect can IOs environment andthus themselves. are said to forge internationalare said perception, discours 1972, Cyert “creators andMarch, As 1963). of meaning andof 1997), identities” organizations (Olsen, of disputes tr andthe monitoringsettling of parties’ gathering andcreation, andresearch. of “epistemic”members information assistance, technical communities that aimto transmit newideas), of IO of involvement personal usually are influence of efforts to modify thepolitical, nor to modify efforts the evolutionusuallyRegime pursues constrained by institutional procedures”. and bystates andshaped are initiated processes that these anticipated. Yetfully to stress itisimportant decisi deliberate represent often of IOs development byAb stated As of themembership. and theinterests interest. not Regimeevolution happen exogenously does path of theequilibrium shaping andevolving the task 35 amongthem. dueto conflicts distributional unattainable some autonomy because this allows them to achieve levels of cooperation that might otherwise be with IOs entrust wehave states seen, As andSnidal,of international 2005). organizations (Thompson istruefor of thecase same thecompany The ownership. exercise thisautonomy thesupervision under autonomy andoversight of balance between –the control Issues hand over s regularly of companies Shareholders (iii) competencies andchannels influence can specific of andgoals(Cohen communication, agendas etal., IOs insight fromconstr controversial) (albeit important An Regime evolution of information of theother intheeyes andjudgement parties. diminishes pa more or one by “captured” be to known is IO an If etal., Greifetal., autonomy 1990; (Milgrom to 1994). its asneutral isessential perception ofanIO The and dissemination. executive path. theequilibrium Lacking of supervising compliance of general international rules with law. Mo the influence that threaten of individual andto those to actors benefit, secure harm thecollective mitigate weaker isto role protect states, mandate. Its byits of andbound theagreement) and purpose intergovernmental forum. fulfilling In th this function, inan until isresolved theissue of parties thebehaviour directs which point, afocal but to provide role isnot power, organ, to anarbiter state restrain anddispute its settlement As temporarily). least ischarged theIO parties, trade dispute between or bargain, ofamutually-accepted tolack due require gapsoccur areinterpretation circumstances whenever unforeseen of thecontract, Whenever equilibrium. cooperation a stable animpo 1.(b)), (subsection outabove waspointed As equilibrium andmaintain the Monitor The legitimacy of the IO as a manager of regime evol ofregime amanager as IO ofthe legitimacy The competence. mative, and intellectual context ofin context mative, andintellectual objective of deepening cooperation. To cooperation. of deepening undertakes thatobjective endtheIO 35 when textual ambiguities or opportunism provoke a oropportunism ambiguities textual when e, norms and values (Finnemore, 1996; Finnemore ande, (Finnemore, normsandvalues ignificant authority to theirmanagement. Managers ignificant authority ade policies. Those are important tasks inmaintaining tasks areimportant Those policies. ade ficials (as mediators in negotiations andasprominent innegotiations mediators ficials (as with imposing a structure-induced equilibrium (at equilibrium astructure-induced imposing with rties, its reputation asareliableandcredible source reputation its rties, ons by states to change their mutually constituted constituted mutually their tochange bystates ons ution stems from inclusiveness, neutrality, and technical uctivist theory isthat of throughthedevelopment theory uctivist powers, this typically involves information creation information involves thistypically powers, rtant part of IO regime management involves the involves management regime ofIO part rtant nitoring state policies is another important aspect aspect important isanother policies state nitoring 125 e IO is guided by the collective spirit (the object spirit(theobject by thecollective isguided e IO in a way that is compatible with the collective collective the with inawaythatiscompatible bott and Snidal (1998: 25) “[t]he creationand andSnidal(1998: 25)bott “[t]he , but is tied to the principal-agent relationship, to, butistied theprincipal-agent terstate interactions. The channels The interactions. terstate

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS the institution. exit to wish (partially) bymakingsure equilibrium that to noparties thecooperation maintain need its runaway Secon problems. possible address can interests Does that meanthat of theproblem Does “mission creep”, interests. anddistributional collective individual, andlong-term balance amongshort-term autonomy and exercise fully satisfying levelsof contro autonomy fully andexercise satisfying a short, In place). inthefirst creation of theIO very (the processes decision-making time-consuming for individu costs in turn, highersovereignty implies towhole. States since grant arehesitant thismay produce muchautonomy “sovereignty too to IOs, asa orbythemembership parties, byindividual granted, shouldtherebe andhowmuchoversight thenfor question signatoriesThe to atrade agreement is what level of autonomy be should theIO 39 38 37 36 from “agency that suffers inanIO trust capture”. putless will who Members, control, Stricter collective place. inestablished thefirst addition, In individu may for ableto autonomy not itwas which gainsfrom achievethegoals be –theIO IO produce less 16). Yet coll control moreindividual meanssacrificing and unwanted areas is inevitable (Barnett andFinn (Barnett and unwanted areasisinevitable keep theautonomy reasonable within bounds of anIO costs” (unwanted policies, lost disputes, or simply disputes,orsimply costs” (unwanted lost policies, As discussed in Section B, this is so because Members who use the WTO as an escape from a terms-of-trade aterms-of-trade from escape an as WTO the use who Members because isso B,this inSection discussed As the use to which the negotiating forum to thenegotiating ispu which the use However, governments. forum for negotiating Member asaneffective institution the maintaining isthat idea themain The publicgood. of aglobal features the not exhibit need governments byMember utilization that its but features, good public that argues thecreation Staiger (2004) Robert andnon-excludability. consumption in of non-rivalry characteristics sharing are thetwo usually asthose defined Public goods multilateral thein trade agreement –provide –an trade agreements whether arises question anddesign to craft could neverhavewho afforded argued of that issometimes having thebenefit It the WTO is a club good of sorts. isaclubgood the WTO thereforemore itmay apt(and be to concentrate features onwhether excludability), thediscussion o :I h T ulcgood? public a WTO the Is 6: Box Club goods are defined by non-rivalry in use and excludability (e.g. Aggarwal and Dupont, 1999). Internet access isa access Internet 1999). andDupont, Aggarwal (e.g. andexcludability inuse bynon-rivalry aredefined Club goods available good ofthe amount the reduce not does individual byone ofagood consumption the that means Non-rivalry in international trade, to yields non-Members. benefits some the WTO excludable benefits at all. benefits Arguably, through promotion its of global peace, rule of law, and predictability or stability excludable market failure, public goods are often provided by society as a whole (e.g. agovernment). (e.g. awhole as bysociety provided areoften goods market failure, public and dynamics action ofcollective reasons For good. public of a(pure) anexample as cited airisusually Fresh good. ofthe consumption from individuals toexclude possible isnot it means Non-excludability byothers. consumption for trading partner’s market liberalization. which are therefore sectors, placed best to the exploit additional export marketrespective access offered by their on a reductions recipr tariff negotiating non-discriminatory selection of top bureaucrats). oftop selection Collective control mechanisms are oversight bodies, voting rules, budgetary control, or managerialcontrol (e.g. voting control budgetary rules, mechanisms areCollective bodies, oversight driven prisoner’s dilemma can effectively internalize all the benefits accruing from their negotiations. Two countries negotiations. their from accruing benefits the all internalize effectively can dilemma prisoner’s driven of “club members” is bigger than currently those out of it 11, ofJanuary of150 (as circle the countries To 2007), aMembership sure, good. ofaclub with be example prominent 38 37 Since the WTO as a treaty applies exclusively to asatreaty Members Since theWTO 126 ternational community with public goods. publicgoods. with ternational community country can never concurrently enjoy the benefits of IO neverconcurrently can enjoythebenefits country t by Members ismorelikely good. aprivate t byMembers and maintenance of the WTO has important global has important and maintenance of theWTO al control from may other provoke reactions hostile d the WTO as the most prominent of asthemost a example d theWTO emore, 2004)? Probably not. Probably Two factors emore, important 2004)? atrade agreement spills overto countries those a loss of control;a loss cf. andSnidal, Thompson 2005: i.e. unchecked evolution of the IO intoi.e. unanticipated oftheIO unchecked evolution al Members due to majoritarian decisions, andto decisions, dueto majoritarian al Members l. Therefore, adelicate atrade agreement isalways . This is not to say that the WTO does not produce anynon- produce not does WTO the that tosay isnot . This collective action problem lies increatingand lies problem action collective “collective action” problem that motivated the a detailed trade agreement. In this context the thiscontext tradeagreement.In a detailed . First, collective control andmajority mechanisms collective . First, ective benefits. Strong individual supervision will supervision Strong individual benefits. ective ocal basis manageocal to improve the of competitiveness their d, the IO’s autonomy is naturally constrained by constrained naturally is IO’s autonomy the d, 39 36 41 40 For example, as was shown in subsecton.5 above, economically small countries do benefit from an MFN clause, anMFN from benefit do countries small economically above, in subsecton.5 shown was as example, For to regard the WTO as a club good that delivers significant advantages even to those Members that Members evento those advantages significant that delivers asaclubgood to theWTO regard To conclude, asanegotiating forum aswellaformal trade organization accurate itis probably hardly be seen as a private good. Also, trade cooperation perceived as a global constitution aiming constitution asaglobal perceived Also, trade cooperation good. asaprivate seen hardly be has long maintained that WTO rights rights thatWTO maintained has long tariff liberalization inthevarious commitments trade rounds.tariff inal to participate actively afford either cannot Member. WTO every not discriminate amongcoun does the organization (information provision, trade assistance, negotiation dispute facilities, settlement, services etc.), its providing In Members. to trade its organization deliver number of can roles that anindependent the membership as a whole and not bilaterally between large nations. large andnot bilaterally between asawhole the membership panel recommendations, orto information and trade libera principle applies to non-discriminatory partes, a de facto veto right), andhave veto equal right), access to th facto a de good? club a as Organization the in Membership that kept to alowprofile smallMembers those ininitial negotiations. benefits yield trading (a order based arule-of-law at instituting trading are order considered can atthecore to to be of cooperate, thedecision thentheWTO initial negotiations. motives like If bloc-building, themember evenbeyond signatories arguably (and of spill amultilateral overto allthat thebenefits agreement trademay cooperation effectively rationales for atrade agreement from thelitera Economics aside, atnocost. trade deal considering to decisions theexternal trade policy domestic “peg” of atrade can agreement a commitment Member device, once inexistence, every its as isunderstood theWTO If andTRIMs? such asTRIPS cuts, tariff not featuredo reciprocal liberalization. tariff reciprocal considers mainly countries negotiating isaccuratelarge for theterm more) (or bytwo enjoyed good isaprivate trade cooperation Staiger’s that theactual suggestion Tradecooperationasaclubgood? organizations). trade formal C.1 andSection rationalesdifferent for of reasons theexistence for trade cooperation), (giving we captures This an organization. asnegotiation/co rationale for anagreement (WTO the between onthedistinction confines Staiger Second, theory. of insists theterms-of-trade strict theauthormakes clearthat First, heargues the within of character trade agreements. public good aspects important Staiger’s highlight two arguments fair to say that all WTO Members benefit from th benefit Members fair to that say allWTO Under the umbrella of the WTO, all signatory countr allsignatory theumbrellaofWTO, Under to the efficiency of the asto trading a whole. the system efficiency Subsections 2-5 below will review the most importan most the review will 2-5 below Subsections even thoughtheytechnicall prohibitions (e.g. barriers of in Agreemen non-tariff the SPS i.e. to the Member community as a whole (e.g.i.e. asawhole 2001). Pauwelyn community to theMember The y cannot change worldpr change y cannot ll the central concerns pursued so far in Section B (reviewing B(reviewing ll thecentral far so concerns inSection pursued and obligations (codified inrules) (codified and obligations l negotiations, orthatl negotiations, have significant not yetmade t rules that any trade agreement should feature. But does the same logic hold in WTO areasthat holdinWTO logic thesame But does ices with theirbehaviour. with ices promoting peace, orspreading agloballiberal tures of IR and international law further shows shows lawfurther andinternational ofIR tures transparency requirements –theyare owedto requirements transparency lization commitments just asmuchlization just asto commitments disputes e services of the Organization. Legal scholarship scholarship Legal Organization. ofthe e services s maintained by some legal scholars), also may also scholars), legal bysome s maintained s-of-trade rationales-of-trade which of trade agreements, ies enjoy the same membership rights (including rights membership enjoythesame ies is legal precept. Section C.1 Section precept. is legal alarge reviewed operation forum) andtherationale forum) operation of creating 127 tries and hence represents a common good to acommon good andhencetries represents t), or notification andt), provisions transparency that benefit ship), no matter how active theywereinthe howactive nomatter ship), relevant to of theoverall the discussion 41 40 Other examples arestandardized examples Other are applied Therefore, itisprobably erga omnes partes erga omnes

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS a Reciprocal liberalization (a) then we can safely conclude that that institutions matter for at least four important reasons. safely conclude that four forthen wecan that important atleast institutions matter predominantly conclude to trade overcome agreements countries that presume we If contracts? ad-hoc and contracting informal cooperation, decentralized as such from formal alternativeto arrangements, trade organizations aninstitution? cooperative apart sets What individually. The process that thiscooperat produces individually. process The home. Cooperation countries what theywouldhave to allows below chosen reduce levelsof protection prisoner’sthepol dilemma andrelaxes terms-of-trade from Babove, the international away of escaping provides trade cooperation inSection explained As LIBERALIZATION TRADE 2. institutions pr First, of theirsovere regularly apart cede trade agreements institutions of role the Summary: –namely, design to topic oftreaty parties why contracting wasconcernedanimportant with section This (d) 43 42 the “efficiency locus” ormoreprecisely. generally Mayer (1981), In defined be to to isequivalent moving liberalization reciprocal theprisoner’s below dilemma(suboptimal) protection to atrade agre meansparties liberalization Reciprocal of international liberalization. andwelfare trade –isreciprocal to attheprisoner’s prevailed what shape thegenerationshape of common normsandvalues, general conditions for foster trade cooperation. peaceful can Institutions relations amongcountries, can to institutions showedthat formal trade institutions contribute can substantially to the establishing the predictability and stability of theinternational andstability trading order.the predictability compliance theexpl with and bycontinuously supervising byfacilita infringements, oftreaty ignorant parties keeping By of aneyeon thecontract. and procedures ininternational trade,agency neverthe institutions can Third, institutions enforce “rules theexplicit of thegame” membership. tothe information disseminating reduce significantly can institutions of international trade relations enhances trade. outthatand overseeing waspointed theefficiency It efficienc institutions enhanceSecond, transactional place. inthefirst equilibrium achieve acooperative must leave their terms of trade unchanged. The coordina leave theirtermsof The must unchanged. trade reci but also locus, ontheefficiency to be required negotiation expands thevolumenegotiation of expands trade, iswelf which One important issue left out of the scope of our debate is what roles institutions assume once the overarching tenet overarching the once assume institutions roles iswhat debate ofour scope of the out left issue important One These are pareto-efficient outcomes where improvements in one country’s welfare will come only at the expense of expense atthe only come will welfare country’s inone improvements where outcomes arepareto-efficient These the legislature) from torpedoing or retracting from earlie the welfare of its partner. The locus is characterized by the tangencies of the welfare curves (defined over the policy policy the over (defined curves welfare ofthe tangencies by the ischaracterized locus The partner. ofits welfare the instruments) ofinstruments) to the parties the negotiations. of international organizations of international multiple principals domestic and multiple featuring models principal-agent intricate ofmore use the general, In 2007). (Elsig relaxed be can actor unitary may then grant to significant (the an authority outsider of is monolithic) national relaxed. governmental (or Some (say, actors entity governments as unitary the executive) epare theground for trade cooperation. Th 43 . It is not necessary for outcome thetermsof trade atthiscooperative equal to be isnot necessary . It (see. e.g. Hawkins et al., 2006; or Checkel, 2007). dilemma point. In Bagwell andStaig Bagwell In dilemmapoint. transaction costs andimprove costs transaction institutional is agents a promising field of research on the nature and roles 128 ignty and confer authority and decision-making capacity capacity andconfer anddecision-making ignty authority procal liberalization between parties to anagreement parties between liberalization procal ting trade litigation, by ive outcomeive countries –where achievehigherlevels and help countries with heterogeneous preferencesand helpcountries heterogeneous with itical economy constraints faced by policymakers at faced bypolicymakers economy constraints itical procedures and timelines, byinforming andtimelines, previously procedures y. administering creationof aneutral body The IO) in an to attempt preventIO) other entities domestic (say, r commitments. the In vein, same the idea of the as IO a starting point. The nature of these reductions can can reductions natureofthese The point. starting less help to lend weight to the agreed-upon rules are enhancing for all. On economic and political cross-border externalities cross-border economic andpolitical ement are required mutually to reduce levels of levels to reduce mutually arerequired ement . ted reduction of protection by all parties to the by all parties of protection reduction ted Although there isnosupranationalAlthough enforcement icit treaty rules,institutions addsubstantially toicit treaty e discussion of non-economic approachese discussion of non-economic transparency ingenerating andtransparency er (2002), not arecountries only er (2002), conciliating andarbitrating, top of this,thetermsof 42 45 44 liberalize. mutually could countries –that than tariffs circumstances insome –morerestrictive bans) (e.g. import barriers quotas, of policy liberalization application in andits theprisoner’s fully dilemmaoutcome in toThus, escape termsof trade deteriorate. whose of non-participants attheexpense would be which liberalization, of countries from reciprocal gainsfor subsets of opportunistic thepossibility creates “world different rates therewouldbe of protection, andStaiger, discriminate acountry If (Bagwell 2002). non-discriminatory be setting multi-country inthis liberalization that reciprocal requires Efficiency fashion? a non-discriminatory orshoulditmake only onemarket partners to in its offers access that offer is applied partners to all its take market different place? provide liberalization access Shouldacountry how shouldthereciprocal clearly intended to applyto there theother If party. involved inanegotiatio parties two thereareonly If themarkets of theirpartners. open to pry timeattempt theirmarkets butatthesame open the apparent mercantilist behaviour of governments du adeterio to wouldcause thenegotiation contrast off. In well less parties ofthe one leave that remainingtrade means that unchanged this ex trade (Lerner, 1936). asatariff ontrade andresource allocation effect achievethesame taxes outcome andthat export Staiger, e.g. that 2002)other instruments, shows impo Th used. thatcould be instrument policy only the rate, couched liberalizationinterms of isoften thetariff of itisnot reciprocal thediscussion Although producers. of domestic these heft sec to theimport-competing Acounterweight markets. trade liberalizationdomestic since itistheavenue access to through foreign theygainbetter which reciprocal liberalization. Reciprocal liberalization economy for to approaches international political The support provide also can trade cooperation thevolume increase of trade andwelfare. reductions even asmutual tariff liberalization ofreciprocal role The principle isto ensure that alltermsof trade external An import subsidy increases imports and reduces the domestic price of the import-competing good. This leads toa leads This good. import-competing ofthe price domestic the andreduces imports increases subsidy import An The intuition for why export taxes have the same effect as tariffs (the Lerner symmetry theorem) can be provided provided be can theorem) symmetry Lerner (the tariffs as effect same have the taxes export why for intuition The A more extensive discussion of the MFN or non-discriminatory principle as applied in the GATT/WTO is to be found istobe GATT/WTO inthe applied as principle non-discriminatory or MFN ofthe discussion extensive Amore production of the import-competing sector expands, imports are consequently reduced. imports expands, sector of theproduction import-competing of price domestic andthe exports reduces tax export An tax. anexport with achieved be can outcome same The too. exports reduces it ofresources, re-allocation induced tothe due but imports; reduces only not tariff the consequence, a As up. isramped sector import-competing inthe production while falls sector export inthe production Thus sector. import-competing tothe sector exportable the from economy domestic inthe ofresources toare-allocation leads below. production in the import-competing sector falls while production in the exportable sector expands. As a consequence, As expands. sector falls sector in while the production exportable in theproduction import-competing Thus sector. exportable tothe sector import-competing the from economy domestic inthe ofresources re-allocation the exportable good. This leads to a shift of resources from the exportable to the import-competing sector. As the As sector. import-competing tothe exportable the from ofresources toashift leads This good. exportable the the exportable good. A tariff reduces imports and raises the domestic price of the import-competing good. This good. import-competing ofthe price domestic the andraises imports reduces Atariff good. exportable the to respect with importable ofthe (Pm/Px) price relative the on only depends world asimplified insuch allocation Resource good). importable andm(an good) exportable x(an involving world ofatwo-commodity context in the to the exportable sector. As the production of the import-competing sector contracts, imports increase. imports contracts, sector sector. of the the production import-competing As to the exportable sector import-competing the from ofresources toashift leads This good. exportable ofthe price domestic and the exports increases subsidy export An subsidy. anexport with achieved be can outcome same The too. exports expands it ofresources, re-allocation induced tothe due but imports, increases only not subsidy import the Thus, rise. exports 45 So the discussion of reciprocal liberalization liberalization ofreciprocal discussion the So 44 is to ensure that theworldpriceremains (terms unchanged of trade) a non-discriminatory fashion. Th fashion. non-discriminatory a ration in its terms of trade and must hurt it. This helpsto it.This explain hurt termsof trade andmust ration inits mobilizes a country’s exporters to for lobby greater acountry’s exporters mobilizes are more than two parties involved inthenegotiation, parties are morethan two ities are channelled only throughasingle worldprice. arechannelled only ities , a unilateral reduction of tariffs by one of the parties parties ofthe byone oftariffs reduction , aunilateral e theoretical literature (Mayer, 1981; literature e theoretical and Bagwell pansion is not accompanied by worldprice changes n, the reduction in tariffs offered by one country is byonecountry offered intariffs n, thereduction s among its different partners, by applying different byapplying partners, different s amongits prices” (or terms of trade) applying to applying each.prices”This termsof trade) (or a multi-country setting, one needs both reciprocal reciprocal both oneneeds setting, amulti-country 129 rt subsidies, would be required subsidies, inthecooperative wouldbe rt ring trade negotiations movesto theyresist when tor isthereby created, diminishing thepolitical should be readinthelight set ofshould be abroader e role of thenon-discrimination

