WTO Working Papers

This Working Paper contains some observations concerning the evolution of trade and trade-related policies in the Asia-Pacific region since the establishment in 1989 of the Trade Policy Review Mechanism (TPRM), whose goal is to improve the transparency of these policies. It also draws some lessons from the Reviews undertaken. In particular, the Paper examines how reforms, either unilateral or in connection with bilateral, regional or multilateral trade agreements, can be greatly facilitated by transparency, including cost-benefit (C-B) analyses of policies and measures that take full account not just of the interests of domestic producers, but also those of other groups, including exporters and domestic consumers. While high quality transparency is not cheap, the costs of achieving it pale in comparison with the financial assistance involved and efficiency losses associated with such assistance. Trade Policy Reviews (TPRs) throw light not only on measures that appear to contravene WTO rules, although that is not their purpose; more importantly, they identify measures not seemingly covered by WTO rules, which can, nonetheless, have economic effects equivalent to measures that are subject to these rules. One of the main lessons from these TPRs is that impediments to economic development are largely homegrown. Consequently, unilateral structural reform, of which liberalization of both trade and foreign direct investment (FDI) has been an integral part, is of paramount importance. By fostering transparency, particularly evaluating the effectiveness of policies and measures in achieving their objectives and their overall impacts (intended or unintended) on the economy, the TPRM can be a catalyst for unilateral reform, including liberalization of trade and FDI. Although the latter has received added impetus from multilateral liberalization under the auspices of the GATT/WTO, the stalling of negotiations in connection with the Doha Development Agenda (DDA) should not preclude further unilateral liberalization. By contrast, the benefits of preferential trade agreements are far from obvious, notwithstanding their proliferation during the past decade throughout the Asia-Pacific region, here few governments have subjected these agreements to rigorous cost-benefit analysis. Economies in the Asia-Pacific region, especially East Asia, have been much more successful than those in other regions in achieving sustained fast growth, and thereby raising living standards and reducing poverty. This success can be attributed not so much to transparency, which is largely lacking, but to, inter alia, their broad outward-looking development strategy. This strategy has involved in particular an increasingly high degree of integration into the global economy with heavy reliance on growth of manufactured exports, high rates of national saving to finance high rates of domestic investment, including public investment in physical and social infrastructure (notably education and health), supplemented by FDI (as well as maintenance of macroeconomic stability, reliance on a functioning market system to allocate resources, and committed, capable and credible governments). However, this development strategy has left growth very heavily dependent on domestic investment and exports, which dropped sharply in the wake of the global financial crisis that erupted in 2008. This, and resulting current account imbalances, and consequent trade tension, has prompted a rethink in a number of East Asian economies of their development strategies. As a consequence, China, Chinese Taipei, Korea and Malaysia, for example, are now attempting to wean their economies off investment and exports and give freer rein to domestic consumption. As circumstances (including comparative advantage) change, and global resources become increasingly scarce, policies need to be continually reviewed in order to ensure that second-best measures are replaced by more cost-effectiveness ones. As improved productivity is the key to sustained development in the long run, policies need to be adapted to ensure that they facilitate, rather than inhibit, the efficient re-allocation of resources by markets in accordance with evolving comparative advantage. Reform needs to be ongoing, therefore. Transparency builds support for, and thus paves the way for, such reform.

Since 1990 the number of preferential trade agreements (PTAs) has increased very rapidly. This paper aims to contribute to this literature by presenting a new database on PTAs called Design of Trade Agreements (DESTA). We identified a total of 690 negotiated trade agreements between 1945 and 2009 of which we have coded 404 agreements for which treaty texts and appendices were available. We aim to have a database for about 550 agreements by 2012. We have coded agreements for a total of 10 broad sectors of cooperation, encompassing market access, services, investments, intellectual property rights, competition, public procurement, standards, trade remedies, non-trade issues, and dispute settlement. For each of these sectors, we have coded a significant number of items, meaning that we have about 100 data points for each agreement. The resulting DESTA database is – to the best of our knowledge – by far the most complete in terms of agreements and sectors covered. This dataset fills a crucial gap in the field by providing a fine-grain measurement of the design of PTAs. Among others, we think that DESTA will be of relevance for the literatures on the signing of PTAs; the legalization of international relations; the rational design of international institutions; the diffusion of policies; the political and economic effects of trade agreements; power relations between states; and forum shopping in international politics. This working paper describes the DESTA data set and provides selected descriptive statistics. The overview puts emphasis on variation in design over time and across regions.

