Question

1. Explain the conflict between regionalism and the GATT/WTO system. Make sure your answer addresses trade creation versus trade diversion

2. Explain the two major reasons why the GATT/WTO process has stalled. Who is harmed by a “nonfunctioning” global trade negotiating system? What would it take to reinvigorate the process?

3.  Through what processes did cartels try to manipulate the price of commodities? State and briefly explain two mechanisms.

Answer 1

1. Conflict between regionalism and the GATT/WTO system

Regional trade agreements (RTAs) seem to compete with the WTO, but often they can actually support the WTO’s multilateral trading system. RTAs, defined in the WTO as reciprocal preferential trade agreements between two or more partners, have allowed countries to negotiate rules and commitments that go beyond what was possible multilaterally. In turn, some of these rules have paved the way for agreement in the WTO. Services, intellectual property, environmental standards, investment and competition policies are all issues that were raised in regional negotiations and later developed into agreements or topics of discussion in the WTO.

The WTO agreements recognize that RTAs can benefit countries, provided their aim is to facilitate trade among its parties. They also recognize that under some circumstances these agreements could hurt the trade interests of other countries. Normally, setting up a customs union or free trade area would violate the WTO’s principle of non-discrimination for all WTO members (“most-favoured-nation”). In particular, the agreements should help trade flow more freely among the countries in the RTA without barriers being raised on trade with the outside world. In other words, regional integration should complement the multilateral trading system and not threaten it.

2. GATT was established in 1948 to regulate world trade. It was created as a means to boost economic recovery after the Second World War by reducing or eliminating trade tariffs, quotas and subsidies.

During the Great Depression, a breakdown of international relations and an increase in trade regulation made poor economic conditions worse and contributed to the outbreak of the Second World War. After the war, the Allies believed that a multilateral framework for world trade would loosen the protectionist policies that defined the 1930s and create an economic interdependency that would encourage partnership and reduce the risk of conflict. The idea was to establish a code of conduct that would progressively liberalize (remove or loosen restrictions on) international trade. Within this code of conduct, consultation on trade issues among member nations could take place and be resolved, and data on world trade characteristics and trends could be collected and shared.

Established over a year before the North Atlantic Treaty Organization (NATO), a Western military alliance, GATT played an important role in the Cold War, which began shortly after the Second World War. It helped the US-led capitalist West spread its influence by liberalizing trade through multilateral agreements. The West, with which Canada was aligned, gained more economic allies through these agreements, which strengthened its global influence in the face of the communist Eastern bloc led by the Soviet Union. After the Cold War, with the collapse of the Soviet Union in 1991, GATT transitioned into a truly global organization — the WTO — and admitted former communist bloc countries, such as Czech Republic, Poland and Romania.

• Becauase of economic and trade policy uncertainties are harming investors. Investors are harmed by a “nonfunctioning” global trade negotiating system.