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS markets. They described the conduct of negotiators in of negotiators theconduct described markets. They observers of the GATT/WTO to emphasize the political aspect of reciprocity (‘reciprocity isintheeye (‘reciprocity of reciprocity to emphasize aspect thepolitical of theGATT/WTO observers long-time has some led This Box 7). (see andservices goods) andnon-agricultural (agricultural goods that considered provisions could be andWTO GATT the world price (and hence the terms of trade) unchanged. hencethe worldprice thetermsof (and trade) that changes leave that of to thisisequivalent tariff shown aset be can It exports. in thevolumeof its that areof equal valueto thechanges inthevolumeofthat changes eachcountry’s imports bringabout liberalization multilateral setting inthe Reciprocal changes of tariff asaset intheGATT liberalization andStaiger (2002) reciprocal haveBagwell defined (i) 49 48 47 46 andbindings.” reductions of duty value the for estimating appropriate might they anymost feel toadopt method freedom complete retain rules establish that to measured,for shouldbe stated howconcessions proposal a to response in which, report party working GATT early an to refers He apply. to chooses theMember by whatever standard an outcome advantageous considers that eachmember andSt byBagwell offered definition of thetheoretical apol making thatinvolves asone negotiations access (1997) inmarket Jackson appraising of reciprocity governments theprocess considers of thebeholder’). XXVIII Article criterion inGATT isanexplicit reciprocity Although became thenormsubsequently,became thus: Barton et al. (2006) also describe reciprocity in the GATT/WTO as equivalent (trade) value from access to access valuefrom (trade) asequivalent intheGATT/WTO reciprocity describe also etal.(2006) Barton or intheGATS, theconcept leaving a negotiations leadingto multilateral trade liberalization, of definition there it,intheGATT isnoprecise This requires that there before balanced be the they mutually parties begin trade reducing between tariffs. “substantial reduction” in tariffs. has tended to neglect. focusing onthetermsof trade problem GATT about that apoint economic theorizing parties, to that theundertaking levels, suggesting specified XXVIII TwoArticle noted to about be thingsneed duties ortheaverage categori dutiesonspecified that individual of duties,thebinding of levels orundertakings the reduction dutiesatexisting andother onimpo charges general levelof tariffs basis, advantageous andmutually on areciprocal Article XXVIII GATT market”. home totheir ofaccess value a commensurate tothe other to balance waswilling thevalueof grant. with concessions Countries wereexpected concessions. wasfollowed This by thepresentation of to alist, eachcountry, of theconcessions “... to eachother for potential requests product countries with sending began theGenevatalks o :Lbrlzto-eae rvsosi utltrlagreements multilateral in provisions Liberalization-related 7: Box See Barton et al. (2006), p. 39. et al. Barton (2006), See See Finger (2005), p. 30. Finger (2005), See Staiger (2005b) and Maggi and Rodriguez-Clare (2007). andMaggi andRodriguez-Clare (2005b) Staiger and Bagwell include rates andapplied bound between difference the toexplain havetried that papers recent Some bis 49 provides a mechanism for Members to conduct periodic “... periodic to conduct for amechanism Members provides negotiations Second, the Article does not refer does to trade free asagoal, Second, theArticle onlyto the 48 47 mbiguous. Besides GATT Article XXVIII XXVIII Article mbiguous. Besides GATT 130 rts ...” towardsrts directed may be negotiations The itical judgement. Finger (2005) tends to sceptical judgement. (2005) be itical Finger aiger. For him, reciprocity in the GATT/WTO involves aiger. intheGATT/WTO him, reciprocity For es of products shall levels. not exceed specified es of products relevant to liberalization toliberalization relevant “governments in negotiations participating should the first round of negotiations, which theyargue round which of negotiations, thefirst bind tariffs has anintrinsic valueto negotiating bind tariffs directed to the substantial reduction of the of reduction substantial the to directed bis. 46 is,i refers to thebindingof dutiesat it First, bis (Tariff andthus Negotiations) inthe bis covering all merchandize merchandize all covering , therearemany other 50 that there elimination issubstantive available of merchandise suggests evidence empirical trade barriers Agreement. The WTO to inthe trade” andother barriers “substantial of expressed tariffs reduction more ambitiousthan the agoal tradeinmerchandise free goods, isto achievereciprocal objective the agreements, of these most In workinthisarea). of ofcontains theempirical some adiscussion D thewhole,On liberalization much more has ambitiousinregional(Section been trade agreements achieved? liberalization istr Two germane. deep How are particularly questions Reciprocal liberalization regional trade agreements? inparticular istrade liberalization inotherHow managed trade agreements, (ii) reduction in protection, are further di arefurther inprotection, reduction asaresult of bindings,andenhancedof market liberalization, through security access asaresult of that of this implies,d astowards thereduction inmarket access level, andthesecurity acertain beyond to commitment thelegal not to raisetariffs The contracting parties to the GATT and the WTO membership have attached as much importance asmuch importance have attached membership andtheWTO to theGATT parties contracting The meansreductio not only intheGATT that liberalization toremember isimportant it reductions, tariff mutual on primarily focused has discussion this While There exists a tariff rate that would result in the same level of imports as a quantitative restriction which, for example, example, for which, restriction aquantitative as ofimports level same inthe result would ratethat atariff exists There Reciprocity in the GATT/WTO has also been weakened in the case of developing countries by ofdeveloping weakened inthecase been has also intheGATT/WTO Reciprocity of theGATT, liberalization. isnot trade, free progressive thegoal only the dilution of reciprocity that S&D has brough that S&D the dilutionof reciprocity liberali toreciprocal relationship anddifferentialthe principleof special treatment higherlevelof li to aprogressively achieving a view first decade or so of theGATT, orso of tool wasacritical decade theelimination offirst quantitative restrictions efficiency to has liberalization less dowith than XI with or other argued could that charges. It be Article etc. trade, –tolimit licensing, import – quotas, XI Article GATT (SCM). Countervailing Measures andtheAgreement and onSubsidies XVI Article arefound onsubsidies provisions inGATT The countries than from countries developed from developing liberalization less requiring involves aspect second The ofSystem Preferences (GSP). marketreciprocal access countries to developing through astheGeneralized such arrangements to en Members WTO Finally, asks XIX GATS Article respectively. competitioncommitments and export of theAoAinvolve market support IV, access, domestic andVIII Articles VI andprotection. support inagricultural reductions of isto progressive consist reform process The agricultural products. wasintended onAgriculture(AoA) Agreement The increases. through tariff this liberalization from undoing prevented governments in bindingsnegotiated tariff The liberalization. to trade boost animportant provided forcing theGATT measures, to upthose give governments By D). prohibitions andforeign Section exchange controls import butquotas, (see were not tariffs, trade liberalization. theimmediate er In post-war imports reduces welfare less than the quantitative restriction. restriction. quantitative the than less welfare reduces imports limits imports only to some level Q. 50 oreventransparency. inthe that, Butthere reasons for are atleast strong believing zation, is to be found in Section D). There are two aspects to aspects aretwo There D). zation, found isto inSection be If demand and supply curves shift around shift curves andsupply demand If in regional trade agreements scussed in Section D of this Report. Dof thisReport. inSection scussed in multilateral rounds of negotiations. ofnegotiations. rounds in multilateral uties. What the GATT/WTO has accomplished interms theGATT/WTO uties. What prescribing instead the use of import duties, taxes taxes duties, of import theuse instead prescribing t about. The first aspect involves non- providing aspect first The t about. the first few then negotiations rounds of GATT the first a, the principal obstacles to international tradea, theprincipalobstacles ter into successive rounds of negotiations “with negotiations of rounds successive into ter beralization” of trade in services. As in the case case inthe As beralization” inservices. oftrade ade liberalization? And towh And liberalization? ade (a fuller discussion of S&D, going beyond the beyond going ofS&D, discussion fuller (a 131 prohibits the use of quantitative restrictions restrictions ofquantitative theuse prohibits n in tariff rates, rates. butthebindingof those n intariff to initiate a process of reform into intrade initiateaprocess , a tariff that, a on tariff average allows Q at extent is reciprocal isreciprocal at extent

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS its exports from Europe. Therefore, inthe 1920s to changed that of unconditional exports MFN policy its USMFN the end of the First World War,the endof theFirst theUnited States aconsiderable for indemand increase experienced conducted utilizing concessions where conducted theconditional both were granted form onthecondition of MFN, GATT Article II and GATS Article II, is a direct desc isadirect II, andGATS II Article Article GATT Extending the bilateral terms-of-trade driven prisoners’ dilemma to a multilateral setting complicates the complicates setting toamultilateral dilemma prisoners’ driven terms-of-trade bilateral the Extending be farhasThus mainly of trade liberalization thelogic in multilateral “pillars” trade negotiation, referred itisoften to asoneof theso-called of theWTO. being a relative newcomer to international trade, retained the conditional form at that time. Following Following conditional atthattime. form the tointernationaltrade, retained newcomer arelative being 19 wave of compensation. liberalism The Europe that reciprocal half swept without inthesecond of the of adequate receiving compensation, andtheunconditional form, concessions where were granted between theUnited trading States partners. andits between jurisprudence enshrined day via of in modern version MFN, WTO The discrimination against US exports. in abidto to entice theUnited States, other countries thus respect reducing with to dothesame of the 17 the of partner to all Members of the WTO? What benefit do they obtain from restricting themselves inthis manner? themselves from restricting dotheyobtain benefit What of theWTO? to allMembers partner themselv committed havegovernments Why explanation. does liberalization non-discriminatory upon framework based setting. multilateral is found inthe asfrom country asmuch from thedeveloping elimination to of The trade isexpected barriers members. differential treatment countries. to developing thepotential via and andtoin theGATT regional givespecial to trade agreements form discriminatory Moreover, of therati adiscussion provides italso to theMF provides anintroduction subsection This However, therationale by go thedecision underlying gran that eachMember principlestipulates MFN The more A analysis extensive of the trade liberalization in favoured the most (b) differential treatment” inRTAs eventhoughmany of isamarked of There absence “special reciprocal. and commitment trade decidedly free isalso The eliminated inregional are trade agreements. being barriers services clear howeffectively such asagriculture andtextil sectors although sensitive 51 upuntil theformation of period theGATT intervening in mercantilism andfromadesire 12 the to MFN before the GATT relatingto inclusionof clauses The (i) policies. trade ofgovernments’ effects beggar-thy-neighbour ofthe alleviation mutual facilitate of trade liberaliz not thelogic negate butdoes analysis that so theyallremain “most-fa Members other WTO it givesto onetrading partner, itha forbidden from discriminating among are favoured inother words, most Members to trading partner; its that itextends in allother Members the developed country member. country inmarket of thediminution access ofthat therethe developed islittle reciprocity Thus, th century engendered widespread use of the unconditional form of MFN. The United of States, The theunconditional use however, form widespread engendered of MFN. century See US Committee on Finance (1973 Finance on USCommittee See th th nation principle nation century, reference the first to with thephrase “most favoured nation” attheend appearing century. 51 The emergence of the concept of non-discrimination stemmed from emergence stemmed thedecline of theconceptThe of non-discrimination non-discriminatory treatment in trade agreements can be traced be back can treatment intrade agreements non-discriminatory s to give the same “best” treatment to imports of like products from all of like products “best” treatments to thesame to give imports to link commercial the In treaties through timeandamongstates. ), The Most Favoured Most Nation The ), their trading partners. Thus, if a country improves the benefits that thebenefits improves ifacountry Thus, their trading partners. 132 onale underlying exceptions to MFN as provided for asprovided exceptions to onale MFN underlying endent of the MFN clauses inbilateral clauses agreements endent of theMFN ation as discussed above – reciprocal tariff reductions reductions tariff –reciprocal above ation asdiscussed them have both developed and developing country anddeveloping themhave both developed vernments to establish amultilateral tradenegotiating to establish vernments en expounded with reference with countries. toen expounded onlytwo voured”. principle thedominance of Given theMFN t the same treatment to like products originating treatment tot thesame like products es and clothing are important exceptions. isless It es andclothing are important N principle, both historically andtheoretically.N principle, historically both , bilateral and plurilateral MFN trade deals were deals trade , bilateral andplurilateral MFN es to extending concessions made to onetrading made concessions to extending es not easily follow from this logic and thus requires andthus follow not requires fromthislogic easily , Executive Branch GATT Study, No. 9. Organisation for Economic Cooperation and Development (OECD) countries stemmed from a desire to for from countries adesire Economic stemmed Organisation Cooperation (OECD) andDevelopment provision. This belief is largely based onthepresumpt based islargely belief provision. This Pomfret (1997) were countries arise Indeed excluded to from trade agreements. be otherwise notes that that would tensions potential mitigates (1997) behaviour (1997) andPomfret that non-discriminatory argue of tariff schedules. For instance, both the literature the both instance, For schedules. of tariff 53 52 a scenario. from such diverging when only anissue thus becomes tariffs of MFN efficiency ornot. The discriminatory welfare, global trade maximizes free aworldwhere In principle rationale MFN economic the The for economic rationale makers astrong that thereisalso for theMFN amongpolicy belief iswidespread There (ii) ininternational tool asastrategic viewed relations. be can MFN Thus, countries from developing independent prevent newly World War.the First by the clause of theMFN Moreover, that initial posit advocacy Ghoshetal. (2003) why wasonereason theUnited Statesagreements embraced after thenotion of unconditional MFN an States United the involving controversies frequent st have embodies A number of authors argued that MFN bilaterally. or multilaterally, plurilaterally areconducted negotiations those ofwhether regardless MFN, ofnation-states. number ofalarge interaction other. each isanappr with Multilateralism confused and“multilateralism”, MFN between distinguish whic innumerous applied regi principleisalso MFN The tariffs and thereby assuage the domestic distortions th andthereby distortions assuage thedomestic tariffs of to trade liberalization governments remove andthus allows effects as itneutralises theterms-of-trade isakey pillarof theGATT that reciprocity have established before. sections Previous described process for inorder to inthemutually governments engage bargaining beneficial emphasize that itisnecessary argument andStaiger principle comes from (1999a, infavourA strong Bagwell of theMFN who 2002), lobbying. political inwasteful engage of politica minoritiesattheexpense strong politically by not of onlyguards government subversion that against commitment policy trade policy to aspecific such andMaggi(1997) asGrossman Authors groups setting. to (2002) influenceargue tariff andIrwin that more to“fine thecase be tuned” asitappears producers, for givemore interest trade scope policies Furthermore, andMavroidis Horn (2 in reduces thus significantly MFN procedures, customs preferential instead, there isno treatment. MFN, With to inorder receive country inthepartner processed sufficiently has been to showthat aproduct needed asproof is not produced inonesinglestage, higherfor tendto Costs be products and governments. proced andother relevant administrative requirements keep origin. Related rulesfor track of theis product to need ofthe because iscostly tariffs ofsuchdiscriminatory administration the aredesirable, tariffs (1931),Viner however, outinthe pointed had already to fewer constr subject policy, andoptimization from a of policy non-discrimination to a perm policy generally, it could be argued that it is more obviou literature on price discrimination suggest reason suggest discrimination price on literature For example, an optimal tariff schedule would involve discriminating among trading partners on the basis of differences ofdifferences basis the on partners trading among discriminating involve would schedule tariff anoptimal example, For in the elasticity ofin the supply elasticity of their exports. See Horn and Mavroidis (2001). 52 In such acase, thereisnoaprioriargument In 001) argue that MFN makes policy makers less prone by to capture makers less 001) makes policy arguethat MFN aints can only result inahigheroptimum. result only can aints s why discrimination may be socially desirable. socially s why discrimination may be s that discrimination would onoptimal and taxation lly weak minorities, but it also reduces incentives to reduces butitalso weakminorities, lly ures can impose significant costs on both enterprises onboth significantcosts impose can ures need to keep track of product origin. By simplifying simplifying By origin. product of track keep to need onal trade agreements. Indeed, it is important to itisimportant Indeed, onal trade agreements. oach to international negotiation that involves the thatinvolves negotiation tointernational oach itting discrimination remove itting d nations excluded fromd nations t excluded formational as well as administration costs. formational costs. aswelladministration instead, is a principal applied within negotiations, negotiations, within applied isaprincipal instead, 1930s that even in situations where discriminatory 1930s discriminatory where thateveninsituations being drawn into adopting a communist regime. into a communist drawn adopting being 133 at theyinduce.A crucial element inthis approach suance of certificates of origin, direct shipment direct origin, of certificates of suance rictly political benefits. For example, both Jackson For benefits. political rictly ion that discrimination is inherently undesirable. h, as noted by Jackson (1997),h, asnoted byJackson aresometimes there is, of course, no scope for tariffs atall, for tariffs thereis,of course,noscope to be made for non-discrimination asafeature for made non-discrimination to be the industrial organization the industrial increase welfare.increase A move heir trade discriminatory s a constraint on tariff s aconstraint ontariff 53 More

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS negotiated by country B will simply amount to furthe B’s to allofAccordingly, country competitors. deal trade extended be any Bmust further to country offers thenany it concession Secondly, byMFN Cisbound atalaterstage. competitors to ifcountry oneof its the initial negotiation and the scope for trade deals andthescope the initialnegotiation bargaining. There are three potentially co-existing ef co-existing potentially arethree bargaining. There initial agreements immuneinitial to agreements renegotiation. ButtheMF towards country A, itensures that themarket A, towards country access for concession diversion in two ways. intwo for diversion concession in less to willing offer Awouldbe this,country C.Foreseeing to country diversion trade via eroded be will evenhigher thatC giving concessions. third In country thenoneof them, e.g. B,trading may partners later country make athird another trade with country deal co tariff to reciprocal liberalize via trade and Bagree The logic of concession-erosion has been discussed by anumber of authors. discussed has been of concession-erosion logic The place. first inthe toexist MFN requires bargaining trade that multilateral implies paragraphs to highlight intheabove that thelogic negative, itisimportant may be effects three net result of these to of thebenefit multilateral acts negotiations. itisconceivableWhilst effect that theconcession-erosion three, these thecircumvention only Of of effect. and, thefree-rider thefoot-dragger effect; effect; of process aroleinshaping plays theactual principlealso that theMFN suggested bargaining, ithas been compensated. fully are parties thewithdrawal, such that seeking theaffected basisby thecountry onan MFN on other goods for compensation offered thewithdrawalshould be of concessions intheform of concessions of anextension ac be can onwhat limits certain the agreement imposes ro inaprevious upon theirbindingsagreed renegotiate of themultilateralThis tradingthe stability system. andStaiger enhancesFurthermore, (2002) Bagwell have incombination argued reciprocity that with MFN liberalization. inreciprocal theincentive toengage for fully restores governments This fromgovernmentshares decision-m equally, togovernments treat trading partners theMF of reci theability inhibits which price externalities revenues. generates astheyenter local- This adifferent tariff, under abroad) different implying tariff price (i.e. coming local country from eachsupplying share therelative of imports with butalso price), (i.e. the worldenvironment, concerned thetotal amount with just arenolonger of governments imports Whilst the above logic suggests that MFN isanes that MFN suggests logic theabove Whilst process bargaining the and MFN di of theWTO andtheefficacy isimpaired reciprocity reciprocal andthus facilitates prices toworld policy Staiger (1999a, influence of wouldalso thetrade governments policies 2002) argue that, absent MFN, of trade po is that effects thebeggar-thy-neighbour 57 56 55 54 own. Theoretical analysis has shown that MFN andthisla that MFN has shown analysis Theoretical own. entitledbecome to take countermeasures by “substantially withdrawing equivalent” concessions of their strategic behaviour and on the efficiency of negotiated of negotiated andontheefficiency behaviour strategic incentive to sequentiallyandthus deal encourages co local prices. Accordingly, they contend that the MFN provision restricts the cross-border effects of trade effects thecross-border Accordingly, prices. local theycontend restricts provision that theMFN eliminates concession erosion only in combination condition together and with a and that reciprocity reciprocity MFN MFN that show They erosion. concession toeliminate enough isnot MFN that argue (2005b) andStaiger Bagwell also eliminate the free-rider effect. free-rider the eliminate also See Ethier Schwartz (2004), and Sykes Bown (2004) provides empirical verification of to the extent which this (2004) Bown form in occurs reality. of reciprocity See Ethier (2004) and Bagwell and Staiger (2004a) for models on concession diversion. 54 Alternatively, if the parties cannot agree on such compensation, affected Members may Alternatively, Members cannot onsuch agree compensation, affected iftheparties aking and thereby makes world prices the primary factor of factor concern.aking andtherebymakes worldprices theprimary 56 (1997) (2004a). andStaiger andBagwell Firstly, by stipulating non-discriminatory behaviour by country B by country behaviour Firstly, non-discriminatory by stipulating 134 argument builds on the possibility for WTO Members to Members for WTO argument buildsonthepossibility would be duly diminished. MFN tempers thepotential tempers MFN diminished. duly would be liberalization. When MFN is MFN When liberalization. procity to maintain the terms-of-trade. By forcing By terms-of-trade. the tomaintain procity und, as provided for in GATT Article XXVIII. However, XXVIII. Article for inGATT und, asprovided licy travel throughlicy worldprices alone. and Bagwell untry B to make an optimal deal in the first place. Bto make inthefirst untry deal anoptimal N principle has rather complex effects on negotiators’ onnegotiators’ N principlehas rather complex effects N principle removes consideration of relative import consideration ofimport N principleremoves relative hieved through such a renegotiation. parties Affected fects: thecircumvention of theconcession-erosion fects: ncessions. If they are free to discriminate between to discriminate between theyarefree If ncessions. outcomes, as illustrated in the following discussions. discussions. inthefollowing outcomes, asillustrated r reciprocal liberalization. r reciprocal this case, the initial benefits obtained by country A by country obtained this theinitial case, benefits bargained for by country A is not diverted entirely Aisnot diverted forbargained bycountry sential elementsential for facilitating multilateral trade tter type of reciprocity may work in concert tomake inconcert maywork ofreciprocity type tter minished. The intuition is that in a discriminatory isthatinadiscriminatory intuition The minished. 55 This removes country B’s country removes This Assume that countries A Assume violated, theprincipleofviolated, 57 liberalization and countries would be worse off th off liberalization andcountries worse wouldbe make agreements conditional on similar agreements being made by other parties. This feature This accords,make by other made conditional parties. being onsimilar agreements agreements via MFN, butwouldnot have trade to make MFN, wouldthenslowdown via itself. equivalentconcessions MFN Awouldbenefit from thedeal, thencountry abstain to Adecided butcountry trade deal anMFN-based to conduct B andC. countries If BandCdecided remains part of the Doha Ministerial Declaration) re Declaration) Ministerial Doha ofthe part remains MFN-induced free-riding in practice. Ludema (1991),Ludema inpractice. free-riding countries where can amodel, for instance, presents MFN-induced 60 59 58 C.negotiation country with intheway of initial subsequentlittle concessions bargaining for to asto its position astronger Bso retain AmayA’s offer country C. such acontext, to In country extended be to concession Bwouldautomatically is partner to aninitialnegotiating C, that stipulates clause any country alarger country.with market MFN access The concession extended Aexpects country butwhere liberalizations reciprocal sequentially. example, co where consider For thecase multilateral within negotiations agreements are undertaken when arises foot-dragging effect The effect). of thefree-rider of tradeother deals thecase granted countries to (in theMFN themvia or of thefoot-dragging effect) thecase (in negotiations countries incentives with to holdbackfrom makingd to the act “foot-dragging”The effects and“free-rider” partners and not to potentially free-riding third parties. A study of US tariffs priorto theTokyo of Trade UStariffs Astudy thirdparties. andnot to potentially free-riding partners to negotiating such extended that weregenerally concessions descriptions narrow product on very that andnoted rounds of theGATT six during thefirst ex For inthepast. tradeliberalization down slowing literature, empirical of existing have however,The mayhad indeed theeffect that free-riding indicates deterrent. asaneffective acts of liberalization thepostponement because equilibrium breakdown in high negotiations. sufficiently di With atemporary wouldtrigger to offree-ride conditions, onecountry these thedecision Under trade deals. according to theauthor, theratification inbefore procedures wellwith engage accepting governments more equitable distribution ofmore distribution gains equitable from trade liberalization. asymme of bargainingpower to theeffects smooth serves free-riding has, argued for that It MFN-induced instance, been effects. free-riding MFN-induced have argument presented theoretical economists Some Fo to participate. theirreluctance despite trade deal concession from unreciprocated nations benefit can in the literature. in the considerable attention andhas received argument recognised isonethat has longbeen “free-rider” The foot-dragging issignificant. conclude that by sequential bargaining MFN-induced caused isprevalent damage andthat thepossible onecountry, with product having another previously negotiated country. with onthat product they Thus, means innegotiations that engage will itisroutine that onathe accession acountry of newMembers negotiated by of asubset countries andthat dyna note that, inr However, andStaiger (2004a) Bagwell andaccepted completed simultaneously round be any must that within universally. thedeals specific principlethat thatargues thesingleundertaking potential welfare from anindividu both improvements See Caplin and Krishna (1988, Section 6) and Ludema (1991). Viner (1924,Viner 1931, 1936) was a key author in the initial (1965) Johnson recognition of problem; the “free-rider” See the discussion in Bagwell and Staiger (2004a). and Staiger inBagwell thediscussion See provided formal the also first Baldwin see and Murray model; (1977) and Baldwin (1987) for discussions. further 59 In essence the logic of this objection to MFN stems from the fact that from foot-dragging thefact stems to MFN of thisobjection thelogic essence In 58 This inhibits theformation of inhibits trade deal This automatically extended toany future extended automatically was introduced which duringtheUruguayRound (and an if they chose toan iftheychose liberalize MFN. without s when other like-minded nations go ahead with a nations aheadwith go other like-minded s when mic shifts in levels of economic development andmic shifts to capture the gains from unreciprocated concessions concessions unreciprocated gainsfrom the tocapture duces theincentivesduces for foot-dragging by ensuring eals in order to maintain ba tomaintain eals inorder r example, of countries consider againthecase A, untries A and B are initially in talks about potential about intalks untries AandBareinitially al country and a global perspective. Jackson (1997) Jackson perspective. andaglobal al country scount in not countries to factors, free-ride elect , in order to circumvent MFN, countries negotiated negotiated countries to circumvent, inorder MFN, tries between negotiating parties andleadsto a negotiating parties tries between from the concessions B and C offer tofrom BandCoffer theconcessions eachother detriment of trade negotiations inthat theyprovide 135 ample, (1979) Finger concessions tariff analysed that at a later date it will commence similar talks similartalks commence will dateit that atalater eality, most issues within multilateral talks are multilateral talks within issues eality, most s scaling down the possible negative effects of effects negative thepossible down s scaling 60 Others cast doubt ontherelevance of doubt cast Others s at every stage and thereby restricts andtherebyrestricts stage s atevery negotiating partner, thus country rgaining chips for rgaining chips future