This paper weaves several sets of facts into an argument that: 1) today’s trade is radically more complex, involving a “trade-investment-service nexus”, 2) this 21st century trade demanded deeper disciplines which were supplied by “21st century regionalism” while the WTO was otherwise occupied, and 3) 21st century regionalism has quite different implications for the world trading system than the traditional thinking suggests. The paper also argues that the traditional thinking (building-stumbling-block and Vinerian economics) is not up to the job of analysing 21st century regionalism. An alternative framework is not provided, but elements a new approach should encompass are discussed.

When looking at the conditions of trade in natural resources the world appears upside down: tariff protection in natural resources sectors is generally lower than for overall merchandise trade, while export restrictions are twice as likely as in other sectors. On the other hand, tariff escalation is significant in natural resources sectors, where materials in their raw state face, on average, lower duties than in their processed form. In this paper, we discuss how export taxes and tariff escalation may be the result of an uncooperative trade policy. Specifically, tariff escalation and export taxes can be "beggar-thy-neighbor" policies because governments may be tempted to use them to alter the relative price of exports to their advantage (terms-of-trade effect) or to expand the domestic processing industry at the expenses of foreign production (production relocation effect). In equilibrium, these policies offset each other in a Prisoners' Dilemma situation, where trade is inefficiently low.

The creation of the General Agreement on Trade in Services (GATS), in the Uruguay Round, and its entry into force in 1995 marked a new stage in the history of the multilateral system. It was motivated essentially by the rapid expansion of international services trade within an increasingly open environment in many countries. Given the peculiarities of services trade, including the intangible nature of the products concerned and the need for direct contact between supplier and user in many cases, the Agreement contains a variety of conceptual innovations, including its extension to modes of supply beyond conventional cross-border trade (consumption abroad, commercial presence, and presence of natural persons) and its coverage, and legitimization, of various types of non-tariff restrictions. In turn, the new concepts needed time to be absorbed by the ministries and agencies involved in services trade. Further, the positive-list, or bottom-up, approach to scheduling trade commitments under the GATS meant that great flexibility was given to Members in selecting the sectors concerned and specifying the levels of access provided under individual modes. Thus, not surprisingly, the schedules that emerged from the Uruguay Round, which still account for the majority of current commitments, contain a variety of unclear or superfluous entries that may cause interpretation problems. Their solution could contribute significantly to the clarity and comparability of access obligations across sectors and WTO Members. The scheduling conventions agreed for the Doha Round thus provide specifically for the possibility of technical refinements that leave the substance of commitments unchanged. However, not only was this possibility used more sparingly to date than might have been expected, but additional flaws would be introduced if some current offers were to enter into effect. The following discussion, with a focus on a particular group of entries (market access via commercial presence), tries to explain the scope for such refinements and develop a clearer picture of the areas where further action might be needed.

We propose a theoretical framework for analyzing the problems associated to unilateral immigration policy in receiving countries and for evaluating the grounds for reform of international institutions governing immigration. We build a model with multiple destination countries and show that immigration policy in one country is influenced by measures adopted abroad as migrants choose where to locate (in part) in response to differences in immigration policy. This interdependence gives rise to a leakage effect of immigration policy, an international externality well documented in the empirical literature. In this environment, immigration policy becomes strategic and unilateral behavior may lead to coordination failures, where receiving countries are stuck in welfare inferior equilibria. We then study the conditions under which a coordination failure is more likely to emerge and argue that multilateral institutions that help receiving countries make immigration policy commitments would address this inefficiency.

The Trade Policy Reviews conducted in the Western Hemisphere over 1989-2009 contain a wealth of information that puts in clear evidence the considerable improvements achieved in most American countries during the first two decades of operation of the Trade Policy Review Mechanism. Those Reviews show that trade liberalization came hand-in-hand with internal reforms, and was generally of an autonomous nature and an intrinsic component of improved economic management. Trade liberalization slowed down during the second decade under review, with tariffs having come down mostly during the earlier years. The use of non-tariff barriers also fell over time although at a slow pace in some of the smallest Members, which found it difficult to implement the more complex trade policy instrument applied by larger countries. Export and other government assistance schemes proliferated throughout the continent but were often characterized by a lack of unity in the criteria used to assign and apply them. The review period also witnessed enormous changes in the services sectors, where reforms usually proved more complex than in the goods area. The multilateral and other international trade agreements contributed to the stability of trade policies and the general rejection of protectionism, although backtracking did occur in a number of cases. Because the commitments made during the Uruguay Round negotiation now fall short of the more liberal trade regimes that came to be over the review period, most Members in the Americas could presently raise trade and investment barriers without violating multilateral rules. Thus, the pressing need to conclude the Doha Development Agenda in order to lock in the considerable trade policy liberalization achieved during past years, and to strengthen the multilateral trading system.