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS preferred preferential coun treatment by theimporting gains.Th exporter efficient themost hosting country past countries deviated significantly significantly countries deviated past gains frompolitical amore subtle of andtailored set concessions. However, (2001) Hoda notes that inthe countries theformula ignored comple production is shifted to its less efficient counterpart in the other exporting country. intheother exporting counterpart efficient less to its isshifted production thisof leadsto worldproduction, inefficiencies, to theallocation onthat firm asthis revenues. approach respect generatestariffs With higher tariff higher want will toimpose government country importing andthe rents havehigher will firm productive incentive for ifon An nowarise discrimination will may then decide to take some of those rents back through tariffs. firmstherefore have These market therelevant andtake good. power advantage andexports produces onesinglefirm country other countries. eachexporting In from thetwo agood imports one country comp marketsthat are not global assume perfectly Theoretical examinations of the efficiency effects of effects of examinations theefficiency Theoretical of MFN beneﬁts based Non-bargaining possibility to it.One reduce tonegotiations try re arelowerwith findthat UStariffs who (2005) findinghas This to concessions free-riders. MFN thatthis asevidence theUnited States liberalization to inorder wasengaginginless avoid extending controllin After countries. developing by predominantly produced to goods respect higherwith (1983) wereconsistently Round byLavergne found that tariffs 62 61 below.or regional aconcept further trade agreements, has It therefore that argued isdeveloped been set-up, explanation,whyThis countries thus, onepossible wouldwant provides to form preferential exporter. efficient from themost higherrents have preferred to extract bett However, wouldbe structure. country not every production anefficient andtheworldwouldendupwith different levelsof efficiency with producers rulewouldmake such asituationIn theMFN itimpos formula. agreed amutually with inaccordance cuts nation negotiations tariff afford will overconcessions that agree andinstead every becomes problem thefree-rider If negotiations. inWTO effect free-rider ofasignificant is evidence partner, have alarger market argue that share, this They i.e. potential there inwhich are less free-riders. arguments generally focus on the efficiency gainsresu focus ontheefficiency generally arguments ambiguous. However, have anumber of ventured Such authors infavour separate arguments of MFN. of multilateral trade negotiations, thenetresult of is MFN that, whilst heresuggests presented logic The problemre-emerges. exceptions themore list, thefree-rider theiritem-by-item with of it by extracting rents from consumers in the importing country. The importing country government country country. importing The from consumers intheimporting rents of itby extracting A formula approach was used in the Tokyo and Kennedy Rounds and it appears to be the favoured approach inthe approach favoured the tobe appears andit Rounds Tokyo andKennedy inthe used was approach Aformula ongoing non-agricultural market access negotiations in the context of the Doha Round. Doha ofthe context inthe negotiations market access non-agricultural ongoing nature. and marketcomplicated in production which trade structure is countr relevant the from imports on tariff ahigher levying by producers cost lowest the from rents greatest the toextract endeavour will country importing ofthe government arevirtually results The exports. subsidise can countries butwho incorporates considers structure that the production same the the possibility governments of the exporting See Hwang and Mai (1991). A model similar to the one by Hwang and Mai (1991) is constructed by Gatsios (1991), (1991) andMai byGatsios (1991). byHwang andMai one Hwang similartothe See Amodel isconstructed 61 The difficulty here is that across-the-board cuts fail cuts to thejoint exploit here is that across-the-board difficulty The from theformula approach acute, therearevariousoptions tely. morethat countries The devi 136 spect to goods in which they, inwhich to goods andtheirnegotiating spect been corroborated recently by Ludema and Mayda because the most efficient firm is “punished” efficient themost because and is for nations to abandon the product-by-product is for nations to theproduct-by-product abandon e firm is more productive than theother.e firmismoreproductive most The sible for the importing country to discriminate among country sible for theimporting etitive. Assume a world with three countries aworldwith whereetitive.Assume its subsequent effect on the bargaining process is onthebargainingprocess effect subsequent its e other exporting country looses, asitwouldhave looses, country e other exporting the MFN principle are typically based on models based principlearetypically theMFN potentially an essential anessential potentially er off under the MFN principle. In fact, only the only principle. fact, In theMFN under er off y. Saggi (2004) extends the analysis by considering amore byconsidering analysis the extends y. (2004) Saggi try. The importing country also looses, asitwould looses, also country importing try. The lting from non-discriminatory trade liberalization. lting from non-discriminatory g for political factors, Lavergne (1983) interpreted Lavergne factors, g for political identical with several policy active countries, active identical as with several the policy intra-industry andthe global intra-industry on an item-by-item onanitem-by-item ate significantly fr ate significantly for changing the structure of for changing thestructure element for theformation market is oligopolistic in market isoligopolistic basis, andthat some 62 om theformula them to create aPTA that for isbeneficial th ati helpto principlecan solve that theMFN shown avenue of escape from a discriminatory-tariff-driven fromadiscriminatory-tariff-driven avenue ofescape concede to of any thedemands group onthe lobby Acco muchmoredifficult. circumstances these under Adhe lobbies. these asaresult oflose upsetting like toparticipat torefuse ideally would government extract rents from those consumers who have a high valuation for imported products. have who ahighvaluation consumers from for those imported rents extract outcome, global principle wouldensure abetter b for andwoul consumers good wouldnot be policy Butsuch a revenues. tariff of maximizing theobjective ifitpursues Cimports than oncountry imports B oncountry C, ahighertariff country itwouldmake for Ato thegovernment levy sense of country If, Bthan preference have from Aconsumers from for astronger country instance, for incountry goods than discrimination. without off worse eachof interactions, strategic thethree players endsupbeing trading pa two it isrational to discriminate between 66 65 64 63 su ableto may lobbies be exert special-interest MFN, absent that, posited has (PTAs) Trade ofPreferential formation the regarding literature Agreements Moreover, political-economy of to commitments The addcredibility governments. thedomestic can MFN an reductions ofcost advantage take will andis post ex investments to tax countries’ ability equally, of theirlevelof productivity independent do would thanthey investments reducing incost less that invest asaresult companies shown be can countries. It away byimporting taxed be post would ex thatFirms are aware any of thefact competitive theirtariffs. chose investmenttrading before reducing partners thelevelof cost firmschoose exporting to theset-up, be off. itcan stage addingapreceding By better principlemakesthat everybody theMFN ge above Yet, of described theset-up simpleextensions developing countries to accept more readily. MFN such asaid-for-trade, side-payments, for inorder applied to be also justify can logic same The importer). concessions by countries to this theindustrialized context made developing (in country non-reciprocal ther can above andtherationale developed exporters The exports. onits levied inthetariffs decrease perspective from industrialized-country theefficient desirable isthus most exporter. MFN country developed least efficient andaless exporter country interpreted asrepresenting ascenario involving an outfrom such lose who those mechanism compensating trade liberalization, theframework shouldallow for to to forthat include agree inorder governments interest groups. interest of national to policies welfare pursue governments ma In moreIn complicated economic modelsinvolving thre See Grossman and Helpman (1995), Levy (1997) (1995), (1998). Levy andKrishna andHelpman Grossman See See Gatsios (1991). See Caplin and Krishna (1988, section 3). from taxation of domestic consumers in future periods. periods. infuture consumers ofdomestic taxation from See Choi (1995). See To (1999) for another time inconsistency model, where the source of the inconsistency comes comes inconsistency ofthe source the where model, inconsistency To time Choi (1995). See another for (1999) See d resulting reductions in import prices. inimport reductions d resulting e lobbies but detrimental to butdetrimental nationale lobbies welfare. rence to the MFN clause makes clause theformationrence to of PTAs theMFN MFN principle is not beneficial for developing country for principleisnot developing beneficial MFN 63 also welfare improving for importing countries asthey welfare also for improving importing . In such a situation MFN would constrain importing importing wouldconstrain such asituation MFN . In me inconsistency problem. Imagine asituation where problem.Imagine me inconsistency advantage obtained through obtained additionaladvantage investments ecause it would impede thegovernment’s to itwouldimpede ability ecause an MFN rule in the framework used for multilateral ruleintheframework used an MFN d end up making each country worse off. MFN The worse d endupmakingeachcountry rtners, butwhere, of asaconsequence theresulting rtners, iftheyhad aguarantee that aretaxed allcompanies e in such a PTA, it cannot ignore the votes itwould ignorethevotes itcannot e insuch aPTA, prisoners’ dilemma. Out of three individual players individual of three dilemma.Out prisoners’ fficient pressurefficient ontheir governments to influence e countries, the MFN provision can be seen asan seen be can provision e countries, theMFN nerate different outcomes and, in particular, predict industrialized country importer, anindustrialized country industrialized in this context, as it would experience arelative asitwouldexperience in this context, ximization ratherximization controlled than being by special- exceptions accompanied orbe by sometransfer 137 issue of PTA formation. As a result, MFN allows of PTAissue aresult, MFN formation. As efore be seen as providing some justification for justification some asproviding efore seen be rdingly, to refuse credibly thegovernment can arule. particular, has In been model theabove 64 65 66 Whilst the Whilst

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS of the RTA. It then becomes an empirical question whether the welfare gains outweigh the losses. thewelfare thelosses. whether of theRTA.question gains anempirical outweigh thenbecomes It To to (trade creation). increase isbound that thisregional trade amongthemembers theextent trade so from entering into an RTA will depend on the balance between the trade creating and trade diverting effects from entering effects into thetrade creating anRTA andtrade diverting onthebalance between depend will can acountry isaresult of trade diversion, partners RTA is necess expansion that between occurs partners may theright notof evenbe crit worldtrade expansion nowbe for thegoods higher price, intermsof exports, ofRTA reduction The impact the formation. in assessing XXIV Article exception, GATT trade under areas.The countries toexception given intheform developing of arrangements serve as building blocs to further libera to further asbuildingblocs serve arrangements these arguments be substantiated by economic theory? theory? byeconomic substantiated be arguments these First, it is the welfare effect of RTAs itisthewelfare rather than effect the First, of c trade Welfare effects Regional asan tradeagreements exception toMFN A central principleintheGATT exception to theMFN (i) a thearguments presenting and also theconceptualwith C, nature thereasons onexplaining theexceptions behind thefocus be will of Section Exceptions to the most-favoured-nation principle exceptions. itisnot the without In principleintheGATT/WTO, of theMFN thecentralDespite importance (c) 67 from paying a lose can Acountry ingreaterdetail. concepts these Boxthe RTA 8discusses diversion). (trade of outside sources of trade from cheaper attheexpense may be trade expansion of theintra-regional part But isincreased. economic efficiency for products, higher domestic cost trade substitutes imports expanded thisexception to give region theGATT does Why areas. trade unions andfree trad multilateral havefared inthe exceptions and S&D trade growth. key exceptions will two of theReport, part following could be made for the exception. The first isthat for first made theexception.could be The exceptions. The Enabling Clause an The exceptions. of thearticle). Dfor overview ahistorical Section (see Viner was undesirable because production shifted from low-cost to higher-cost countries. from low-cost shifted production because wasundesirable Viner non-member from acheaper source of imports Trade inthe wastheshift diversion unionpartners. to customs producers lowercost domestic from costly shifts that implying since desirable this production waseconomically union members, trade creationdefined asthedisplacement of do union. of customs He effects ontheproduction solely focused Viner understood. are presently concepts these way originally defined that Viner of preferential ar effects thestatic analysing ofpreferentialanalysis trade arrangements (1950)Viner introduced of theconcepts “trade creation” and“trade diversion” intheeconomic o :Taeceto n rd diversion trade and creation Trade 8: Box In fact, the preamble to the Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Tariffs on Agreement General ofthe XXIV ofArticle Interpretation the on Understanding tothe preamble the fact, In of world trade that may be made by closer integration between the economies of the parties to such agreements”. tosuch parties ofthe economies the between integration bycloser made maybe that trade of world Trade 1994 states that this exception to MFN reflects a recognition by WTO Members of “the contribution to the expansion expansion tothe contribution of“the Members byWTO arecognition reflects to MFN exception this that Trade 1994 states 67 A second argumentA second isthat by regional allowing trade liberalization, preferential these reation and trade diversion reation andtrade gainst theexception. Amorehistoric gainst d GATS Article V also provide for exceptions for MFN for for customs provide exceptions for Valso MFN d GATS Article 138 rangements. There is however a difference inthe ishoweveradifference There rangements. wayof thestandard have sincebecome . They expansion of worldtrade that is theright metricto apply al trade agreements? There are two arguments that arguments areal trade two agreements? There regional trade agreements couldregional contribute trade agreements to world suffer a welfare loss. Whether a country gains or loses gainsorloses acountry Whether awelfaresuffer loss. to unionmember, ahigher-cost custom for which mestic production by imports from othercustoms from byimports production mestic and how“trade creation” and“trade diversion” , was allowed from the very beginning of theGATT beginning from thevery , wasallowed ing obtained from theRTAing obtained partner. thecriterion Thus, be discussed: the exception given to theexception given RTAs andthe discussed: be special and differential (S&D) treatment. keeping In anddifferential special (S&D) ing system is given in Section D of this Report. DofthisReport. inSection isgiven ing system lization at the multilateral level. To what extent can To level. multilateral atthe extent what lization It is not the only legal instrument used for granting used instrument legal isnot theonly It /WTO is that allowed for customs unions andfree unions for customs isthatallowed /WTO erion to apply to RTAs, because noterion to to allof apply thetrade RTAs, because arily desirable. If thead desirable.arily If in intra-regional trade barr in intra-regional al account of howtheregionalism ditional trade amongthe iers will stimulate intra- stimulate will iers This origin requirement increases the cost for producers in a country which is a member of the RTA of the isamember which for inacountry thecost producers to origin requirement increases This content agiven meeting requirement areel goods Only imports from through thirdcountries routed from being imports may tariffs for external example, where agreements, of trade free thecase In of aPTA. to thetrade creation overestimate effects isatendency There avail of thepreferential Beyond themselves tariffs. the price. Before forming trade agreement afree (F consume for alowerprice ahigherquantity (the than p the cheaper (p the cheaper ambiguous (it may have gone down, gone up or remained the same). thesame). uporremained may gone have down, ambiguous (it gone ad valorem tariff ad valorem tariff p faces supplyatprices p It aninfinitely elastic of theworld(W). andtherest (P) the partner to isassumed smallcompared be to (H) thehomecountry where model, Consider athree-country below: illustrated be can concepts of these analysis equilibrium partial The concepts. of these understanding to thecontemporary theclosest represents unionprobably of acustoms the effects istaken trade surplus into by theincreased account. Johnson’s of analysis equilibrium (1960) partial in unionmight still custom diverting trade a purely into union ofcustoms account. effects consumption (1957), to take Lipsey that with the awelfare needed analysis Starting itwasunderstood did not change). Consumers nowpay will p did not change). overall imports increase byq increase overall imports represents the additional cost of importing d theadditional of cost represents importing Suppose now that country H and P form a FTA. Country H will now import from P, Country nowimport Hwill HandPform aFTA. nowthat country Suppose since p regional trade agreement. Then, H will import d regional trade agreement. import Hwill Then, trade diversion (area G). In thisexample, theFTA In G). (area trade diversion welfare from theincreased trade creation between lose (area A) and the government loses tariff re andthegovernment tariff A) loses (area lose welfare from increase thetrade cr from the trade diverting effect of the FTA. Note that another Note way atareaGisthat of it looking of theFTA. effect from thetrade diverting w ; that is, at these prices country H can import whatever quantity it demands, but it cannot affect butitcannot affect itdemands, quantity whatever import Hcan country prices ; that is,atthese h (the price it would have to pay for imports from W, (theprice of from itwouldhave theworld therest to pay for since tariffs imports p p p Pr p h W i ce w ) world market. The overall welfare effects of an FTA will depend onthedifference of anFTA depend will ) worldmarket. overall welfare The effects T on imports. Assume W is the least-cost source of foreign supply, before the A 0 -q 1 q plus d 1 eation effect of the FTA. The area G represents thewelfare loss areaGrepresents The of theFTA. eation effect BD 1 q -d 0 0 p and domestic prices fall. Consumers anddomestic gainastheycan and imports will rise to rise d will andimports C 0 G -q venue (area C+G). The area B + D represents the areaB+Drepresents The C+G). venue (area 0 0 the fact that they limit the possible trade creation that theylimitthe fact thepossible -q area A+B+C+D represents this gain). Producers this gain). represents area A+B+C+D from thehigher-priced (p increases overall trade but the welfare effect is overall trade butthewelfareincreases effect differ, of rules originare TA), H is assumed to have a non-discriminatory TA), to Hisassumed have anon-discriminatory (areas B + D ) and the decrease inwelfare from B+D)andthedecrease (areas 139 crease welfare,crease onconsumer once theimpact 0 d This implied that what Viner would consider would Viner thatwhat implied This theRTA tariff. external the lowest with member attheprice p 0 igible to receive preferenigible to receive d 1 h =p 1 w -q ( 1 1 . As aresult of theFTA, . As + T often erected to prevent erected often Quant ). p ) partner instead of instead ) partner tial tariff treatment. tial tariff i ty p is less isless p and

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS intra-RTA trade may lead to such a decline in demand for the exports of non-members that theprices of of non-members intra-RTA trade may for leadto indemand theexports such adecline andfrom of thedeterioration outfrom intheirtermsof expansion trade diversion trade. lose who The RTAs may be strong, in practice thewelfareRTAs wi inpractice loss strong, may be origin as a means of protection. Even as tariffs amon origin asameansof Even protection. astariffs explanation ofexplanation theKemp-Wan Butthis a“possibility” theorem. isjust result; theexistence itdemonstrates Beyond the members of RTA thetrade bloc, Beyond themembers formatio of theUnited itisamember. hypothesis where inthecase Statestrading andtheFTAs partner test to be conducted on that formof ornot. are thetrading the natural However, blocs trading partners theonlyempirical inperhaps hypothesis so far, similarfashion, (1991) In Summers trading partners. Krishna (2003) is unable to find support for the natural not guarantee that members of the customs union will actually pursue this course of action. this course pursue not guarantee ofunion actually will thecustoms that members asbefore. of union thecustoms aswelloff Butitdoes that wouldleave non-members tariff of anexternal 1976; theorem, (Kemp-Wan unchanged Boxfor unionmembers 9below anand thecustoms See 1986). to thenon-members are chosen leave thevolume of trade than between tariffs beforeoff iftheexternal tariff, acommon adopt itispos external members of unions, customs case where thespecific take out.In do notcan lose to ensure that non-members in Chang (2001). andWinters there that are steps countries Now entering into aregional trade agreement countries isgiven onexcluded of thiseffect evidence inworldmarkets. Some decline goods export those (1991) Krugman 1989). andLutz, (Wonnacott has ar that one another so apreferentialwith trade agreement amongthemislikely to welfare be increasing arebo costs orlowtransport contiguity geographical hypothesis of “natural trading partners”, of countries, theideathat because which there are certain has to This led the 1960). world(Lipsey, theoutside with andthelowerproportion the members trade agreement ismore likely to welfare of be trade among enhancing thehigher istheproportion the smaller are the risks of awelfarethe smallerarefrom therisks trade loss thelowerinitiallevelof heldconstant, being What factors are likely the to strength affect of the before theRTA wasestablished! configuredrequirement that so anindustry so could be (1997)Krueger (1995) andKruger andKrishna have of thepreferentialin countries are members who tr produced preferences anincentive give inputs to to use producers of thetariff availability option. The distor oftheRTA, theycreateeconomy-wide effect reducing the welfare of non-members. The Kemp The reducing thewelfare of non-members. ofestablishment apreferential trade agreemen (1976, Kemp-Wan theorem The that conditions of the so sufficient aset 1986) provides would be net exporters; in other products, they would be net importers. The removal of tariffs removalof tariffs The netimporters. theywouldbe inother products, netexporters; would be themembers products, of some theworld. therest In trade with aggregate themembers’ product, Consider of trade prevailing thepattern before union.hence, thecustoms with theterms of also trade) union of ifthere acustom tradeestablishment (and, isnoresulting change inthevolume of its bythe affected of theworldisnot adversely issimple. rest thetheorem The behind logic The union. of acustom of theestablishment effects from theadverse to shielded be intuition of for some providing thetheorem, non-members of howitispossible part o :Epann h epWnTheorem Kemp-Wan the Explaining 9: Box customs union, which has a common external tariff external hasacommon union, which customs 140 assigned crucial importance to whether the members themembers to whether crucialimportance assigned sible to leave the welfare of non-members no worse noworse sible to leave thewelfare of non-members t increases thewelfare withoutt increases of themembers the establishment of the custom union. For eachFor union. of thecustom the establishment MFN tariffs of thecountries entering into tariffs theRTA,MFN trade creation and trade diversion effects? All thingsAll effects? trade creationandtrade diversion tions away by from leadingproducers theleast-cost ade arrangement instead of those outside thebloc. arrangement ade outside of instead those ll be small if the members of theRTAs are smallifthemembers naturalll be und to conduct a disproportionate amount oftrade adisproportionate und to conduct g trade partners inaRTAg trade partners arereduced, thecontent -Wan theorem was derived in the context of a inthecontext -Wan wasderived theorem gued that while the theoretical argumentgued that thetheoretical while against n will come at the expense of non-RTA members comen will attheexpense actually receives greater protection effective than diversion. It has also been suggested that afree suggested been has also It diversion. . The focus in this discussion is on thesecond ison focus inthisdiscussion . The called attention to the possible use of rulesof use to attention thepossible called areas. This permissiveness partly accounts for thela partly permissiveness This areas. Second, this liberalization among RTA partners will sp will RTA among partners thisliberalization Second, RTAs promote members, liberalization of the expansion international amongits deeper allowing trade. The idea that preferential idea The because welfare onnon-members impose will losses are likelytrade agreements to si beneficiaries, be to of demonstrate preferential could assembled that arguments be While themembers non-members. not intheRTA guarantee anincrease welfar members’ theappropriateshould be metric. International from trade preferential expansion does trade agreements tends to ambivalent. be Changes economic theory inwelfare counts, both rather than trade expansion the middle of the20 and intheGATT of thechiefexceptions toOne MFN Some conclusions discussed in Section D of this Report. to multilateralism Thes view). (thestumbling bloc of theliterature, But,another stand view). takes viewthat theopposing regionalism is detrimental for libe buildssupport ultimately trade liberalization andmultilateralism. regionalism between interaction welfare static considerations,Beyond these theeconomic literature has considered also thedynamic liberalization could be seen as a threat to that privileged access. asathreat to that seen could privileged be liberalization incentives strong markets, are very their partners’ may lock-in to once theagreement. And members of harmonization The discussions. negotiating alot absorbs of regional resources that trade agreements devoted could to be multilateral Dof inSection ingreaterdetail examined be will level and net imports are part of theinitialendowmen arepart and netimports external tariff on that product must be lowered. lowered. be must that product on tariff external ,thecommon isgreater than p*(j) j,p^(j) above. ifforproduct Thus, some economy described andthegeneral unionisestablished the customs betwee thedifference from taking derived would be union’s thecustoms that preserves tariff of common theworld. therest This external trade with tariff thecommon external must so exists, economy always ofthis general equilibrium theclosed of trade thatconsistent prevaile thepattern with be will ofprices set this constructed, havebeen ofthiseconomy endowments initial how the Given economy, match demands. of thisclosed i.e., exactly will for market, each where supplies p*) bythevector equilibrium thegeneral of that of (denoted prices be aset will the existence economy. It is then possible asasingleclosed initial consider endowments, union, this onecan the analysis, customs its with to appeal to th netexports levelsof these that isthecontribution thepre-union This of thetheorem.Assume tariff? to made thecommon external be are always wesureHow can that such adjustments remainunchanged. will union’s thecustom that for so eachproduct of adjusted theworld be therest can trade with tariff Butthecommon external of non-members. unioncustom trade attheexpense that wouldbe this newequilibr action, authorities take nofurther the If andconsumption). andquantitiesof p^) internal (production by thevector prices (denoted e ofunionwill thecustoms among themembers th century. There appears to be two argume two to be century. appears There trade liberalization ultimately builds supp builds ultimately liberalization trade rules and policies, which sometimes accompany sometimes which regional integration, andpolicies, rules e Arrow-Debreu (1954) conditions guarantees which e Arrow-Debreu milar arguments could be made to suggest that PTAs to suggest made could be milar arguments thereby created to try and maintain that. andmaintain Multilateralthereby to created try e ideas and the empirical evidence for ise ideasandtheempirical eachview rge number ofRTAs since that established have been d before thecreation union. of thecustoms Since stablish a new economic equilibrium –anewset aneweconomic equilibrium stablish WTO is that given to customs unions and free trade andfree unions to customs isthatgiven WTO ur greater liberalization at the multilateral level. On level. multilateral atthe liberalization ur greater RTA members establish preferentialRTA footholds in establish members of the trade diversion and terms-of-trade effects. effects. andterms-of-trade of thetrade diversion ts of the custom union. Then for purposes of for of union.purposes Then thecustom ts One strand of thought suggests that preferential of strand thoughtOne suggests ralization atthemultilateral bloc level (building 141 equilibrium prices of closedequilibrium thehypothetical ium islikely to of leadto intra- anexpansion e and is likely to adversely affect thewelfare of affect e andislikely to adversely this report. At this point, it suffices to say that n the actual internal that prices n theactual prevailafter nts for isthat, thisexception. bynts One ort for liberalization at the multilateral atthe for liberalization ort

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS clause). Developing countries Developing thenusually may no clause). available countries to by themembership developed i.e. extend MFN to smallcountries aswell, toi.e. MFN of avoid inorder trade from adeviation thelatter. extend receive S&D), since small countries are already (unilaterally) making trade policy choices that, while that, choices policy trade making (unilaterally) arealready sincesmallcountries S&D), receive achieve the global optimum, large countries must ma countries must optimum, large achieve theglobal Two questions arise in trying to explain theration to explain Two intrying arise questions MFN. from be characterized as carrying MFN implications, since MFN characterizedbe ascarrying between large and small countries, in order to andsmallcountries, preven inorder large between inanagreement asaform andStaiger of (1996 S&D Bagwell and2002) non-reciprocity have justified small countries asked shouldnot be to make market trade externalities, the MFN political optimum isintern political theMFN trade externalities, according onterms-of- based of to B.2, trade agreements theories B.5 andC.2.(b), inSections above economically beneficial) constituteeconomically beneficial) anappropriate response? considered exemptions from thegeneraleconomies, andtodotemporary rules(otherwise what extent Second, onwhat grounds developing can countries different claim from to systematically advanced be why wouldother countries have anincentive to agree asexceptions seen be could also purposes, orSPS for TBT trade restrictions enacting when procedures favourably, ruleinantidu duty such asthelesser to individual developing countries orother rules th GSP references under sc arenon-reciprocal examples and, hence, membership im ofremainder theWTO tomorefavourab provide endeavour basis) on abest (often may require Members However,implications for forms different trading of partners. specific S&D i.e. inaway that rights wouldhave theirspecial are differenttrading not partners, authorized to exert orexport purposes for balance-of-payments restrictions Not much theoretical literature exists on asymmetric obligations ininternational literature onasymmetric muchNot theoretical trade agreements. exists in tradeagreements? agree toS&D Why do parties they accord to each other. However,allowed to more favourable provide treatment to (som most S&D pr treatment (S&D) anddifferential special for case The is of parties that asub-set principleinthesense asanexception to theMFN portrayed may be S&D (ii) 71 70 69 68 the question when a country can be considered be can small; acountry when the question upon to reciprocate market toupon reciprocate access concessions. to cons influence itmay prices, be relative product choices cannot possibly be motivated by international cost-shifting (Staiger, 2006). cost-shifting byinternational motivated be possibly cannot choices from aninternational efficient since are their nevertheless perspective, potentially trade-restrictive, very To recall, MFN treatment is necessary in an agreement between large countries in order to avoid an opportunistic anopportunistic toavoid inorder countries large between inanagreement isnecessary treatment To MFN recall, The underlying problem is that most theories are silent on why large countries would have an incentive to negotiate tonegotiate haveanincentive would countries large why on aresilent theories most isthat problem underlying The In other words, positive tariffs in a small country represent a domestic political optimum (or else tariffs would in zero) other be aIn small represent words, country optimum tariffs tariffs else positive a political domestic (or with small countries place. in the first partner. Bagwell and See Staiger (2002). seemingly small countries may be able to pass on some of the incidence of an import tariff to exporters in its trading competitive. Also, sinceis transportation monopolistically havesome smallcountries precisely, evenapparently More However,externalities. the point here ispoint of that, view, from a efficiency global they should do so. terms-of-trade toimpose inaposition arenot latter the since tothem), MFN extend (and board on countries small tobring not or towhether as indifferent be should countries Large basis. abilateral on ofconcessions erosion policies onto other countries through manipulation of its terms-of-trade. terms-of-trade. ofits manipulation through countries other onto policies ofits costs ofthe some shift can country alarge contrast, By choices. policy ofits costs true the reflect and already 142 71 mping proceedings or longer orlonger mping proceedings ovisions currently available under the WTO would not would theWTO under available currently ovisions at allow Members to countries treat developing moreat allowMembers ale and existence of S&D in trade agreements. First, First, intrade agreements. of S&D ale andexistence idered “large”idered “intermediate”) (or called andmay be t implement theauthorized measures astrade (such developing Members are granted rights that aregranted arenot rights Members developing as a whole (who would, hence, (who theMFN as awhole allviolate to morelenient obligations costs encourage trade between proximate countries, encourage even trade between costs once a country acquires some market acquires some once for acountry power a hemes. But calls for targeted technical assistance assistance technical for targeted Butcalls hemes. t terms-of-trade losses for thelatter. discussed losses t terms-of-trade As access concessions on an MFN basis (and, thus, basis(and, access onanMFN concessions power over their terms-of-trade their over power ply departures from MFN. The most prominent most The from MFN. ply departures le treatment countries to developing than to the e or all of) the remaining parties than that which theremainingparties e orallof) ke market basis, access onanMFN concessions subsidization) in a way that discriminates among inawaythatdiscriminates subsidization) ationally efficient. This implies that, in order to inorder that, implies This efficient. ationally time-frames /simplified for a sub-set of parties? for asub-set , provided that the industry 70 The authors raise authors The 69 Also, 68 bilateral North-South agreements than for multilateral liberalization. The question also remains whether whether remains also question The liberalization. than for multilateral agreements North-South bilateral than by larger developed countries. developed bylarger than conditions aremoreli intrade. power These monopoly has less country theimporting when and(ii) effective; areless instruments these orwhen terms-of-trade to manipulate attheirdisposal the instruments countries when have policy less in atrade agreement; (i) rather andbe rigid, (ove discretion trading partners on core findthat, disciplines while etal. (2006) Horn of future distribution lead events their probability Trading may diff andsimultaneous. reciprocal partners that obl for thefact allows Finally, theory contract economy political concerns domestic the underlying importance, while the benefits of increased flexi of increased thebenefits while importance, (e.g. foregone marketcountries, intermsof are increased economic likely access) thebenefits of to little be to contain migrator (e.g. interest anattempt their own concerns moti ordevelopment as well, such assecurity for so course,other theymay reasons do atradeagreement.Of within demands accommodate S&D to willing maybe countries developed why rationale atrade-related provide approaches three All countries itcomesdeveloping to when contractin cooperation. towards lowtariff up thetransition mutually process to speed country for thedeveloping S&D to ontemporary agree that for itisbeneficial partners both have that wouldotherwise to alarge partner engage signal acredible to putinplacegives hightariff 76 75 74 73 72 countries ar developing models intheabove describe of “smallness”, attributes The “domestic commitment to problems” used or“increased uncertainty” different? developingcountries are How in economy notably Political approaches, a large developed country to solve its commitment problem. its to solve country developed a large to pressure from import-competing industries. fromimport-competing to pressure problem atime-inconsistency model and Perroni (2005) andTabellini,(Staiger 1987; Tornel 1990; Matsuyama, groups interest bydomestic for demands protection to resist governments help(self-interested) can B.5, explainedexplanation. in commitments Section As Large countries have a rich array of alternative domestic measures which they can use to manipulate their terms-of- their tomanipulate use can they which measures domestic ofalternative array havearich countries Large Possibly, a model yielding similar could results using the constructed be assumption of international economy political Besides smaller, being it is assumed that the developing can do so. country large inthe policymakers whereas choices, policy trade tocertain pre-commit credibly cannot policymakers are commitment, fully anticipated tariffs disappear. policy With and quasi-rents tariffs. from expected tariffs ofactual deviations byunanticipated generated quasi-rents the tomaximize as so protection for pressure exert trade through is higher. instruments domestic terms-of- todistort incentive the case, this In elastic. perfectly isfar from that supply export foreign faces it markets, aretrade constrained if through tariffs an international tr rents that can be earned in the meantime. inthe earned be can that rents quasi- the for lobbies industry andthe slowly depreciates sector import-competing country’s smaller inthe capacity since step, inasingle place take cannot equilibrium cooperative long-run tothe transition the model, the In out. arephased privileges its gainswhen reduced havetoaccept might it problems, institutional its tosolve S&D receiving temporarily after that, knows country small the gain.Conversely, surplus along-run tosecure inorder country small More precisely, investment decisions in the import-competing sector are based on expected tariffs; In the transition period, the large country accepts a lower surplus than what it could otherwise extract from the from extract otherwise could it what than surplus alower accepts country large the period, transition the In temporary S&D to foster political demands by exporters in the to smaller country liberalize. to demands foster by political exporters S&D temporary externalities Th and the bounded rationality of exporters. 75 As suggested in Section B.4, commitment theory may provide a better explanation for explanation abetter may provide B.4, commitment theory inSection suggested As 76 The authors conclude that S&D might be warranted might be for smaller conclude that S&D authors The regard to time-inconsistency problems, regard to time-inconsistency 73 igations by trading partners are not necessarily symmetric, symmetric, arenot necessarily igations bytrading partners s in the absence of cooperation andtherefore ofcooperation s intheabsence manages bility may matter for a smaller/weaker country. for a smaller/weaker may matter bility g overinternal measures assubsidies). (such The governmentThe engagesinatrade agreement with ing to contract incompleteness may thesame.ing to not incompleteness contract be are not equally pertinent in the developed world. inthedeveloped arenot pertinent equally r domestic instruments) is relatively more attractive attractive more isrelatively instruments) r domestic l, 1991; Conconi MaggiandRodriguez-Clare, 1998). border measures, such as tariffs, shouldapplyto all measures, border such astariffs, s, which are beneficial for compared to both arebeneficial s, which non- ade agreement. Moreover, is a when large country in world 143 no interest in an agreement. The authors show authors nointerest inanagreement. The y pressures). In any event, In industrialized for large y pressures). in the context of international inthecontext trade agreements er in their flexibility to make sinceer intheirflexibility commitments e large country would then have an interest to provide toprovide haveaninterest then would country e large in a small(er) developing country as being related asbeing country developing in asmall(er) country has country dependable less institutions. political Its e sufficiently unspecific to make unspecific thate sufficiently thecase ves that may either be altruistic or otherwise in orotherwise ves that altruistic may eitherbe kely to be met by smaller developing countries 74 At time, thesame thesmaller country 72 offer analternative offer ex post , investors , investors

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS developing countries of lackdeveloping thetransfer finditharder trade liberalization. toThey to adjust theimpact mechanisms to compensate the losers. The costs of costs The thelosers. tomechanisms compensate Third, developing countries are resource-constrained ameansto overcomeand Venables, dome As 1998). externalities of this sort justify government intervention. Finally, justify of thisexternalities sort theargument inthepresence of goes, (WTO, 2004). And (iii), the costs of implementation of certain trade with obligations are associated of implementation of certain thecosts (iii), And 2004). (WTO, enabling environment, framework, macroeconomic asacomplement asound notably to trade reform andVenables, 2001). lack the (Limão also infrastructure duetofor They inadequate instance transport may prevent which thei constraints countries face also Developing supply-side (ii) etal., 2005). (Andersson andwage-setting laws to labour andSapir, conditions 1987; (Langhammer MFN under competitive become UNCTAD, 1999). andtoultimately inforeign markets togainafoothold exports country developing tohelp expected Preferential policies. substitution complement asastrategic access is togained incurrency import countries thefull indeveloping against industries and, hence, to in theeconomy, foreign exposure (Puga competition including exports abias against putinpolicies place in developing countries to introduce newindustries protect distortions serious substitution markets alarge cannot number addition, sustain economies, of local In import producers. countries indeveloping industries market sizedomestic in ordueto hightrade barriers need to establish social safety nets, improve educatio nets, safety social to establish need Second, developing countries are sometimes confront 1990). (Grossman, may possible not be pioneers) compensate subsidies to production markets orproviding equity (establishing thatassuming intervention anoptimal such astraderestrictions, policies, best n-) market (or failures, countries second- may to wish pursue arenot rea innewsectors opportunities business competition. Consequently, anda lack andimperfect of inefficiently transparency isallocated capital such as byimperfections, characterized be marketsmay also capital First, problems. usually faces two inthelearning losses despite newactivities in these all the productivity gains in thepresence of spillovers. knowledge all theproductivity suffer from markets imperfections that arenot present from markets imperfections suffer into base, to theywouldneed diversify production developing countries order to In certain produce increase alimited theirFirst, number of products. countries. situationofdeveloping thespecial regarding made found inara be can characteristics broad of these different and countriesdeveloping are systematically 79 78 77 new industries are associated with learning-by-doing costs. (Melitz, 2005). for than aninitial establis timeperiod production retraining (Falvey et al. 2006). In developing countr developing In etal. 2006). retraining (Falvey lookin while theirsavings andrundown their job to toneed innewtechnologies invest remain compe afford an extended period of unemployment (Matusz andTarr, of (Matusz unemployment period thegovernment response, may In anextended 1999). afford The author also discusses a number of industry characteris a number of industry author discusses also The Learning-by-exporting, whereby pioneer exporters should be compensated for the exploration of foreign markets, is markets, offoreign exploration the for compensated be should exporters pioneer whereby Learning-by-exporting, which otherwise is underprovided (Hausman and Rodrik, 2003). andRodrik, (Hausman isunderprovided otherwise which imitated by government, The others. it is argued, therefore to needs encourage entrepreneurship and innovation, at producing. Entrepreneurs face of discovery, the costs then can but easily successful be investment opportunities More recent variants of the infant industry argument stress the externalities involved in learning what one is good protection, and compares the effectiveness ofprotection, and different compares such and instruments, as quotas. the subsidies, effectiveness tariffs (2004). subsidization. aGreenaway analysis For critical see and that Knellera case special has export made to been justify 78 Realizing the potential for future gains, venture capitalists should be interested to invest toinvest interested be should capitalists venture for gains, future potential Realizing the eventually need to be exposed to competition. thepresenceeventually of In scale to exposed need be r industries from taking advantage of new trading opportunities, of newtrading advantage opportunities, from taking r industries 144 lized. Second, new entrepreneurs cannot appropriate cannot lized. newentrepreneurs Second, impact of global competition, of global trade preferencesimpact have g for new employment opportunities orundergoing g for opportunities newemployment nge of more concrete arguments that of are moreconcretenge commonly arguments non-traditional sectors. However,non-traditional such sectors. countries may ies, households living atthesubsistence ill- living levelcan ies, households other markets. In order to improve productivity, new to order improve other productivity, markets. In hed (foreign) producers (infant industry argument) (infant producers (foreign) hed industry phase. However, concerned country thedeveloping titive or go out of business andbytitive orgooutof workers business lose who n and revisit its regulatory framework, e.g. framework, inregard regulatory its n andrevisit structural adjustment by are companies borne whostructural in a similar fashion in the developed world.Notably,in asimilarfashion inthedeveloped require exceptional treatment. In practice, aspects require exceptional treatment. practice, In aspects . This has at least three major consequences: (i) (i) three has majorconsequences: . This atleast stic market limitations while cushioning fledgling fledgling cushioning while market limitations stic tics thattics should considered be in the to decision afford ed with limited market outlets dueto market limited asmall with ed outlets 77 Therefore, pioneers incur higher costs ofTherefore, incurhigher costs pioneers 79 Information and asymmetries the steel industry into a domestic monopoly? Or if it sets a regulatory standard that foreign standard competitors aregulatory into monopoly? ifitsets Or adomestic industry the steel Economists have that of intheabsence shown Economists approp undermined by non-tariff trade barrie byundermined non-tariff therefore, make often of additional use legalprovisio andreduce th to thebottom” policies indomestic to circumvent internal to measures negoti use tempted 82 81 80 15 beyond onsteel cent per tariffs conces tariff therefore can offset of suchuse policies andthe similarto tariffs that arevery internal have can measures effects trade-related of not directly usingother theircommitments internal cannot undermine that measures. members But alarge number reductions negotiated undermine can Internal tariff measures ifthey only bindingsareeffective tariff Negotiated (i) Internal of trade measures and agreements the effectiveness (a) negotiated market access concessions to their trading partners. can states that member individual policies based FROM LIBERALIZATION However,barriers. trade- ornot therearather areexplicitly non-trade always large number of possible THE GAINS SECURING Trade that ofrules le onthedesign focuses cooperation 3. addressed. could be and howtheremainingchallenges concerns refl country have developing been how special formidable pr poses to theiruse conditions attached of theappropriate authorize that policies shouldbe of identification countries The from that S&D, shouldbenefit recommendations for trade policy-makers. into concrete However, insights to translate these agreements. trade within itisnot straightforward To summarize, for developing theeconomic literature countries rationales provides possible for S&D the transition. andfinancial technical require also They provisions. exempted, remain to need may countries developing for yieldingimmediate scarceresources without benefi not to correspond thecurrent priorities development Schuler, notes that sophisticate 1995). Maskus (2000) implications thatadministrative andinfrastructure overall level of protection will be lowerthan if be will overall levelof protection butthat theresulting to substitute for tariffs, policy domestic tempted be to theimperfect use anyway intheliterature, shown will has that been governments inthiscase, It substitutes. unlikely perfect to be theyare ontrade astariffs, have can similar effects instruments policy theabove-mentioned Although orentirely offset. partly be market access that foreign governments had expected to gain through the bound tariff reductions will prod steel ofimprove domestic thecompetitiveness to meet? subsidizes do ifthegovernment Or industry are unlikely to ableto orthat themmuchin theindustry cost be meet, more itwill that thedomestic Example taken from Howse (2002). Howse from taken Example See Petersmann (1996). See Howse (2002). ad valorem rs orotherrs governmental measures. . 82 What would happen, if by legislation the country turns thecountry wouldhappen, ifbylegislation What imply secure market secure inthesense imply access commitments, countries were entirely of unconstrained intheuse may strain developing country capacities (Finger and (Finger capacities country may developing strain e valueof outcomes.Trade negotiation agreements, implement, which will undermine thevalueof the undermine implement, will which assistance as well as longer time periods to manage timeperiods aswelllonger assistance mestic production of steel? All these policies would of policies steel? these All production mestic sions. Assume a country binds itself to not increase bindsitself acountry sions. Assume d asexceptions from thegeneral rulesandof the actical challenges. Section D.4 discuss further will Section challenges. actical of a majority of developing countries of butcompete developing of amajority ated market access and that this may trigger “races market andthatthismaytrigger ated access ucers with respect to foreign andthe producers respect with ucers ns to protect agreed tariff reductions from being being from reductions tariff agreed ns toprotect d intellectual property regimes, for instance, may for instance, regimes, property d intellectual riate legal provisions governments may indeed be may indeed governments provisions legal riate 145 at least temporarily,at least from implementing certain ected inthe multilateral overtime tradingected system gally prohibitordiscipli gally ts. For all of these reasons, allof itisargued these that For ts. 80 81 ne a defined set oftrade set ne adefined