The previous literature provides a highly ambiguous picture on the impact of trade and investment agreements on FDI. Most empirical studies ignore the actual content of BITs and RTAs, treating them as "black boxes", despite the diversity of investment provisions constituting the essence of these agreements. We overcome this serious limitation by analyzing the impact of modalities on the admission of FDI and dispute settlement mechanisms in both RTAs and BITs on bilateral FDI flows between 1978 and 2004. We find that FDI reacts positively to RTAs only if they offer liberal admission rules. Dispute settlement provisions play a minor role. While RTAs without strong investment provisions may even discourage FDI, the reactions to BITs are less discriminate with foreign investors responding favourably to the mere existence of BITs.

In spite of their growing importance in international trade as well as in bilateral and multilateral trade negotiations, services have only attracted limited attention from researchers interested in determinants of trade policies and trade cooperation. This paper seeks to account for countries' varying levels of market access commitments under the multilateral General Agreement on Trade in Services (GATS). I develop an argument suggesting how levels of democracy and factor endowments are associated with more commitments. The empirical analysis supports these propositions, and also suggests that relative size, as well as regulatory capacity, are positively linked to GATS commitments.

The paper discusses a number of issues related to the treatment of trade credit internationally, a priori (treatment by banking regulators) and a posteriori (treatment by debtors and creditors in the case of default), which are currently of interest to the trade finance community, in particular the traditional providers of trade credit and guarantees, such as banks, export credit agencies, regional development banks, and multilateral agencies. The paper does not deal with the specific issue of regulation of official insured-export credit, under the OECD Arrangement, which is a specific matter left out of this analysis. Traditionally, trade finance has received preferred treatment on the part of national and international regulators, as well as by international financial agencies in the treatment of trade finance claims, on grounds that trade finance was one of the safest, most collateralized, and selfliquidating forms of trade finance. Preferred treatment of trade finance also reflects the systemic importance of trade, as in sovereign or private defaults a priority is to "treat" expeditiously trade lines of credits to allow for such credit to be restored and trade to flow again. It is not only a matter of urgency for essential imports to be financed, but also a pre-condition for economic recovery, as the resumption of trade is necessary for ailing countries to restore balance of payments equilibrium. The relatively favourable treatment received by trade finance was reflected in the moderate rate of capitalization for cross-border trade credit in the form of letters of credit and similar securitized instruments under the Basel I regulatory framework, put in place in the late 1980s and early 1990s. However, as the banking and regulatory communities moved towards internal-rating based and risk-weighted assets systems under the successor Basel II framework, a number of complaints emerged with respect to the treatment of trade credit – particularly in periods of crisis. Issues of pro-cyclicality, maturity structure and country risk have been discussed at some length in various fora, including in the WTO at the initiative of Members. Part of the issue was that Basel II regulation was designed and implemented in a manner that, in periods of banking retrenchment, seemed to have affected the supply of trade credit more than other potentially more risky forms of lending. With the collapse of trade in late 2008 and early 2009, the regulatory treatment of trade credit under Basel II clearly became an issue and was discussed by professional banking organizations, regulators and international financial institutions. A sentence made its headway into the communiqué of G-20 Leaders in London in April 2009, calling upon regulators to exercise some flexibility in the application of Basel II rules, in support of trade finance. As the issue of removing the obstacles to the supply of trade finance spread became part of the public debate, discussions with respect to the regulatory treatment of trade finance in the context of the making of "Basel III" rules are now raising political attention. Part of the underlying problem regarding the design of regulation of trade finance is that banking regulators may not have enough understanding of the way that trade and trade finance operate in practice. In turn, the banking community has made insufficient progress in explaining these issues to regulators and in providing evidence about the high level of safety and soundness of their activity, in collecting statistical information and even in defining clearly what comprises trade finance. This paper aims at clarifying such issues. The WTO, in its role as an "honest broker", is trying to help the parties concerned, and has been asked from time to time to act as a go-between between the two communities, in order to clarify issues. Section 1 looks at the overall Basel framework and its evolution over time, with particular emphasis on the regulation of trade finance. Section 2 looks at issues raised in the WTO context by the trading and trade finance communities, be it by WTO Members or by experts, and how this has helped to clarify some of the disputed issues. Section 3 raises a number of questions which need clarification from the trade finance community for regulators to be able to better capture the reality of trade finance operations, and allow them to regulate with full understanding of its implications.