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS An alternative approach suggested in the literature inthe suggested approach alternative An fromAny deviation the distortion. thespecific to approach to correct remedies theproblem, isthebest anexist thatcorrects isapolicy policy” best A “first best policies” likebest to market target environmental orinformation imperfections externalities asymmetries. A related approach would be to device general rules that rules general to device wouldbe approach A related measures. andphyto-sanitary and sanitary do for some disciplines specific ofdesigning approach these disadvantages. these in theliterature publicorders”. leadto that a“war can such anapproach between out pointed wouldbe. ithas Second, intervention been to what afirst-best define difficult real life often a may be policy” best the“first while First, problems. levels of market access by bargaining on trade barrie “first best policy” would be forbidden. Such an design specific disciplines for eachofthemindividually. disciplines specific design ava instruments policy overallthedomestic directly negotiations couldtheory, onecould this In address inefficiency. consider that negotiate governments discipline of to theuse internal measures Approaches u with associated Having identified theinefficiency (ii) lower than optimal. andlevelsof trade that are instruments policy Countries domestic wouldthus inefficient endupwith measures. protectionist 88 87 86 85 84 83 producers take advantage of the protectionist effe of take theprotectionist producers advantage ef bythenegative created of theburden major part byprod influenced aremainly policies government producers andthusproducers constrain themarket reductions. to access provided foreign through producers tariff standar problem, lowerdomestic asgovernments type that thiscould shown eventually leadto has been a“race-to-the-bottom”- It objectives. other policy governments motives, for protectionist used also toare used remedy environmental orconsumption are policies suddenly those If production externalities. professional to workers.Environmental events adverse standards against orto security provide purposes Labour related. that arenot trade objectives policy many internal to pursue areused measures because isthecase, choices. This policy domestic inefficient market contribute butcould also toward leadto negotiation opening, little that imply not tariff only by to replace oflimiting members tariffs theability to consider assmallpossib keeping theloopholes leadto mor loopholes Even with thoughagreements may be instruments more costly other, because that completely by agreements eliminate tariffs, served be may not necessarily interests agreements. This argument This may,agreements. however, not holdfo to do so for all possible domestic policy measures, WTO Members have arguably to chosen follow Members the measures, WTO policy domestic to for doso allpossible E.g. Mattoo andSubramanian (1998). E.g. Mattoo This approach has been developed in Bagwell and Staiger (2001) and is further explained in Bagwell and Staiger andStaiger inBagwell explained (2001) andisfurther andStaiger inBagwell developed been has approach This See Bagwell et Bagwell al.See (2002). See Copeland (1990). (2002) and Bagwell et al. (2002). See Bagwell and Staiger (2002). andStaiger Bagwell See See Bagwell and Staiger (2001), Howse (2002). Howse (2001), andStaiger Bagwell See 88 According to this approach governments negotiate over the levels ofmarket levels overthe access negotiate governments According tothisapproach 83 In other words, trade agreements with “loopholes” other with In words, trade agreements than notrade are better substituted for tariffs. 146 approach would allow governments to reach wouldallowgovernments approach desired could end up trading off protectionism against those against protectionism could enduptrading off legislation may for instance be used for redistributive for redistributive used be may forlegislation instance ilable that could potentially affect market access and market access affect potentially could that ilable , the so-called “targeting approach” not have does , theso-called ucer interests, consumers may end up carrying the consumers may endupcarrying ucer interests, altered “domestic” policies. A failure to do so could so Afailure todo “domestic”altered policies. ing distortion inthemarket allpossible andthat, off ing distortion ficiency effects of alternative “trade” while effects policies, ficiency rs, like tariffs, only. potential like has approach two This rs, tariffs, cts of those policies. As aconsequence consumer As policies. of those cts e liberalization than no agreements, onemaye liberalization want than noagreements, nilateral policy choices, the question arises how arises choices, thequestion nilateral policy well defined concept in a theoretical model itisin model concept inatheoretical well defined 85 le inorder to encourage trade liberalization by r all individuals within countries. If, within r allindividuals for instance, mestic measures, i.e. intellectual property rights i.e. property measures, mestic intellectual ds inorder to of raise competitiveness domestic allow trading partners only to use so-called “first so-called to only use allowtrading partners Although it looks like itlooks anentirelyAlthough unrealistic task 87 84 86 linked to thelegalconcept of national treatment and, D.6 of inSection detail inmore discussed be will andto for internaldisciplines intheTRIPS measures, indicated before, WTO Members appear to have chosen the first approach, the one of setting explicit approach, theoneof setting to have appear thefirst chosen Members before,indicated WTO party to terminate the trade policy obligations altogether on short notice (mostly three to months). six notice (mostly obligations onshort altogether to terminate thetrade policy party an measures; nullified byother (e.g. domestic) purely insituationsalso thecommercial where opportuniti but violations of treaty incase not for providing procedural remedies only rules legal (ii) measures; policy islinkedthird approach, instead, toconc thelegal li intheeconomic discussed approaches three All fulfils mix thenegotiated marketpolicy access commitments. having n inthepreferred manner after mix policy weretoprovisions allowfor such anapproach, each market andthus its access maintain commitment. legal If tariff import to its raise permitted – itwouldbe to given environmental problems intheimportance of changes because –for instance standard its increase to intheirmarket changes without other words, In ifagovernment accessstandards commitments. seeks marketits access commitment. However, to allowcountries need to wouldalso provisions raise legal asto maintain so tariff import its from theinitial lowers that level, standards italso provided itcan, its levelof marketachieve thedesired Subsequent access. 91 90 89 national treatment principle. todiscrimination norm distinguish National Treatment in isreflected approach legal thefirst theGATT In (i) techniques: make of often one, legal use Agreements, oracombination, complementary of three like theWTO orby other trade barriers governmental measures, trade agreements, by undermined non-tariff being Disciplining of the trade use distorting policies Agreements aswe underWTO reductions tariff theagreed to protect order In (b) only concern tariffs. It has been argued that this targeting approach can deliver desired outcomes, even if direct negotiations from mayderive such infringement commitmen market access that negotiated guarantee to need provisions markets. Legal access to its internal theagreed-upon to which measures deliver with and oftariffs mix policy best the on unilaterally decides ofthem each andthen todeliver arewilling they meant relevant to most avoid The such practices. is that internal writers measures III havetreaty thepotential andArticle to substitute barriers for border that haveentered they once against discriminated be shouldnot barriers, to border reduced thanks enter that can acountry’s territory other words,goods In market,entered theyshouldinprincipl thedomestic often been discussed in the context of GATT Article XXIII. Article of GATT inthecontext discussed been often See Howse (2002). See Petersmann (1996). See Bagwell et Bagwell al.See (2002). 90 (i) substantive legalrulesprohi (i) 89 Taking gove asgiven, andinitialstandards 91 The conceptThe of national have treatment goods implies, that once imported acceptable internal non-trade from non-acceptable measures, i.e. the adjustments in tariffs orstandards. intariffs adjustments biting or limiting the use ofbiting orlimiting trad theuse text of this Article isreproduced inBox 10. of this Article text ept of “nullification orim this Report. The second approach has typically been has approach typically second The this Report. Articles III and XX. GATT Article III provides anon- provides III Article GATT andXX. III Articles egotiated market access levels,aslongany new terature are reflected in the WTO Agreements. As Agreements. WTO inthe arereflected terature es protected by those trade agreements were being trade by agreements those es protected a lesser extent in the SPS Agreement.approach This intheSPS extent a lesser ts are secure against unilateral infringement, where where infringement, unilateral against aresecure ts e not treated be differently goods. from domestic government would remain free to reconfigure its its toreconfigure remainfree would government in particular, to GATT Articles III and also XX. The XX. andalso III Articles inparticular, to GATT d (iii) termination clauses allowing a disappointed adisappointed allowing termination clauses d (iii) ll as the reciprocal “balancell asthereciprocal of concessions” from to this negotiation, if a government seeks to lower lower to seeks government a if negotiation, this to territory. Article III thus reflects the awareness of theawareness thus reflects III territory. Article 147 rnments can negotiate tariffs that would tariffs negotiate can rnments e restricting or distorting trade ordistorting e restricting pairment” andhas therefore

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS must only be applied to “like” services or also to MFN of whether GATS thecontext In arises, discrimination theadditional than ones. question broader the term “likeness” isacrucial asnarrow issue for definitions of likeness upgreater opportunities open in clauses other inseveral MFN appearing a termalso itonlyapplies to However, “like” ambitislimitedtheir trading by onerestriction: partners. its products, from andservices to goods andunconditionally MFN apply automatically must Members WTO in goods. 1GATT,of Art. therefore, to applies any kindof du less favourableless than” and“so asto protection”. afford the interpretation givenof theterms “like” product, applied “sobe asto protection” afford to “directl than thetreatment givento “like” products. domestic 93 92 to ensured need be that also internal measurMembers that to thegains order secure fromIn negotiations are by not internal undermined measures, WTO to which the use of internal measures is disciplined through GATT Article III depends to a large extent to extent to alarge depends III Article of internal throughto theuse GATT which isdisciplined measures The legal text indicates that imported products shouldnot receive treatment that is“less products favourable” that indicates imported legaltext The GATT and WTO disputes. internal sale, purchase, transportation, distribution or use.... or distribution transportation, purchase, sale, internal of allla of national origininrespect products accorded shall be treatment favourable noless other than party contracting that accorded to like 4 whichwasnot similarlytaxed. product orsubstitutable competitive a directly and,ontheother hand, product ontheonehand,taxed between, wasinvolved competition inconsistent tobe considered withtheprovisions of sentence thesecond onlyincaseswhere Interpretative note to III.2: paragraph 1. inparagraph forth to set inamanner theprinciples contrary products ordomestic imported orother internal internal to apply charges taxes shall otherwise Moreover, party nocontracting charges of any orother orindirectly, to internal internal taxes directly shall subject, not be party contracting kind of any into other theterritory imported of any party contracting of theterritory products The in excess2. of those applied, directly orimported indirectly, or domestic products so as to afford protection to to applied shouldnot domestic be orproportions, amounts inspecified of products oruse toprocessing production. like domestic andinternal of products, oruse distribution products. theinternal affecting regulations andrequirements Regulation” andother internal that recognize internalandlaws, charges, taxes Contracting Parties The and Taxation Internal 1. on Treatment “National III Article GATT 10: Box . Neven (2001)Neven to appear argues make that legal texts a dist terms ofthe interpretation The and Trachtman andMarceau (2002). (2002) inEhring discussions the instance for See, on Beef “likeness” in than” and“no arole favourable played have, less instance, for a role in a role Alcoholic Beverages the degree in of the market. domestic rivalry degr the consider jointly should one areprotected, firms is not warrantedproducts from an economic point of view. Instead, determining when to the extent which domestic substitutable” but argues be that products, the distinction The products of the territory of any contracting party imported into the territory of any into theterritory imported of any party contracting of theterritory products The sentence of of 2wouldbe conforming paragraph thefirst A tax totherequirements . term The “directly competitive or substitutable” has interpreted been in US-Taxes on Automobiles and 93 Chile-Alcoholic Beverages. Beverages. Chile-Alcoholic , US-Malt Beverages US-Malt 148 The interpretation of the term “so as to afford protection” played protection” “so term toafford ofthe as interpretation The service suppliers that are“alike”. suppliers service of four existence The y competitive or substitutable products”. orsubstitutable y competitive degree The ws, regulations and requirements affecting their affecting andrequirements regulations ws, and quantitative regulations requiring themixture, requiring regulations quantitative “directly product”, orsubstitutable competitive “no inction between “like” between inction and “directly products competitive and ty, trade administrative procedure, etc. that affects the WTO Agreements. Again, Agreements. theinterpretation of theWTO ee of substitution between domestic and domestic foreign ofee substitution firms between and es are applied on an MFN onanMFN areapplied es sale, for offering sale, purchase, transportation, It also indicates that internal indicates should not measures also It tween “like”tween and “directly competitive and substitutable” 92 Japan-Taxes on Alcoholic Beverages All fourAll termshave played aprominent in role EC-Asbestos Japan-Alcoholic Beverages II Beverages Japan-Alcoholic andin basis. The MFN obligation MFN The basis. Korea-Various Measures . , Korea- 95 94 their not application entail does intermsof certain, that theyarejustified provided therefore, exceptions explicit provides for polici XX, that inrecognition of the fact XX Article introduced GATT drafters GATT According (2002), to Howse internal measures products. to introduced counter by imported distortions to appropriate apply ability governments could potentially impede products, fromdifferent domestic way, “like” allowedto i.e. nocircumstances treat are imported under implying that Members products thatnegotiat realistic very author,this The into account reductions. negotiating however, when tariff that itisnot acknowledges to instrument theoptimal wouldbe tariffs this case andin attheborder occurs ifthedistortion justified be wouldonly This goods. andimported domestic an economic point of distortions viewasdomestic that argues from such makes anapproach sense (2006) Horn to distortions. countergoods any domestic not allo buttheyarealso motives, for protectionist arenotinternal to allowed use of measures themotive. other regardless words,Members In products, higherinternational taxation are not to allowed levy Members implies that WTO argues III thatdifferently. itisreasonable to assume that Article (2006) Horn indome to counter distortions first-best-policies use to allowMembers that implies thetexts buthisanalysis of internal motives, measures for protectionist Ederington’s (2001) interpretation legal of theGATT to retalia policy trade means that use countries can of theagreement, isto onlyontrade policy, relax Ederington of intheset-up which the stability (2001) meansof countering efficient theincentivthe most for reason de thesole decision, a government’s policy agreement. international Giventhat thesole externalit and distortion tomeasures counter fully any domestic of trade andinternal set from implementing countries efficient measures, theinternal afully shouldset enforcement limited that when andshows from of countries aneconomic point view prevents power to protection abroad presumptiondifferential that treatment reflects in the form According negotiations. to to maylevels” Ederington intheGATT agree (2001) that Members this of internal cover andwh which trade barriers II, taxes or Iand Articles regulations. this treatment contrasts He ofprotection. internal measures theprovisions inGATT with amount to(2001) ablanket proscription of of internal theuse texts thelegal measures asaform of He argues that haveEconomists interpreted theimplications ofArtic this approach makesof sense products ... is more elusive in services than in goods.” anditistempting of to supply addsto concludemodes thecomplexity that “... theconcept of likeness is important in this context, as it has been interpre asithasbeen inthiscontext, is important “relating to the conservation of exhaustible natural resources” can be adopted. be can naturalresources” ofexhaustible “relating conservation tothe hu toprotect “necessary measures that stipulates line between “legitimate” and“cheating”Article between policies line public commitments. liberalization trade on norminArticl the rather general non-discrimination The fact that rules to avoid circumvention through domestic policies were included in the original GATT texts reflects reflects texts GATT original inthe included were policies domestic through circumvention toavoid rules that fact The Quote taken from Cossy (2006) who refers to “Subsidies and Trade in Services, Note by the Secretariat, S/WPGR/9, 6 S/WPGR/9, Secretariat, bythe Note andTrade to“Subsidies inServices, refers who (2006) Cossy from taken Quote March 1996. agreement, it albeit is a plurilateral agreement not covering membership. the entire WTO inaseparate with dealt been has procurement government while explains This flows. trade on effects significant suppliers domestic If are favoured over their foreign competitors in public procurement this can therefore have Government purchases of goods and services represent an important part of economic activity in many countries. surprising that one area of government that oneareaofgovernment surprising mayseem it ofview point this From tofunction. cooperationeration trade for inorder are they important how ors will manage to do so. If they don’t, then Article III interpreted in a strict interpreted inastrict III to theydon’t, manage so. will do If ors thenArticle unjustified ich only require that tariff protection does not exceed any not exceed “binding does protection that require tariff ich only intervention is excluded from the GATT. or arbitrary wed to differentiate between domestic and imported andimported domestic towed differentiate between te against those who deviate from deviate theagreements. who those te against on imported products thanon products imported on domestically produced man, animal or plant life or health” life plant or man, animalor andmeasures counter the distortion and policy makers shouldtake andpolicy counter thedistortion ted intermsof a“necessity test”,ted that inthesense would normally not justify differential treatmentwould normallynot of justify es that of may discrimination, evenentail elements e to deviate from andto theagreement e to guarantee deviate fection is to pursue terms-of-trade gains.Therefore, terms-of-trade isto pursue fection texts is thus that they manage to eliminate the use the toeliminate manage isthusthatthey texts explicitly listed, non-protectionist goalsandthat listed, explicitly non-protectionist e III may not in all cases be an adequate dividing anadequate be may not inallcases e III stic markets. Other economists interpret Article III III interpret economists markets. Article Other stic adjust trade policies to maintain the viability of to the trade policies theviability maintain adjust y in his framework is the terms-of-trade effects of effects y inhisframework istheterms-of-trade 149 le III in different ways. According toEderington ways. indifferent III le discrimination. GATT Article XX, for instance, XX, Article discrimination. GATT 94 protection in the form of tariffs ispreferable intheform of protection tariffs This areaisgovern This 95 The word “necessary” ment procurement.

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS given in Article 2of theAgreement. inArticle given inclusion of a provision for non-violation nullification-or-impairment complaints in GATT Article XXIII. XXIII. Article inGATT complaints nullification-or-impairment for non-violation ofaprovision inclusion under GATT Article XXIII and need to establish a causal link between therelevant internal measure and linkbetween acausal to establish andneed XXIII Article GATT under GATT. SCM of The subsid theuse Agreement disciplines taken approach intheSCMThe so Agreement differs Disputes, complainants face a particularly high burd face complainants aparticularly Disputes, on However, 26 of theUnderstanding Article under it is explicitly or implicitly limited to certain enterprises. orimplicitly limitedit isexplicitly to certain prohibition through the Agreement. This is the case for subsidies contingent on export performance orprohibition performance through for the Agreement. subsidies isthecase contingent This onexport the nullification or impairment of a negotiated concession. concession. ofanegotiated impairment or nullification the adverse effect on trade benefits accruing thecovered agreements. under ontrade benefits effect adverse to any that other produced an government itself action more general wouldaddress which provision measures inadvance anditwastherefore shouldhave thatpolicy trade suggested agreements another distorting trade allpotential tocatalogue toimpossible next be would that it recognized drafters GATT to party adisappointed allowing clause termination nullified were being by trade other agreements by measures those andthatprotected theycontain a inthat formentioned remedi above theyprovide legal (ii) Legal remedies in case of orimpairment incase nullification Legal remedies contain procedural rule also texts legal GATT The (ii) thatarethere “legitimate” andpolicies policies public between todistinguish guidelines indefining further havegone Agreements inWTO provisions Other that theyare“necessary” to shown achievethisprotection. be it can measures that claim to target the protection of human, animal or plant life or health can only be used if 99 98 97 96 bodies. standard-setting in, international encourage reliance measure on, and(ii) anSPS andparticipation to impose forrequirements aMember thescientific andprocedural expand of GATT, were to concerned theneed (i) with drafters XX asits of Article asanexpansion extent, to some Agreement understood, argued that shouldbe theSPS been requests for compensation, where policy changes adversely affect thevalue of negotiated affect concessions. adversely changes for compensation, policy where requests the country importing subsidized goods, or distortion of trade flows). of trade flows). subsidized ordistortion goods, importing the country of industry to thedomestic injury (including of another country to theinterests effects adverse specified to cause shown be iftheycan measures to countervailing orsubjected disputesettlement theWTO via “specific” subsidies are considered to “actionable” be differen why theyreceive explains which policies, Note that trade-based such goods. subsidies explicitly are infact overimported of domestic on theuse Paragraph 1(b) of GATT Article XXIII provides for arigh provides XXIII Article of GATT Paragraph 1(b) XXIII. GATS of Article contains inparagraph asimilarprovision (3) concessions under the GATT. As drafted, GATT Article XXIII:1(b) could be read as providing abasisfor readasproviding could be XXIII:1(b) Article GATT theGATT. under concessions drafted, As provision of theGATT,a specific engages aMember Article 2.1(b) Article of the SCM Agreement that specified specif See Howse (2002). D.6 also Section See on Agreement. the SPS the eligibility for,the eligibility and the amount of, a subsidy, th provided legislation pursuant to which the granting operat authority conditions adhered to. are strictly A footnote to this article in nature and horizontal in application, such areeconomic andwhich others, over as enterprises number favour certain not do which areneutral, of which conditions employees or criteria or size of enterprise. See Hudec (1990). Most notably,Most isto asubsidy considered be “specific” ifaccess to 96 150 s representing the second and third legal technique andthirdlegal thesecond s representing terminate the trade policy obligations altogether. terminate thetrade policy t treatment from other “specific”Other subsidies. en of proof when challengingen of aninternal proof when measure Rules and Procedures Governing the Settlement of Governing theSettlement Rules andProcedures es insituations thecommercial where opportunities to cheat on trade liberalization. It has,for instance, It liberalization. trade on to cheat in actions that undermine thevalueof that negotiated undermine in actions , which implies that they can either be challenged implies, which that eitherbe theycan t of where, redress not violate eventhoughitdoes mewhat from taken thegeneral approach inthe icity shall whereicity not the granting exist authority, or the further explains that objective criteria explains that orfurther conditions objective mean ies thaties are“specific” according to thedefinition 97 es, establishes objective criteria ores, objective conditions establishes governing at the eligibility is automaticat the eligibility A subset ofA subset “specific” subsidies faces outright 98 This eventually to led theThis and that such criteria and 99 gemn,teTTAgreement ortheSCM Agreement. Agreement, theTBT define fully of thescope potential application concept. of refer, thenon-violation They in particular, to the consistent rules. those with the rulesthat to theyagree follow andonlyexceptiona exceptional that remedy. thereas panelexplained The panel emphasized should remedy that thenon-violation those with health objectives, are excluded from the scope of application of Article XXIII:1(b). of of Article application from are thescope excluded healthobjectives, with those Asbestos 103 102 101 100 the current has set-up thepotential to leadto apheno Instead, negotiations. tariff by achieved be cannot efficiency case this in so and level, negotiated the at access market tosecure as so tariff its raise tounilaterally flexibility not havethe would it rules WTO the under levels, tariff grant atexisting greater market trading partner access to inaway its that wouldeffectively standards to be extended. Currently, if subsequent negotiations to tariff a government wished to change domestic its however, has, literature pointe That also XXIII. Article Recent contributions to theeconomic preferences, moral valueorcultural heritage. orders”, like specific that consumer country may be oncharacteristics depend giventhat policies optimal be can literature inthe out policy pointed been has It of dispute. which practice in know to is difficulty that theques givento this Assuming question. been in debated to thinkinghas economic been corresponds that for allow aninterpretation texts legal existing whether question legitimate. The considered be i.e. that policies, arethebest policies best first fr policy domestic alegitimate howtodistinguish on that Agreements WTO oron XX, and/or III Articles Reconciling economic and legal approaches of internal disputes concerning measuresMost onmarket theeffect on GATT access based have been (c) covered agreements. arisingunder the valueof trade benefits undermines change isnot Member, rulebutmerely of inbreachof another any GATT GATT evenifsuch policy excl not necessarily –policies change inthepolicies asaresult of anunanticipated offset ithad which previouslycommitments negotiated systematically are being showthat market-access itcan whenever for redress Member byaGATT/WTO abasisformay requests provide inSecti According developed to theeconomic arguments domestic producer that led to import substitution. producerdomestic that ledto import the“subsequent years, the GATT measure” involved, in nullifiedconcession has been orimpaired asaresult of of theapplication thechallenged measure. Throughout thevalue ofapplication of themeasures thenegotiated atthetimeconcession (4) wasnegotiated; to withdraw anequivalent market-access concession theoriginal thatispermitted market changes restore orthecomplaining country access) form of other policy inthe change (typically policy domestic of its for findaway to thetrade compensation effects offer partners isentitledcomplaining to arebalancing country of also regulatory subsidies can be the object of a non-violation complaint. of At anon-violation time, thesame the theobject subsidies be can regulatory also measure is applied by a WTO Member; (3) thecomplainant (3) could not Member; havemeasure reasonably isapplied anticipated by aWTO the complaint. conditions (1 are: anon-violation These with that acomplainant jurisprudence suggests must GATT/WTO Reference to report. AB See Japan-Measures Affecting Consumer Photographic Film and Paper, WTO document. WT/DS44/R (March 31, (March 1998). Consumer Affecting Photographic Japan-Measures See Film and Paper, document. WT/DS44/R WTO See Bagwell et Bagwell al.See (2002). See Hudec (1990). report, in which the Appellate Body rejected the rejected Body theAppellate inwhich report, 102 Bagwell et al. (2002), however, etal. (2002), Bagwell not necessarily arguethat does thisapproach literature have therefore argued in argued havetherefore literature 101 uding, for example, labour and environmental standards – uding, for andenvironmental example, standards labour remedy to correct a domestic market failure, adomestic to correct should remedy In the WTO-era, the theWTO-era, In if it obtains priorauthorization by ifitobtains theDSB. market-access trading eitherits wherein commitments, considered to be a first-best-policy in a given situation in a given afirst-best-policy to be considered that this approach can lead to a “war between public leadtothat can a“war thisapproach between d out that the possible use of Article XXIII would need would need XXIII of Article use d outthat the possible lly would expect to be challenged for actions that are for challenged toactions be wouldexpect lly on for this caution is that WTO Members negotiate Members on for this isthatWTO caution ) a concession has been negotiated; (2)asubsequent negotiated; has) aconcession been menon of “regulatory chill”, not do asgovernments om one that is not legitimate. In economic terms, economic thatisnotlegitimate. In one om tion can be answered in the affirmative, another intheaffirmative, answered be tion can concern specific domestic measuresconcern domestic like specific theSPS on 1above, theconcept complaints of non-violation the relevant literature and different answers have answers anddifferent literature relevant the 151 be approached with caution andshouldremain caution approached an with be all but one case, thegranting allbutonecase, of to asubsidy a argument that certain types of such measures, as types argument that certain establish four conditions in order to be successful four successful to conditions be inorder establish The relevant legal provisions give guidelines guidelines give provisions legal relevant The 100 If a non-violation complaint issuccessful, the anon-violation If favour of a more extensive use of use favour of amore extensive Kodak-Fuji litigation illustrated that illustrated litigation 103 Kodak-Fuji

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS in trade agreements represents thesubstitution of represents oneformin trade for agreements of protection another. this view, In of trade contingent anti-dumping. measures, thepresence of particularly contingent measures itmay surprisingevidence. not that So be falling tari ambiguities inherent contingent give inthese events an indication that the suggested approach has approach moreapp thatan indication thesuggested measures as policy instruments that by are well used instruments measures aspolicy trade contingent about view regard measures. contingency They have cynical aless etal. (2006) Barton isno isthatcontingent protection explanation One aninitialleve Given possible. isalways renegotiation agreements trade in measures contingency Explaining of international if trade cooperation, contingent thereceivedtheory In provisions are unnecessary CONTINGENCY (a) 4. have far andlegislators so been that Members fact The trade anddomest that could achieveefficient governments Staiger (2001) argue that this giving additional flexib outofendeavour concern to theco raise standards about with a temporary reversal ofliberalization. reversal atemporary with that ri they give for pressure protectionism political trade agreement thought may be of asanticipating th measures of of trade ina contingency liberalization. introduction a permanent reversal engineer The may pressure buildupto a nothing isdone, political that for itprovokes. demands protection of thecost adjustment thepolitical itself,with If butwith cont sees which explanation leadsto hissecond This of workers preferable. and ofenhance firmswouldbe themobility of ways facilitating measures efficient Domestic to adjustment. themost measures are not necessarily of competition. However, this since explanation with trade thedifficulties acknowledges effects healso provid of imports employed to theentry slowdown to make, difficult be workers with facing of be Temporary unemployment. can longspells protection have itdoes where comparative advantage. Such anadjustment may to sometimesadvantage sectors not have comparative does acountry where Trade to movefrom sectors resources requires liberalization of economic measures adjustment arisingfrom liberalization. to asatool contingency lowerthecosts explanations (1997) possible Jackson two suggests protection. from of theconsequences lowertariff away togovernments shield vulnerable sectors from trade liberalization. toorder thelosers compensate Contingency measures fill this voidby providing of theincome in gains from thewinners part donot have identifiable mechanisms for extracting typically trade. of more open Trade inacountry.effects liberalisation andlosers produces However, winners countries 19 (Schuknecht, determination ofinjury case in the taken particularly thedecisions substantiates agencies, by therole played these influence by political inaffecting regulations bureaucrac governtheworkof which these influence.political influence bro Butpolitical be can Now, administered by contingent bureaucracies,insulated to be appear which measures from are typically andpol process through thepolitical protection secure for thepres anexplanation providing requires asbefore. aswelloff This trade liberalizationparties compensating able to leaves which some offer its accommodated ifitis be can thelevelof itto thatprotection increase requires for oneof theparties around the world has reduced tariff rates to very lowleve rates to very around tariff theworldhas reduced economy of bythepolitical explained couldmeasures be ence of contingency rulesintrade agreements. ence of contingency 152 ility in the context of the WTO Agreements wouldensure Agreements of theWTO inthecontext ility ffs have coincided with the more frequent and wider use themorefrequent andwider have with coincided ffs 92; andWaelbroeck Tharakan -meaning policy makers to theredistributional manage policy -meaning se to,se thispressure ameans to andproviding deflate thing but protectionism. The presence of contingency of contingency presence The thing butprotectionism. for contingency measures. The first explanation sees sees explanation first The measures. for contingency ught to bear on this process by shaping the laws and by shaping ught thelaws onthisprocess to bear l of reciprocal liberalization, a change inconditions achange liberalization, l of reciprocal iticians may not be too reluctant to meet the demand. thedemand. to meet reluctant iticians may too not be substantial leeway for leeway bureaucraciessubstantial to interpret the point where protectionist forces ableto wouldbe protectionist where point rather hesitant to use Article XXIII may, however, XXIII be rather Article to hesitant use ingency measures aspragmatic to tools deal, notingency e possibility of such difficult adjustments andthe adjustments of such difficult e possibility eal at the theoretical than at the practical level. than atthepractical eal atthetheoretical protectionism (Tharakan, 1995). Trade 1995). (Tharakan, liberalization protectionism ing time for domestic industry to to adjust the industry ing timefor domestic ies (Finger etal., 1982). research empirical ies (Finger Indeed, ls. The losers from this process have from anincentive thisprocess to losers ls. The mpetitive position of their producers. Bagwell and of Bagwell theirproducers. position mpetitive ic policy outcomes with tariff negotiations outcomes tariff with ic policy alone. , 1994). Furthermore,, 1994). the and Prusa (2003) have found that for four of the major users – Australia, Canada, the EC and the United Canada, ECandthe the –Australia, havefound that users for fourmajor ofthe (2003) and Prusa Source: WTO Secretariat. WTO Source: aeurs1270 112 142 182 Safeguards measures Countervailing 105 104 firms. for theaffected attractive measures very for companies. They andfinancial losses joblessness alarger thus, triggering sectors, import-competing rate appreciation. of real Periods exchange rate appr correlat filingswereclosely States –anti-dumping of ec periods Finally, linkbetween thereisastrong 1995-2005 measures, and initiations actions, contingent Trade Table 3 (2,851) than there were safeguard initiations (14 Tablecountries Using (see thenotifications ma 3). by actions) anti-dumping reliance onthem(particularly measures istheheavy of contingency scope to incl necessary whyitmaybe reason A second below. subsection inthe invoked, arediscussed trade contingentthe differences inthese measures, including be theconditions theycan which under of domest to thebuild-up employed deflate be they can andco anti-dumping Hence, safeguard, to address. to precisel rise theygive atrisk.Thus, policies that may for trade putliberal demands protection injury, generate domestic theycan to domestic injury they of whether irrespective orpolicies, trade practices referred to sometimes as“unfair” of practices types to certain trade practices?, that foreign to theextent i.e. andcountervailing dutiesinresponse to actions include anti-dumping necessary orisitalso actions measures contingency of Scope itlimited onlyto Is safeguard oremergency actions. to issue contend ofOne contingency isthescope with (b) thatthisisou ex-ante means is allowed is thelevelof when protection duringperiods losses andcir defined well under agreement of thetrade from theprovisions temporarily Trade ameansto depart togovernments provide need will agreements costs. adjustment of large untenablein away makes because which maintenance policy of thepresent inthefuture. timebutalso atthepresent not only environment. Trade involve governments agreements intheeconomic that recognize clauses theuncertainty there are onwhether built-in escape depend implies that of view thedepth liberalization achievedThis by that atrade be agreement can (1,804) than there were safeguard applied. measures (70) nidmig2811,804 2,851 Anti-dumping period, safeguard measuresperiod, relied initiations were on. were theleast 20 There timesmore anti-dumping of the theuse While thisneed. addresses measures Finger and Nogues (2005) make a similar point inthei make point asimilar (2005) Nogues and Finger It should be noted though that a safeguard action may involve multiple import sources. sources. import multiple mayinvolve action asafeguard that though noted be should It certain important sectors to obtain much more liberalized trade policies for the general economy”. general the for policies trade liberalized more much toobtain sectors important certain anti context, “in that political larger the liberalization rd otnetisrmn ntain Measures Initiations instrument Trade contingent tweighed by the long-term welfare gains. bythelong-term tweighed y those conditionsy those that contingent measures are meant 2) and nearly 262) andnearly mor times flow of imports. Economic downturns increasedflow ofcause imports. But economic circumstances inthefuturemay evolve circumstances But economic cumscribed conditions. The presence of contingency ofcontingency presence The conditions. cumscribed ed with macroeconomic activity andreal exchange activity macroeconomic ed with ude anti-dumping and countervailing duties inthe duties andcountervailing anti-dumping ude -dumping and safeguards are a necessary quid pro quo to are and anecessary safeguards -dumping de by Members to the WTO, overthe1995-2005 to theWTO, by Members de r examination of the Latin American experience with trade experience r examination American ofLatin the onomic distress and anti-dumping activity. Knetter Knetter activity. andanti-dumping onomic distress temporarily increased, the deeper liberalization thattemporarily thedeeper increased, untervailing measures are alike to the extent that arealike extent measures tothe untervailing contingent measures may result in ex-post welfare welfare ex-post in result may measures contingent contribute to conditions that make anti-dumping eciation leadto in of can competitiveness aloss 153 making commitments on policies that apply will onpolicies making commitments are fair or unfair, result in increased imports and arefair unfair, or imports inincreased result ic pressure against trade liberalization. Some of Some liberalization. trade against pressure ic 105 e anti-dumping measurese anti-dumping 104 ex-ante may

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS bound and applied tariff rates as a de facto trade facto rates asade tariff andapplied bound and Countervailing Measures Agreement and the Agre andthe Agreement Measures and Countervailing to offer compensation for the adverse effects of themeasure ontrade partners. effects to for compensation offer theadverse industry, rather domestic thanharmed inresponse its that surge has to animport measure asafeguard isinresponse –which applying contrast, acountry In there isno requirement to orsubsidization), (dumping Finally, andcountervailingmeasures since anti-dumping excluded from their coun application ifthose i.e., themeasures basis. are not appliedonanMFN are found orsubsidized, to dumped be products whose suppliers onlyonthose measures are imposed andcountervailing anti-dumping supplier- dumpingorsubsidization may be Because orcountry-specific, arethe trade practice, imports ifthose a particular are imports eventhoughthose imports increased against bytho caused injury material suffered has industry (i.e., their“normal below value”), orsubsidized import andcountervailing measures onlybe can Anti-dumping differences amongthem.measures, there are important andcountervailing safeguard,Although anti-dumping commitment isbreached.WTO rate that no thebound so that theymoveabove butnot to theextent from imports industries domestic the of usingthemargin between Finally, Members WTO note of oneshouldalso some thepractice “compensatory trade partners. adjustment” to affected by countries inTable actions asisshown anti-dumping 3above. reliance on of theheavy because measures ispartly dumping andcountervailing dutiesascontingency preferred a more targeted instrument that di instrument could be preferred amoretargeted frequently, governments less isused why thisinstrument asonereason cited because hasmeasures been Contingency-related provisions in the multilateral system contin At themultilateral important level, themost (c) preferred instrument for to adjusting trade difficu argued itcould thatThus, be countries rather have than safeguard found measures anti-dumping the 107 106 re The etal. 2006). (Barton the source of theinjury why countriesreasons have apreference for usingthe have andsafeguard identified asthe actions been anti-dumping of differences between these Some of considered trade remedies be will ascontingent measures. allthree types of this discussion purpose an MFN basis,i.e.,an MFN are meant to applyto allsource coul which Articles But thereareother relevant GATT of Schedules). The latter allows a WTO Member to Member aWTO allows latter The of Schedules). to Safeguar (Restrictions XII Articles areGATT these Products) and the corresponding multilateral agreements – Anti-Dumping Agreement andthecorresponding multilateral –Anti-Dumping agreements Products) ofParticular Imports on Action (Emergency andXIX Duties) andCountervailing (Anti-dumping VI The Agreement on Safeguards provides for a modulation of amodulation for provides Safeguards on Agreement The The formal The Agreement name is of the the Anti-Dumping Agreement on Tariffs and Trade 1994 provided that the measure has taken been as a result of an absolute increase in imports. isineffect a measure that years three first the for retaliating from measure toasafeguard subject Members prevents . tries accounttries for asmallshare of imports. 154 cause of serious injury to its domestic industry. domestic to its injury of serious cause se imports. A country can apply asafeguard measure apply can Acountry imports. se lties and letting off protectionist steam. So, steam. for the protectionist off andletting lties luctance of countries also measures safeguard to use luctance d the Balance of Payments) and XXVIII (Modification (Modification andXXVIII d theBalance of Payments) remedy. The applied tariffs are increased to shelter areincreased remedy. tariffs applied The s of imports, although developing countries be althoughdeveloping can s of imports, gency provisions are to be found in GATT Articles Articles found areto provisions inGATT be gency former. non-discriminato The s, respectively and subject to that showing domestic andsubject s, respectively d also be considered contingent measures. Among Among measures. contingent considered be also d Agreement on Implementation of Article VI of the General to the effects of a particular trading practice –has trading practice of aparticular to the effects offer compensation to the affected trade partner. compensation offer to theaffected Safeguard measures are inprincipleappliedon duties have lumped together ascontingency been are applied trade to practices inresponse specified invoked against imports traded at dumped prices prices atdumped traded invoked imports against rected at the country or set of countries orset that are atthecountry rected increase its bound tariff, subject to providing tariff, subject bound its increase ement on Safeguards. The classification of anti- ement classification onSafeguards. The not dumped or subsidized or otherwise subject to subject orsubsidizednot orotherwise dumped this general rule, however, 8.3 in the that sense Article 107 ry feature of safeguard safeguard of feature ry 106 , Subsidies Every contract needs to enforceable, contract needs be Every since enfo Trachtman, 1999). and Dunoff 1999; (Craswell, time over commitments of exchange mutual a as defined made and deters defection. Without enforcement a contract can be expected to break enforcement down, or, Without defection. anddeters expected made be acontract can more 110 109 108 – Agreement isatreaty The basics of enforcement WTO “[T]he (a) enforcement anddispute settlement. of into enforcement, introduction thebasics rulesof ashort giving thissubchapterAfter discusses enforcement to theruleof force, synonymous not be need process. an orderly, butmay be rules-based RESOLUTION DISPUTE AND of asupra-national authority, must rely trade onself-enforcement. agreements most However, self- ENFORCEMENT OF RULES anyAny trade (impli agreement, contract needs infact, 5. to from trade. openness of adjustments thecosts absorb ofand evenadoption common regulations, policies harmonization coordination, ingreater likely toresult isalso integration Deeper less. much maybe openness and peoples of the members, the risk of protectionist forces being able to mount a reversal of economic integrationcontemplated thegoalof isshared deeper If leaderships by thepolitical by themembers. of economic integration of thedegree contingent afunction be may measures also intrade agreements andahighershare ofintra-RTA trade (Teh tariff etal., fora common external theneed Thus, 2007). go that ofintegration forms bydeeper characterized RTAs those about What ableto have which trade abolish contingent been measures? RTAs are These for theregional trade agreement. support political to preserve necessary also may Governments findthecontinued of intheagreements. trade existence contingent measuressectors bundleinrestrictive the RTA, typically governments sectors from import-competing newdemands creates anRTA the to establish decision has asanobjective to additional committing li when toneed perform of theRTAs continue to of trade allowtheuse remedies trade (Teh inintra-regional etal., The 2007). Contingency-related provisions in regional trade agreements Testifying to measures thevalue ininternational of contingency thegreat majority trade agreements, (d) asbefore. aswelloff not that leave theformer trademeasure partners inthesense does rather than safeguards, asacontingent that of from anti-dumping, could theuse arise an inefficiency at hints point last This 2004). aswellto therequirementgoods paid(Jones, that be compensation linkedhas been to countries’ to aversion legitimize a likely, place. inthefirst wouldnotconcluded have been The continuing importance of contingent measures in measures contingent of importance continuing The Communities.European have achieved of abolition trade contingent measures,RTA, althoughthis thelargest included e.g. the andthelevelof economic region dev geographic thetrade contingent in74 measures examined study Appellate Appellate Body Report, As noted above, however, Article 8.3 softens the retaliatory rights of affected Members, thus reducing the noted instances Members, above, As of however, rights affected the retaliatory softens 8.3 Article Masten (1999: 26) form some notes: “Without of assurance that others will, when the time comes, uphold their end necessary to realize the full value of exchange”. fullvalue torealizethe necessary actions take other or opportunities, forgo tomake investments, reluctant be justifiably will individuals bargain, of the in which compensation must paid be by the taking the safeguard Member action. Japan–Alcoholic Beverages II Beverages Japan–Alcoholic the international of equivalent acontract , (WT/DS8,10,11/AB/R: 16, emphasis added). elopment of their members. Only ahandfulOnly of RTAselopment of theirmembers. rcement gives credibility to rcement credibility gives and institutions, allowthecountries which to better protectionist measure thatprotectionist isapplied onfairly traded rules of andsensitiverules origin, longtransition periods beralization trade inafree agreement. Since the well beyond thedismantling measures; wellbeyond of border RTAs reflects the balancing act that governments thebalancingact RTAs reflects RTAs, which varied insize,RTAs, of integration, varied which degree cit or explicit) rules of enforcement.cit orexplicit) theabsence In 155 dismantling of all barriers to regional trade,dismantling ofallbarriers this for protection. To preserve political support for support for To protection. political preserve 110 themutual commitments .” 109 Contracts are best arebest Contracts 108

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS the discounted value ofcooperation. value discounted the The curve curve The “Nash equilibrium” isal non-cooperative pre-contractual theagreement (thethreat exits of to reverting the party the affected superior enforcement exists), body until the two curves intersect at intersect curves until thetwo of reprisal thecosts increases, level of cooperation foregoes from having defected and prompted the grim trigger response. The potential defector balances potential defector response.The andprompted the grimtrigger fromforegoes having defected the short-term incentivethe short-term from the cost aninfinite to thelong-term cheatwith suspension ofAs cooperation. agreement exceed allthecompiled future gains of cooperation. Beyond ofthe infringement one-time gainsfrom the thispoint, Beyond self-enforcement. through sustained be can deviating from thetermsdeviating short- of theagreement. The Ea asatrade agreement). (such interaction repeated The Chart shows a contract between two players, two between acontract Chart shows The and prove its violation. This presupposes that such a presupposes This violation. and prove its point can to aclause in thecontract or by athird party Acontract violation party. is verifiable iftheaffected in detected be can thatinfringements means Observability measures. andquantifiability. Enforceability verifiability loss) observability, (reputation has three components: to fees) emotionalEnforcement economic (penalty from (incarceration), physical vary can instruments of amultilateralenforcement asthemembership (such contract). orinterested parties by acircle of affected (or a court) can quantify the damage incurred asaresult of incurred thebreachof thecontract. thedamage quantify can acourt) (or opportunistic, that is, inefficient redistribution of redistribution thatis,inefficient opportunistic, of excess i.e in advantage Chart 3 displays two mechanisms to mechanisms two Chart 3displays engaging inrisktransfer and/ of minimizingcosts, level of The cooperation and thelevel of enforcement enter to isdrivenby contract thedesire cooperate. into Parties Every contractual relationships theaim with (i) by aneutral (self-enforcement), third-party, itself party affected Enforcement of “enforcement isafunction and“enforceability”. capacity” Enforcement istheability capacity 117 116 115 114 113 112 111 ( where on thehorizontal axis, ( of cooperation Chart 3variousdegrees In of degrees. issue, butamatter abinary not be violation can be determined by a neutral third party. Fi byaneutral thirdparty. determined be can violation to reciprocate credibly against a violation of theterm aviolation against credibly to reciprocate Third-party enforcement may called “court-and-copper” be Third-party enforcement, since constitutional require states that a The discounted value of cooperation is the sum of all future per-period extra-gains from having a contract ( acontract having from extra-gains per-period future sumofall isthe ofcooperation value discounted The The hit-and-run gain is hit-and-run the additional the The injurer utility en Other kinds of enforcement are possible, but are not considered here, since they are just variants of the two explained explained two ofthe variants arejust they since here, considered arenot but arepossible, ofenforcement kinds Other Quantifiability may be important where thereQuantifiability is no may important be approaches the no-contract (Nash-cooperation) level, the smaller are the future gains from (Nash-cooperation) cooperation. approaches the no-contract of a trade agreement. The 102) (2002: case the for andStaiger Bagwell See andsovereignty. offreedom ofaloss because example for returns, point optimal uptosome isbeneficial round vis The convex curvature of line ofline curvature convex The “X” aplayer “rest world”. andaplayer ofthe between game, namely atwo-player as represented be always can byand actions the other are identical. This is of without loss incentive the since examined, tobe needs contractor one only Therefore, symmetrical. tobe areassumed parties simplicity, For mechanisms. at to zero andequal isflat curve short-term benefit, since it merely stretches from the moment of defection until the time the violation isdetected. violation the time the until ofdefection moment the from stretches merely it since benefit, short-term determines a legal infringement (judge) jurisdiction and enforces an executive (police) the law. (2002: 102) provide in arguments some favour of this curvature having no contract at all). Again, the concave curvature of the S-E H&R (“self-enforcement”) thei inChart 3represents . 114 U N The vertical axis depicts the utility gain in excess of gaininexcess asituation acontract, without theutility depicts axis vertical The . 115 The hit-and-run benefit (if seized by the potential defector) is by definition an isbydefinition bythepotential defector) seized (if benefit hit-and-run The H&R S-E C C is intuitive (increasing marginal return from defection), but not necessary. Bagwell and Staiger andStaiger Bagwell necessary. not but defection), from return marginal (increasing is intuitive C curve also must go through the origin: The more the contracted cooperation level level cooperation contracted the more The origin: the through go must also curve N max SE , where the contracted cooperation is equivalent to the situation without agreement. , which can be defined asthe“most defined be can , which cooperative” levelthat cooperation ) refers to full cooperation and( to) refers fullcooperation enforce cooperation. continued 117 It is the sum of future benefits from cooperation that the injurer C opt 156 ). After that point more cooperation has declining, possibly negative negative possibly has declining, cooperation more thatpoint After ). prima facie welfare party. to thedetriment of theaffected exceed the hit-and-run gains from one-time defection defection gainsfromone-time thehit-and-run exceed or reaping transaction efficiencies. Cooperation efficiencies. or reaping may transaction s of the contract. Enforcements of thecontract. by exercised the be can 113 nally, quantifiability, implie clause is contained in the contract and/or that the the that and/or contract the in contained is clause ch contracting party has anincentive to cheat by party ch contracting generalization: In a model with multiple the enforcemen actors, assumed to cover relationship along-term with so called a“grim called so trigger” of strategy enforcement). joys from defecting over cooperating as promised. It isa It aspromised. overcooperating defecting from joys term benefit from defection is hit-and-run called fromterm defection benefit the first place – either by the affected party itself itself party place –eitherby theaffected thefirst for the of case the “contract” a being trade agreement. The violation of the rules, or in seeking retaliation. njurer’s opportunity costs of reprisal, that of reprisal, is, costs njurer’s opportunity 111 S-E by society at large or through collective collective through or atlarge bysociety curve is intuitive (more cooperation in every inevery cooperation (more isintuitive curve 116 C C In case of self-enforcement (i.e. no S-E N ) to of theabsence cooperation. it is irrational for the injuring party itisirrational for theinjuring party s that the aggrieved party s that theaggrievedparty 112 C ) are plotted ) areplotted vis-à- s t (shown as the move from the dotted asthemovefrom thedotted (shown harm to the injurer (Chart 4). Weak enforcementharm to theinjurer 4). (Chart factor C is more far-reaching (between ( 120 119 118 injurer’sthe time-value, on enforcement depends party’s of aself-enforcement theagreement. Under capacity scope regime, anaffected favouring enforcement successful Factors Enforcement andenforceability determinethest capacity (ii) (a anenforcementIf exists body Source: t impartial byan isenforceable that inacontract clause) damage aliquidated (here, defection for disutility expected is the l C&C The “court-and-copper”-enforcement. for stands C&C cooperation. future from benefits foregone tothe tantamount are costs Note: contracts in constraint Enforcement 3 Chart Hence, acentral of without theplayers). enforcement to symmetry (due body, onlytherange between deal, eventhough to to amorecooperative agree party to comply (“binding Antici constraint”). mutual cooperation cooperation mutual punishment results in a utility amounting to ( inautility punishment results contracting parties conclude theiragreement inthe“shadow conclude parties contracting of thelaw” ( point S-E stands for self-enforcement. The S-E curve represents the expected costs (disutility) of defection in a self-enforcing agre inaself-enforcing ofdefection (disutility) costs expected the represents curve S-E The self-enforcement. for stands S-E U SE The injurer’s time value, or “discount factor” describes how much the injurer is interested in the current period period current inthe isinterested injurer the much how “discount value, or describes injurer’s time The factor” The shadow of the law effectively stretches from from stretches law effectively ofthe shadow The Any costs connected with enacting a sanction mitigate the the mitigate asanction enacting with connected costs Any law is self-enforceable yielding an additional utility in the range between isself-enforceable intherange between anadditional yielding utility H&R stands for “hit-and-run”. The H&R curve represents the discounted benefits of defecting from the terms of the initial cont initial ofthe terms the from ofdefecting benefits discounted the represents curve “hit-and-run”. for H&R The stands H&R future, a grim strategy has no Therefore, deterrent effect. no agreement would signed. be contract is possible, since defection is more attractive than legal punishment. legal than attractive ismore defection since ispossible, contract party that forgoes future benefits of cooperation, but also the punishing party. punishingparty. the also but ofcooperation, benefits future forgoes that party defecting the only isnot it since victim, the for toapply iscostly strategy trigger agrim that argued issometimes it à-vis instead of instead C Graphical analysis by on based Bagwell authors, and Staiger (2002: 103). law future periods. In the extreme case in which the injurer is only interested in today’s utility and not at all inthe atall andnot utility intoday’s interested isonly injurer the inwhich case extreme the In periods. future U . Third-party enforcement ahigher than mutual yields theself-enforcement utility mechanism. Third-party law U U U SE opt N ( D C i s-)Ut N U SE i l ). However,). not here, asdrawn anoptimal safeguard still theshadow of thelawcan i C ty (U) opt 119 the affected party’s enactment costs of retaliation costs enactment party’s theaffected , possibly because the law cannot enforce every little detail of thecontract. detail thelawcannot little enforce because every possibly C c N ourt to detect an infringement and and infringement an detect to ourt and C S-E SE pating theinjurer’s behaviour, irrational itisequally for theaffected C C to the solid to thesolid law H&R law ), because defection is punished immediately. ispunished theinjurer For defection because ), H&R –C&C H&R C C N opt to S-E’ s skew the injurer’s opportunity-cost curve downwards downwards curve s skew theinjurer’s opportunity-cost the welfare-optimal level of cooperation would be wouldbe levelof cooperation thewelfare-optimal C law rength of anenforcement mechanism and, hence, the 157 victim’s power (and willingness) to retaliate. For example, For toretaliate. willingness) (and victim’s power ), which is negative everywhere below the cut-off thecut-off below everywhere isnegative which ), curve in the Chart). Enforceability for arole intheChart). plays curve , i.e. over the entire contracting space. Beyond c oppers to enforce oppers verdict) thecourt’s U 120 N and as well as its general ability to do ability general aswellits C&C U inChart 3). C s-e m ax (hatched area). (hatched S-E C&C level (C) Cooperat 118 Cooperation Cooperation i on ement. Those hird party. C C law N and ract. ract. C no vis- opt ine ine

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS Source: Source: t impartial byan isenforceable that inacontract clause) damage aliquidated (here, defection for disutility expected is the l C&C The “court-and-copper”-enforcement. for stands C&C cooperation. future from benefits foregone tothe tantamount are costs the possible contract range shifts to the left from to theleft range shifts contract the possible line) and with deficient detection and acquittal andacquittal deficient detection andwith line) h motneo nocmn aaiyadenforceability and capacity enforcement of importance The 4 Chart (dotted aweak“court-and-copper” regime Under of thelaw: theshadow under concluded for contracts Enforcement andenforceability important areequally capacity (the more attractive defection one-time make andquantifiability verifiability observability, Insufficient curve. hit-and-run short-term ofthe shape the 121 enforcement. Self-enforcement in trade agreements of theabsence asupra-nationalIn authority, any among sovereign contract nations rely must onself- (b) Note: of enforcementinsufficient the determined by theintersections area) (chequered in Box 11, (previ ante of inasmallrange ex cooperation dotted line to the solid a treaty violation between anallege between violation a treaty arenot costly, only leadtothat theycan disa sort infringement andcalcul andprove acontract detect to inorder itself byother parties theactions andquantify verify has to observe, ones) larger (even party capacity – are in the hands of the affected party. This brings with it some considerable disadvantages: considerable disadvantages: itsome bringswith This party. –are inthehands of theaffected capacity of vigilanteanarchic system justice, of ingredients both enforcement – enforceability andenforcement utility). Fewer enforcement Fewer result possibilities inasmallerself-enforcementutility). range and, consequently, asshown S-E stands for self-enforcement. The S-E curve represents the expected costs (disutility) of defection in a self-enforcing agre inaself-enforcing of defection (disutility) costs expected the represents curve S-E The self-enforcement. for stands S-E First, enforcement ona entirelyFirst, depends capacity H&R stands for “hit-and-run”. The H&R curve represents the discounted benefits of defecting from the terms of the initial cont initial ofthe terms the from ofdefecting benefits discounted the represents curve “hit-and-run”. for H&R The stands H&R truncheons or teargas”. or truncheons damages for harm inflicted or police enforcement. ha WTO The relief, injunctive ofincarceration, prospect toamember, isno there adverse aruling issues Understanding Settlement ipe el 19:47 ttsfrtecs fteWO We ae salse ne h T Dispute WTO the under established apanel “When WTO: 417) (1996: ofthe Bello case the for Hippler states Graphical analysis by on based Bagwell authors, and Staiger (2002: 103). U N ( D C i s-)Ut N 121 Self-enforcement to isnot vigilante synonymous the In justice, system. oraself-help i l i ty (U) C H&R’ SE ' C H&R' law curve). For every level of cooperation, defection pays off more (higher defection defection more(higher off pays levelof cooperation, defection every For curve). ' C SE C d injurer and an affected party setting off threats of retaliation and of retaliation threats off setting party d injurerandanaffected law H&R H&R curve gets skewed asillustrated inthemovefrom tothe gets theleft, curve C opt 158 possibilities (yielding a leftwards shift of the shift aleftwards (yielding possibilities greements over the nature, effects and consequences of andconsequences overthenature,greements effects C party’s own retaliatory power (“size”). power retaliatory each own Second, party’s law ate the damage incurred. Subjective assessments of assessments Subjective incurred. ate thedamage ous situation (hatched area) compared to compared scenario with area) ous situation(hatched to to C s no jailhouse, no bail bondsmen, no no blue helmets, law’ . C-C C-C S-E' line shifts downwards to solid tosolid downwards shifts line C m ax C&C' S-E C&C H&R’ level (C) Cooperat and S-E’ i on H&R curves). ement. Those hird party. curve), curve), C-C’ C-C’ ract. ract. ine ine For all these factors rulesof enforcement factors allthese For anddisp the right). This will reduce thepotential reduce will for This op the right). of thetreaty, since defections of the enforcement upward shift (an capacity byallsignatories –smallandbigalik in thesystem 127 126 125 124 123 122 of enforcement:vigilante system Codified ofenforcement rules anddisputesettlement the agreement. behaviour theproper prescribe rules These procedures. agreement usually to to agree aco bindthemselves Rules of enforcement in and trade agreements disputesettlement signatories entails, thatAware apure to vigilante atrade of system thetremendous disadvantages (i) counter-retaliation and, possibly, atrade war. be expected to be reluctant to conclude an agreement or make wide-ranging commitments. to conclude anagreement ormake reluctant to be wide-ranging expected be trade liberalization commitments by the members oftrade liberalization theagreement. by commitments themembers • • • Articles XXII and XXIII of the GATT, and entitled XXIII “Consultation” XXII Articles and “Nullification and Impairment”, respectively, are The risk for the breakout of a trade war may be factored in by signatories in their subjective discount factor. discount subjective intheir inbysignatories factored warmaybe ofatrade breakout the for risk The Finally, enforcem agreed mutually First, by laying down concrete mechanisms, proc concrete mechanisms, down bylaying First, to more benevolent and less conflictual mechanisms conflictual andless benevolent to more or even all signatories may step in (see approa in(see or evenallsignatories maystep non-litigating) (but member, adefecting affected against willing to retaliate effort aloneinits country ormu ofcollective rules bywriting weaker states of atrade agreement maySecond, themembership to agree enhance theenforcement of capacity confidence into thesystem; andinjects andstability predictability enforcement instruments, such as compensation in the form of tariff liberalization or monetary fees.enforcement liberalization such ormonetary intheform ascompensation of instruments, tariff (observability, verifiability and quantifiability) are andquantifiability) codified. verifiability (observability, out mechanisms in times of acute domestic crisis. domestic ofacute in times mechanisms out ofstrategy enforcement to aregime of commensura substantially more from one trading partner than it exports to that market. For example, country country example, For market. tothat exports it than partner trading one from more substantially In other words, rules of enforcement and dispute settleme See Chart 4 above. For small countries, a system of vigilante justice will push down the the down push will justice ofvigilante asystem countries, small For 4above. Chart See reluctant to cheat against against tocheat reluctant multilateral of enforcement, system however, in country the modelwill punish every a defector. Country C capacity) and in addition skewcapacity) the imports from from imports of Rosendorff, 2005, Rosendorff andMilner, 2001, Rosendorff 2004). 2005, andHerzing, Rosendorff, agreem ofthe stability the increase mechanisms opt-out ready clauses valves as safety in trade subsection see agreements, ofexamples rules of enforcement and dispute settlement. what two unique goods, one from each other country. each from However, one uniquegoods, two countries a sing form a trade agreement. Each exports country ov ofmultilateral advantages the illustrates (1999) Maggi been established among others by Sykes (1991), Downs and Rocke (1995), Ethier (2001). For a discussion of escape ofescape bySykes (1991), adiscussion For others (2001). andRocke (1995), Ethier among Downs established been 1984; Keohane, 1984; Axelrod, (e.g. response grimtrigger toa superior isvastly ofenforcement atit-for-tatstrategy setting, inarepeated-game that argue authors Many , since it does not have the import leverage to inflict economic harm by retaliating against against byretaliating harm economic toinflict leverage import havethe not does it , since what the calculative basis for indemnity (remedies) shall be, etc. be, shall (remedies) indemnity for basis calculative the exactly constitutes exactly enforceable actions, 124 B while exporting mainly to mainly exporting while A knowing that knowing are more easily detected, prov detected, aremoreeasily H&R ent maypromptsignatories rules to curve towards the left, leaving a significantly diminished contract space. contract diminished asignificantly leaving left, the towards curve C B . In a bilateral enforcement system, system, enforcement abilateral . In will punish it by raising the tariff against its product. product. its against tariff byraisingthe punishit will S-E 122 how portunistic defection and result in more extensive andresultinmoreextensive defection portunistic Under an unconstrained self-help system countries can anunconstrained system Under self-help curve in Charts 3 and 4) and increase theenforceability andincrease 3and4) inCharts curve ches byMaggi,ches etal., 1999; Bagwell 2007); they can be detected and distinguished from lawful behaviour, 127 e. Mutually agreed and codified rules can enhance can rules andcodified e. agreed Mutually re set ofre set enforcement rulesanddispute settlement ute settlement may provokeute settlement higherlevelsof trust Another option is the choice of less trade-restrictive optionisthechoiceAnother oftrade-restrictive less can bring significant improvements overapurely improvements bringsignificant can nt lay down the contracting parties’ common denominator denominator common parties’ contracting the nt laydown ltilateral enforcement. asmall ofleaving Instead 159 4 above. It is claimed that commensurate punishment and and punishment commensurate that claimed is It above. 4 a circular asymmetry in trade exists: Each country imports imports country Each exists: intrade a circular asymmetry te punishment, or the possibility for lenient opt- te punishment, orthepossibility edures and timelines, rules ofenforceability rules andtimelines, edures Oye, of the For case trade 1986). this agreements has er bilateral enforcements with a simply model. Three model. asimply with er bilateralenforcements . Examples include a move from a grimtrigger agrimtrigger from amove include Examples . in case of disagreement over issues covered in covered overissues ofdisagreement in case ent, asth aswell le unique to good each trading partner. imports also It ed and punished (skewing the andpunished ed 125 A rules-based system generates system A rules-based change theirenforcement regime e initial commitment to liberalize (e.g. toliberalize e initialcommitment A cannot reciprocate against defector defector against reciprocate cannot S-E curve (lacking enforcement (lacking curve C through tariff hikes. In a In hikes. tariff through A sources most of its ofits most sources H&R 123 C 126 is therefore curve to curve ex ante

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS If such is the case, disagreements andtrade disput such isthecase, disagreements If virtually any trade agreement. Successful disputereso any Successful agreement. trade virtually capacity of the membership to punish party. of theoffending themembership capacity of theoffend onthewillingness depends ultimately adjudication ofadjudication disputes. Taking th conciliation,dissemination, arbitration andtheca into of consideration. such an functions The informat such asasymmetrical market imperfections, inconnec roles important may assume organization why has formal demonstrated 1above in Subsection and Snidal, 2005). (Thompson limits certain within such issues to with deal tomotivate givetheauthority contracting parties may prove achallengeto andf thesmooth complexity contractual help. short, In situationsis to avoided, outside these be without to are usually solve difficult Since developments. unforeseen partie to contracting proveorder hissuspicions. The in intheagreement clause to to point aspecific party –makes itharder forloopholes theaffected size Contractual incurred. of thedamage incomplete the andproving adeviation detecting has difficulties party since theaffected opportunistically act in above, 1.(b) asymmetrical insubsection discussed enforcement capacity of the affected party. enforcement of theaffected capacity the benevolence of the membership can become qu become can ofthe benevolence themembership in role tradeagreements of The institution adisputesettlement enforcement self time,Over arules-based regime th (i) 130 129 128 re ofprivate situations incomp andexceptions. Arise rules and complicated ot andanincreasingoverlapwith rights), property newareas of cooperat industries, inclusion of further of thetrade The agreement increases. complexity in discharging its functions, theDSM enhances functions, in discharging enforceability, its fulfilsmany of theins (DSM) mechanism settlement A more complex agreement can make it harder (and more costly) for signatories to anticipate and write down future down andwrite to anticipate signatories for costly) more (and make harder can it agreement complex Amore The DSB (and, more specifically, dispute settlement panels and the Appellate Body assisting it in carrying out its its out incarrying it assisting Body Appellate andthe panels settlement dispute specifically, more (and, DSB The ucin)poie ebr ihrlnso hte eti esrscnttt iltoso h T Agreement and with rulings measures provides onfunctions) Members constitute whether certain violations of theWTO violations of the agreement. andcalculate prove todetect, signatories for maybecome it difficult more the measures, toborder) opposed (as quantifiability. Finally, achieve (verifiability). a acting when settlement to helps and agreement ofthe terms tothe according sanctionable are really actions what inassessing assists “court-and-copper” enforcement; it can merely provide for observability, verifiability and quantifiability. more effective Hence, in into effect. putaverdict that can body executive pronounce on the size of countermeasures in of the Yet, case non-compliance. there is no equivalent to a national recommends, if applicable, concerned that the brin Members contingencies, trade instruments and areas of disagreement. The further a trade agreement pervades into internal intointernal pervades agreement atrade further The ofdisagreement. andareas instruments trade contingencies, (observability). Taking up(observability). the role of an broker honest aviolation ofdetecting chances the DSM improves disseminator, the information ofan role the assuming In velation ofinformation. velation this negotiation takesthis negotiation place e example of the WTO, Box of 11 theWTO, e example that theorganization’s shows dispute 130 128 160 Hence, “self-enforcement” remains of abasicpremise organization may include mon may include organization and independence to a formal dispute settlement body to body aformal disputeand independence settlement her international regimes will require more extensive her international moreextensive require will regimes titutional roles mentioned above. Box 11 that shows accession of new and more diverse countries, theaccession of newandmorediverse lculation of damages, in lculation ofdamages, , information gatherer, adjudicator and arbitrator the DSM ion (such as environmental standards or intellectual orintellectual asenvironmental standards ion (such ing party to cooperate and/or intheenforcement to and/or cooperate ing party s would need to negotiate the proper handling of to theproper negotiate s wouldneed as an arbitrator and damage calculator, it ensures better formation makes it easier for an injuring party toformation makes iteasierfor aninjuringparty lution remainsinthehands ofthesignatories, and the language used above, the institution cannot provide for provide cannot above, theinstitution used thelanguage lexity may result inmore ambiguitiesandinmorelexity ion or uncertainty over future events, aretaken overfutureevents, ion oruncertainty ness – including the existence of ambiguitiesor –includingtheexistence ness es, sooner orlater,es, sooner are likely to occur. wasAs rictionless enforceability may ofThis atrade deal. rictionless ite challenging to manage, especially when theite challenging when to manage, especially at depends solely on the letter of thelawand ontheletter solely at depends stitutions matter.stitutions that aformal wasshown It g measures these into conformity; ultimately, arbitrators tion with dispute settlement, once realistic dispute settlement, tion with ex post facto post ex 129 but it does not have an impact onthe not have animpact butitdoes and if a wider renegotiation andifawider formation gatheringand itoring andinformationitoring the DSU. Article 5.1 of the DSU states that conciliation and mediation procedures are voluntary. In arevoluntary. procedures 5.1 andmediation that conciliation DSU.the Article DSUstates ofthe The of theDirector-General. offices and thegood mediation conciliation, through resolution ofdispute forms alternative DSMoffers the addition, aimof isto consultations reach amu The initiated. litigationmay before be theparties heldbetween 4 of that theDSU consultations be requires and the Working Procedures contained in Appendix 3 of the DSU specify the panel procedures to thepanelprocedures 3of theDSU specify inAppendix contained and theWorking Procedures before of thematter assessment make anobjective Moreover, in contrast to certain international trib international Moreover, tocertain incontrast advisory opinions.advisory similarto inquisitorial powers to note that 13.2 isimportant It of theDSU). (Article of thematter” aspects oncertain theiropinion to obtain source andmay consult experts “Right Information”), to Seek panels“may dispute settlement information seek from any relevant andaskthemfor add In explanations. the parties clari or information additional toobtain order In including otherwise), decided (unless followed be an gathering Information D.3.(b)). a before theirdisputes theDSM toused settle to solution adispute”. apositive to secure have onnumerous disputingparties occasions Indeed, 3.7addition, Article of theDSU that stipulates “ Consultations andtheenforcementagreements law isconcerned. of WTO fora asfar overoutside of astheadjudication theWTO disputes under DSM has primacy the WTO ad In 1of theDSU). Agreement andArticle the WTO forum settlement dispute Central manner: following inthe functions these covers compliancemonitors abou records andkeeps official Finally, caused. ro intrade benefits its or loss priorapproval bytheDSB, with impose, countermeas ornot isnotcompensation considered forthcoming appropriate itmay by theaggrievedparty, law.into WTO conformity itfails with If to fully of time, comply areasonable within period and nullifiedhave conc orimpaired, been theMember agreements accruingAgreement. theWTO aviolation under has When occurred ortrade benefits thech to whether inorder determine of thecase interpre invoked parties, bythe provisions of legal of themeasure at the nature, andeffects operation relating to themeasurethe case has atissue. It evidence. thelight In of bythepa thesubmissions law of provision WTO andwhich measure atissue the step, panelspecifying thecomplainant of theestablishment adisputenext settlement requests reso before negotiations andsettlement consultations for DSM instrument disputereso istheWTO’s The (DSM) mechanism settlement dispute WTO The 11: Box factual information by virtue of Article 17.6 of Article informationfactual byvirtue of th DSM may only deal with cases WTO Members decide to initiate decide before them. Panels donot have Members WTO cases DSM with may only deal interp andlegal law covered inthepanelreport : The DSM acts as an “honest broker” between disputing WTO Members. Article Article Members. asan“honest broker” disputingWTO DSM acts : The between olcino evidence of collection d ex officio : The DSU applies to all covered agreements (Article II:2 of II:2 (Article DSU to applies allcovered: The agreements prosecution by an attorney general orchief prosecutor. byanattorney prosecution le as information repository implies that the DSM thatthe implies repository asinformation le the Appellate Body is barred from gathering new gathering from isbarred Body Appellate the final ruling was adopted by the DSB (see Section Section DSB (see bythe final rulingwasadopted the right to gatherinformation asto so ascertain fication, panelsmayto atany timeputquestions [t]he aimof thedispute [t]he unals, panels and the Appellate Body cannot give cannot Body unals, panelsand theAppellate ts those provisions andapplies those themto thefacts ts the deadlines for written submissions by parties. byparties. submissions for written the deadlines e DSU (“An of to issues limited shall be appeal allenged measureallenged isinconsistent theWTO with rties, the panel determines the relevant facts of therelevant facts thepaneldetermines rties, retations developed bythepanel.”). developed retations Also, the erned is required to bringthemeasure isrequired atissueerned ition, based on Article 13 onArticle ition, based of theDSU (entitled respective mandate is contained in Article 5of inArticle mandateiscontained respective tually of acceptable thedispute. settlement In 161 it, including of the facts of the case. Article 12 of Article thecase. it, includingof thefacts it violates. The partie The it violates. issue. The panel also assesses theapplicability assesses issue. panelalso The ures equivalent to thelevel of economic harm t the disputes and their settlement. The DSUThe andtheirsettlement. t thedisputes lution. In the first instance, it provides for instance, itprovides thefirst lution. In rt can be had to the litigation process. In the had In to be can thelitigationprocess. rt : Articles 11: Articles of theDSU apanelto requires dition, by virtue of Article 23of theDSU, of Article dition, by virtue settlement mechanismsettlement is s submit arguments ands submit arguments

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS agreements because it assumes that trade partners have itassumes that trade partners because agreements Why isthere aneedfor transparency? of international intrade transparency to about trade received has say theory cooperation little The TRANSPARENCY (a) 6. 131 implementation of theobligations. of its thestatus about trade partners allits to notify to acountry require moreeconomical may be It arangeof andproducts. measures across commitments of their to, for own, costly monitor partners onecountry implementation by onits allits very become thenumber of pa obligation. As is implementing its istherefore there alegitimat nature ofliberalization, are required toSecond, parties impl etc., to thenegotiations. were not butwho parties exporters, - importers, from it benefit available directly made can that be much by to who cost can governments without those tend to confidential. be Butonce negotiatio these additi In inschedules. if theywere not inscribed would It thatof products. regulations involve thousands involve trade go agreements First, of information trade agreements. isacuteinthecase ofproblem imperfect onthem.Ther havecan asignificant economic impact that informed, informedconsequently, may matters fully differently not ortheymay about be be parties information means that some to there be isbound information. Imperfect by imperfect theproblem posed oninstitutions discussed above section The to theiradvantage. to altertheterms-of-trade strategically behaving assumption giventhat thefocus of theanal simplifying that there are no (transaction) costs to acquiring or costs that there are no(transaction) entitled “Surveillance of of Implementation Re disputes related to provisions of the respective the of provisions to related disputes the DSB to “inform Councils therelevant WTO been implemented” (Article 22.8 of implemented” theDSU). been (Article tothe recommendations bringameasure into conf orconcessions provided orotherbut hascompensation obligations been suspended have been nomto ismnto,monitoring dissemination, Information of countermeasures, arbitrators have awards. damage determined there 16 where, have for been following arequest authorization 7separate disputes), (in instances other theviolat than where agreements which those orunder 22.3 of theDSU, andto determine, trade sectors Article inwhich under party aggrieved damages suffered byarbitrators to the determine thelevelof economic harm intrade benefits andloss of quantification and Arbitration covered inrelationrelevant agreements to themeasures WTO inquestion. of, andtheapplicability of thecase andconformity before with, the themastomatter thefacts Adjudication monitor theimplementation of adopted rulings. the Appellate Body may be requested to establish whether the DSB rulings and recommendations have been fully havebeen andrecommendations rulings DSB the whether toestablish requested may be Body Appellate the and panels Moreover, compliance implementation. for oftime period areasonable necessary, if mayobtain, Members implemented. : Article 11 the : Article objectively panelsto assess of disputesettlement theDSU requires vernments making very detailed commitments on tariffs andother tariffs on commitments detailed very making vernments ement inthetrade agreement. obligations made Giventhereciprocal 162 n surveillance and on, the negotiations leading to these schedules often schedules on, leadingto thenegotiations these commendations andRulings”, theDSB to obliges ns are concluded, theinformationns areconcluded, isapublicgood : Articles 22.6 and 22.7: Articles of theDSU authorize 131 covered agreements”. 21 Article of theDSU, processing information. This is an understandable isanunderstandable This information. processing e interest by a party to see to it that its partner partner toitthatits tosee byaparty e interest cost involved in acquiring information andthat, information inacquiring involved cost ormity with the covered agreements have thecovered with agreements notormity e are quite specific reasons for believing that the for reasons believing e arequitespecific rties to quickly anagreement, itcan increases, rties perfect information. This is equivalent toassuming isequivalent This information. perfect and Committees of any developments in andCommittees of any developments be difficult to keep difficult trackbe commitments of allthese This surveillance includes those cases where cases those includes surveillance This ysis is the inefficiency that arises from countries from thatarises inefficiency isthe ysis ion occurred retaliation is justified. Thus far, Thus isjustified. retaliation occurred ion : Article 2.2 of the DSU instructs of 2.2 theDSU instructs : Article a number of WTO Agreements. Thus, themeaning Thus, of surveillance, Agreements. howitislinked and to transparency a number of WTO Although Wolfe (2003) does not speak about surveillance, it is a function that is explicitly provided for provided surveillance, that in about isexplicitly not Wolfespeak itisafunction does Although (2003) 132 theschedu goods, non-agricultural clause. For the MFN (Sch II 1994, isArticle GATT In therelevant article are to applied to be other Members. that dutiesandlimitations ontrade inservices to import respect with Member ofobligation eachWTO runinto frequently which hundreds orev schedules, Member by commitments WTO ofschedules specific Schedules of concessions identified fo asamechanism not explicitly Although (i) to society. civil transparency external ande) limited nopresencewith inGeneva) resources orwith those (particularly internal Members by of ismeant which to theinstitution transparency transparency its closely sections provisions. This transparency these anumber could of of be ways There classifying provisions of isto aMemb diminish theopaqueness ofthese effect cumulative the regulations, SPS or subsidies as such that Agreement, under covered co Agreement may be WTO inaparticular provision thetransparency While Agreements. Transparency in the WTO are therange spread of ontransparency across Provisions WTO (b) dissemin be can cost little that with aspect, good to correct fully itisnot possible While resources. not of have need theinstitution access to thesame financial Members andhuman The the membership. to isinternal aspossible One asopen transparency, process involves which makingthedecision-making implement therulesof thetrade agreement. ar There better to helptheMembers information, established has been andimperfect costs of transaction because that, to that has transparency to theinstitution (organization) dowith another is aspect also There for. iscalled none andthereforeremoving this avoid ambiguity costly Transparencylead to dispute settlement. of there onenforcementnoted inthediscussion above, thea from measures that As are intended protectionism. ashidden onimports effect an unintended adverse on trade. It may not always have can ramifications application measures andthelike, butwhose SPS that have objectives non-trade be easy to distinguish regulations, ondomestic commitments involving a Third, the need to preserve or secure the gains from market access requires countries to make how it may help reduce the incidence of disputes is also discussed. how itmay helpreduce of discussed. theincidence disputes isalso information. information. them to Marketsfunction will makedecisions. better theenvironment andenable theyoperate inwhich understand better help private economic agents on thestraight andnarrow. th beyond going Second, theyhave thetrade agreemen commitments under made Transparency obje helpsachievetwo to thepublic.openness transparency, isexternal involves which theinstitution’s aspect second The process. the decision-making codify Members’ commitments; b) the Trade Policy Review Mechanism; c) publication and notification; d) d) theTrade and notification; c)publication b) Mechanism; Review commitments; Policy Members’ codify which schedules andservices tariff a) into: provisions groups thetransparency who Wolfefollows (2003) In hisIn classification, Wolfe includes also in (2003) ctives. The first is improved compliance by the parties to the compliance isimproved bytheparties first The ctives. dependence from the executive branch of government. for such differences, there are some which have which for apublic therearesome such differences, edules of Concessions) which comes immediately after ated with a significant impr asignificant with ated mong other things, standards, technical regulations, technical mong other things,standards, between well-intentioned regulations well-intentioned that onlyhavebetween gulations and the regulatory process may assist in may assist process gulations andtheregulatory more efficiently when economic agents have more wheneconomic agents efficiently better dispute settlement proceedings insituations where proceedings dispute settlement mbiguity inherent insuch situationsmbiguity sometimes can er’s trade regime and trade policymaking process.er’s trade regime andtrade policymaking en thousands of pages, codify in great detail the ingreat detail codify of pages, en thousands ncerned thenarrow onlywith range of measures r transparency, of theschedules concessions and 163 e parties to the agreement, transparency should to theagreement, transparency e parties s are of valuable. probably some themost The e two aspects to this institutional transparency. aspects e two le usually consists of tariff bindingsbutinthe of tariff le usually consists t. Shining a spotlight on the parties keep themt. Shiningaspotlight ontheparties ovement in the quality of ovement inthequality 132

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS two documents are prepared. One is a policy statement by the Member under review. isa under second bytheMember The statement isapolicy One areprepared. documents two detailed report written by the WTO Secretariat on its own responsibility. The Secretariat’s report consists consists report Secretariat’s The responsibility. own its on Secretariat WTO bythe written report detailed concerned. isallowed to comment Any Member onth Each review is conducted on the basis of a report greater transparency in, and understanding of, in, thetrad andunderstanding greater transparency of andhence toAgreements, functioning thesmoother of the Membership is to go through a review every six years, with possibly a longer period forLDCs. period alonger possibly with years, six isto every through go areview of theMembership 16 next The years. two every areview are to undergo the review mechanismthe review enables there commitments made under theMultilateral under made commitments Trade and, Agreements applicable, where thePlurilateral Trade “to is: contribute purpose to improved Agreement. Its Trade Mechanism Review Policy 3of theMarrakech Annex under wasestablished Trade (TPRM) The Mechanism Review Policy (ii) consumptionsupply; commercial an abroad; presence; –cross-border of to supply thefour modes respect with arelisted andlimitations commitments The Commitments) isth of Specific (Schedules XX Article oftheGATT. anintegral areconsidered part schedules The support. domestic includes also theschedule of agricultural products, case The frequency of a review depends onaMember’s share traders of depends worldtrade. of four areview biggest The frequency The inestablished 1988. provisionally had been Before mechanism review ofand practices. aMember’s this, trade policy apeer commitments procedures,newpolicy orfor theAgreements orto disputeunder settlement impose isnot, however, It trading system. asabasisfor theenforcement intended to serve obligations of specific of themultilateral onthefunctioning andtheirimpact andpractices trade policies Members’ individual appreciation andeconomic evaluation andpractices, trade policies of afull range of Members’ individual Ac their objectives. viable alternatives) inachieving lastly, And measures. aneconomic evaluation of the ofexpenditures interms incurred costs the Third, of thenature of acleardescription policies First, four covers process key thatTPRM isachieved of transparency inthe economic policymaking. elements The theirobjectives. inachieving of thecoherence policies of assessment these a better int policies to placeattempt trade andtrade-related revi The disciplines. WTO to existing subject measures andlabour, equivalent capital to orthat vitiate have andcan movement services, effects of goods, light throws onhowpolicies theTPRM under andmeasures practices policies, of Members’ review The meeting. ofthe conclusion atthe delivered Chairperson’s remarks concluding TPRB ofthe text meet review the after arepublished statement policy si institutions andthemacroeconomic policymaking trade anddescribing of chapters theMember of thetrade examining andpractices detailed policies of aMember, eachreview For Trade bytheWTO’s (TPRB). areconducted Body Review Reviews Policy isEach report subsequently published and thereby statement, orthepolicy objective, the above of aMember’s trade policies realized isto through reviews be regular on Members.” objective This and measures not covered by WTO rules may nonetheles rules notand measures covered byWTO treatment obligations oftheGATStreatment obligations andany exception themarket apply will to access aMember which andnational sectors theservice identify schedules The considered an integral part oftheGATS. anintegral part considered gular collective appreciation and appreciation gular collective made available made to public. thegeneral 164 and measures. Second, their rationale or objectives. Second, theirrationale andmeasures. orobjectives. by the Secretariat and a statement by andastatement theMember by theSecretariat cordingly, enables theregular collective theTPRM ing, along with the minutes of the meeting andthe theminutes of themeeting ing, alongwith heir broader policy setting, therebycontributing to setting, policy heir broader e corresponding provision in the case of theGATS. inthecase provision e corresponding or taxes forgone in pursuit of these policies and policies of these forgone inpursuit or taxes providing an opportunity for anexchange of views. anopportunity providing tuation. The Secretariat report andtheMember’s report tuation. Secretariat The ew of broad macroeconomic and structural policies policies andstructural ew of macroeconomic broad e report, which stresses the transparency aspect of aspect thetransparency stresses which e report, adherence by all Members to rules,disciplines adherence and by allMembers effectiveness ofeffectiveness policies and measures (relative to d presence of natural persons. The schedules are schedules The of naturald presence persons. e policies and practices of Members. Accordingly, of Members. andpractices e policies s from those obligations it wishes tomaintain. itwishes obligations those s from tariff rate tariff quotas, subsidies limits on export and s have an important bearing on the international the on bearing s haveanimportant are to be reviewed every four years. The rest rest The four years. every reviewed areto be the multilateral trading system, by achieving themultilateral trading system, evaluation of of thefullrange Section D provides a detailed account of how the GATT/WTO has responded to thechallenge of ensuring has responded account adetailed of howtheGATT/WTO Dprovides Section of public forums to better explai of publicforums to better in meetings, groupsaccess to relevant WTO society Members and trade-related statistics. Other activities activities Other statistics. andtrade-related Members large. Much of this involves ma ofthisinvolves large. Much to to refers efforts theWTO’s transparency External those without WTO missions in Geneva (non-resident delegations). delegations). missions inGeneva (non-resident WTO without those of them establish bodies that perform essentially many essentially that perform bodies of themestablish 133 not do contain an Agreements But eventhoughother WTO andre Dof thisReport) Section see more of VERs, (for of VERs monitoring theimplementation of theagreement, andmonitoring examining thephase-out Agreement include tofunctions to ambit.Butthose the Committee have onSafeguards awider appears thirdy heldevery sessions special the Committee onSubsidies andCountervailing subsidies notifications at Measures to Members’ review implementation of adopted recommendations orruli 21:6) requires theDispute (Article Understanding prov contain explicit Agreements ofA number WTO rather than intheMembers. bodies) its intheinstitution (and isvested which activity to theobligations theyhave un incurred by Members beyond goes surveillance understood, clear andeasily to ensure by that isanobligation theMembers thetrade measures transparency While theytake are Surveillance (v) thepublic. andwith members with dealings inits internal transparency andexternal toth WTO bythe outreach the includes inclusive. It of internal isto transparency make objective The ororganization intheinstitution itself. laying aswith bare of theprocess decision-making agreements Institutional transparency (internal and transparency) external haveInternal transparency to of andexternal clarification less doabout theprovisions in multilateral (iv) knowwhere that members so points enquiry contain obligations also tonumber of Agreements pub or theadoption of newmeasures, ortheprogress are of required Notifications theenactment legislation, to Agreements. about inform other Members WTO provisionsNotification are, in terms of count, th of such measures. modification orto such seek measuresabout andeitherto theiractivities adjust to be affected by governmental that are likely Members isthat thepublication obligation behind regulations. other idea essential WTO The measures should to acquaintedand traders become them” with all information related to theadministration of trade andnotification Publication obligations to “publish requires Xof Members theGATT Article promptly insuch amanner asto enable governments (iii) of themultilateral onthefunctioning and theirimpact tradingWTO, system. thebroad principlesof with non-di their consistency See Appellate Body Report on US-Underwear h nttto n T Agreements. andWTO n theinstitution king available official WTO documen king available WTO official ear. The surveillance function assigned ear. function surveillance The , p. 21. they can obtain the relevant information. relevant the obtain can they e most commonly mechanism found inthee most transparency decision-making in the WTO transparent andgenuinely intheWTO decision-making have a reasonable opportunity toacquire information opportunity have areasonable ceiving and reviewing allsafeguard notifications. andreviewing ceiving e smallest and poorest WTO Members, particularly to particularly Members, WTO andpoorest e smallest cluding the Ministerial Conferences,cluding theMinisterial andtheholding madeintheimplementation of A commitments. that. It implies keeping implies that. watch It overthecompliance Settlement Body to keep under surveillance the engage with civil society groups andthepublicat society civil with engage related to external transparency involve giving civil giving involve transparency to external related of the same functions described above. Article 68 above.Article described functions of thesame lish information on a relevant measure or establish establish or measure arelevant on lish information der the WTO Agreements. It is almost always an always isalmost It Agreements. theWTO der ngs. Article 26 of theSCMngs. Article Agreement requires 165 scrimination and predictability that underlie the scrimination andpredictability isions onsurveillance. Dispute SettlementThe explicit provision explicit onsurveillance, all almost ts, reports, submissions byWTO submissions reports, ts, by Article 13 byArticle oftheSafeguards 133

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS WORLD TRADE REPORT 2007 II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS Surveillance in the WTO, takes place principally through the various committees or WTO bodies that bodies takesSurveillance in place theWTO, WTO principally through or thevarious committees w Members taken byactions WTO of anti-dumping reports semi-annual Committee Agreement.provides onAntidumping The the TRIMS 7) Trade-Related Article Investment Measures (under TPRM asa“basisTPRM for theenforcement obl of specific of su Agreement). This IV, 3of theArticles section over surveillance mandate toconduct by differences performed inthesurveillance important by theInternatio conducted the surveillance activity The existence of theTrade existence Mechanism, The Review Policy of differences, there appears to be two essential ones essential two to be thereappears of differences, implementation of negotiated commitments under have been established by the WTO Agreements. The The Agreements. bytheWTO established have been Committee Agreement. on The 15) isto review annuallyTBT of theimplementation the andoperation notifiedhave by another been Member. Committee onTechnical The to Trade Barriers Article (under of onAgmay theCommittee bringto theattention surveillance function of theWTO. function surveillance on Agriculture (under Article 17) requires the Committee on Agriculture to monitor the progress inthe progress the tomonitor 17) Agriculture on Committee the Article requires (under Agriculture on product of transparency. noted above,product theTrad As the on what donewith could be there restrictions of are theWTO, quite explicit thecase policy. In subsequently summarized to to andtransmitted aview thecountry’s influence authorities,clearlywith (such surveillance with tasked maybe WTO in the ofmembers”. bodies rate policies specific While and, to fulfil “over surveillance that system function, over theentire international monetary theexchange of such disputes among Members, it performs avaluable function. itperforms of such disputes among Members, of theinstitution. the reputation To reduces thefrequency surveillance damage can that WTO theextent andthey onresources theyrequire expenditures andto because theinstitution Members tocostly WTO Unne proceedings. dispute settlement means there also violations wilful are ofIt less of by made commitments theMembers. thelevelof confidence increases That to by inthevalue theircommitments. incentive abide for Members on watchful that stands theinstitution the knowledge required of transparency themeasuresThe that Memb not have does potent thesame effect. by Members Agreements provisions ofthe transparency WTO of theobservance with together bodies WTO byBut thisisnot to that conducted say thesurveillance onMembers.” commitments newpolicy to impose their ability to timelyandaccurate provide their ability notificat by Members, of transparency theobservance link between there Thus isanimportant the Secretariat. by prepared reports as well as byMembers for consultations andrequests complaints notifications, and inparticular, compliance that theirobligations Agreement under Agreement. with Members’ The of the TRIPS Agreement mandates the TRIPS Council theTRIPS Agreement mandates of the TRIPS overarching scope as in Article IV of the IMF Articles of Agreement. Articles of theIMF IV overarching asinArticle scope members” with respect to theirexchange rate polici respect members” with isto of Fund pr surveillance theobjective Second, there isnosurveillance Committee onSafeguards), Body,as theDispute Settlement ortheCommittee onSubsidies andCountervailing Measures, orthe of policy recommendations that are submitted to that recommendations aresubmitted of policy ithin the preceding six months. six ithin thepreceding exchange rate arrangements in its Articles of Agreement (Article of Agreement (Article Articles exchange rate inits arrangements cessarily frequent disputes andre disputes frequent cessarily 166 the Agreements and hence less frequent tothe andhenceAgreements less recourse provision in the WTO Agreements that has thesame Agreements intheWTO provision the UruguayRound reform programme. Any Member the IMF Board for discussion. The Board’s are for The Board discussion. views the IMF rveillance has two interrelated aspects: surveillance surveillance aspects: interrelated hastwo rveillance e Policy Review Mechanism explicitly rules outthe rules explicitly Mechanism Review e Policy ions to various WTO organs and the quality of the organsandthequality ions toWTO various igations ... orfor dispute oduce “specific principlesfor theguidance of all nal Monetary Fund. There are similarities butalso are similarities Fund. There nal Monetary is to monitor andimplementation of theoperation riculture any measure which it considers oughtriculture any to measure itconsiders which es. All Fund Article IV staff reports provide aset provide reports staff IV FundArticle All es. to monitor the operation of the TRIPS Agreementto monitor of theoperation theTRIPS the IMF and the surveillance in the WTO. In terms In intheWTO. andthesurveillance theIMF ers take,ers andingeneral of theirtrade regime, and raw material of this surveillance comes from the from comes ofthissurveillance raw material . First, the IMF has been given an explicit legal anexplicit given has been theIMF . First, in particular, comparisons has with occasioned guard for possible violations create a powerful createapowerful violations guard for possible course to dispute settlement are to dispute settlement course settlement procedures,settlement or from using domestic policy instruments to erode the value of trade concessions granted to partners. Rules thevalueof to granted trade concessions erode to partners. instruments policy from usingdomestic groups andthegeneral society to civil engage noequivalenteffort to be there appears EC orNAFTA, requirement for internal transparency. for Except regional thelargest integration such asthe agreements, isconsider agreements inthese given that membership principal achievements of the system andthechallenges that have alongtheway. emerged of thesystem principal achievements have evolve itself rulesand theinstitution how these D–to narrate –Section of thisReport to part thelast by left shall trademade rulesandinstitutions. It be conceptual nature. ortheoretical anus Butitprovides inthis chapter of discussion and the institution The informat disseminating negotiations, facilitating responsibilities are important responsibilities. these Among andgivenimportant substantial authority with vested broker. isoften honest institution or for The aconciliator ofademand andbecause contracts iscr institution An and information asymmetries. to institutions question, answer are thesecond esta In compliance to theterms of with assess asto theagreement. so better policies measuresRules reduce of and thecost acquiring on transparency information trade partners’ about levelsof liberalization.to indeeper Enforcement lock from theterms of theagreement. defection deters inorder short-term injury. protectionism suffer producers trade off domestic They when commitments on contingent to theagreem measures allowparties dilemmaprisoners’ outcome. Rules onanti-circumvent to thetrade agreement mutuallyallow theparties to that reduce of below the levelsof protection areasof five rule-mak question, to thefirst answer In establishe are institutions often CONCLUSIONS are What therulesthat questions. make chapter byThis askingtwo upatrade agreement? began Why 7. orevents. documents access topublic byproviding official mechanism review like ofabsence apeer theTrad Dfor discussion of amore transp extended Section measures range of (see trade andregulatory obligations andpublication as wellnotification onawide Transparency provisions in RTAs Transparency provisions inRTAs to appear resemble (c) trading system. Thus, bilateral Thus, trading andregional system. trade agre d inadditionto therules? ion and settling international trade disputes. ion andsettling eated because trade agreements may be incomplete may be trade agreements because eated the rules in trade agreements has been primarily of has a been the rulesintrade agreements e Policy Review Mechanism of the WTO. Moreover, of theWTO. Mechanism Review e Policy arency in RTAs). The one big difference may be the onebigdifference may be The inRTAs). arency ing were identified. Rules on reciprocal liberalization liberalization reciprocal on Rules identified. ing were blished because of the presence of transaction costs costs of of transaction thepresence because blished eful lens for assessing thecontributions be that can eful lensfor assessing d inthemultilateral the to identify trading system, ent to escape temporarily from their liberalization liberalization their from temporarily ent toescape many found of inthemultilateral theelements ements typically contain of schedules concessions, typically ements 167 ion, such asnational treatment, prevent parties ably smaller than in the WTO, there is less of there aably smallerthan isless intheWTO,

II SIX DECADES OF MULTILATERAL TRADE COOPERATION: WHAT HAVE WE LEARNT? WORLD TRADE REPORT 2007 C THE DESIGN OF INTERNATIONAL TRADE AGREEMENTS