We examine the effects of transit, documentation, and ports and customs delays on Africa’s exports. We find that transit delays have the most economically and statically significant effect on exports. A one day reduction in inland travel times leads to a 7 percent increase in exports. Put another way, a one day reduction in inland travel times translates into 1.5 percentage point decrease in all importing-country tariffs. In contrast, longer delays in the other areas have a far smaller impact on trade. We control for the possibility that greater trade leads to shorter delays in three ways. First, we examine the effect of trade times on exports of new products. Second, we evaluate the effect of delays in a transit country on the exports of landlocked countries. Third, we examine whether delays affect time-sensitive goods relatively more. We show that large transit delays are relatively more harmful because of high within-country variation.

It is becoming increasingly important to put freshwater issues in a global context. Local water depletion and pollution are often closely tied to the structure of the global economy. With increasing trade between nations and continents, water is more frequently used to produce exported goods. International trade in commodities implies long-distance transfers of water in virtual form, where virtual water is understood as the volume of water that has been used to produce a commodity and that is thus virtually embedded in it. Knowledge about the virtual-water flows entering and leaving a country can cast a completely new light on the actual water scarcity of a country. For example, Jordan imports about 5 to 7 billion m3 of virtual water per year, which is in sharp contrast with the 1 billion m3 of water withdrawn annually from domestic water sources. This means that people in Jordan apparently survive owing to the import of water-intensive commodities from elsewhere, for example the USA.

In this report we first give a brief overview of trade in seafood and seafood production. We then review the basic bioeconomic theory of the fishery and pinpoint why fisheries are different from most other industries. We next review the theoretical literature on trade and renewable resources that shows how unconventional outcomes from trade liberalization can emerge. Given this background, we discuss the most important policy issues in relation to seafood and trade, including sections on managing the global commons and domestic trends in management. In the final section, we discuss specific issues that are germane to the WTO and its rules.

This paper provides a review of current thinking on the economics of international trade in mineral resources. There is not a great deal written on this topic, and so my review is necessarily broad rather than deep. In some cases I am only able to cite related and even tangential literature. I first define what is meant by trade in mineral resources. I then discuss patterns of trade in mineral resources. The paper then moves on to the five topics requested by the World Trade Organization: theoretical and empirical literature on international trade in minerals; trade impacts of mineral abundance and the resource curse; the political economy of mineral trade in resource-abundant states; non-economic considerations associated with strategic mineral resources; and the impact of domestic market structure and regulation on production and trade in minerals.

The General Agreement on Trade in Services (GATS) is broader in policy coverage than conventional trade agreements for goods and, at the same time, offers governments more flexibility, in various dimensions, to tailor their obligations to sector- or country-specific needs. An overview of existing commitments on healthcare and health insurance services shows that WTO Members have made abundant use of these possibilities. While most participants elected not to undertake bindings on healthcare services at the end of the Uruguay Round, nor to make offers in the ongoing negotiations, insurance services have been among the most frequently committed sectors. If there is a common denominator, regardless of the Members concerned (except for recently acceded countries), it is the existence of a lot of 'water' between existing commitments and more open conditions of actual access in many sectors. This may also explain, in part, why there have been very few trade disputes under the GATS to date - far fewer than under the GATT in merchandise trade. Also, governments appear to be generally hesitant in politically and socially sensitive areas to take action in the WTO. There are indications, however, that the same 'players' have acted differently in other policy contexts. For example, it appears that under recent preferential trade agreements (PTAs) the European Communities has been even more cautious in committing on hospital services and protecting scope for (discriminatory) subsidies than under the GATS. Yet, this is not necessarily true for the obligations assumed by many countries, including individual EC Member States, under bilateral investment treaties (BITs). These treaties overlap with the GATS, as far as commercial presence is concerned, and may be used by aggrieved investors to challenge policy restrictions in host countries. However, though frequently invoked, BITs do not meet the same standards, in terms of transparency, open (consensual) rulemaking and legal certainty, as commitments under the GATS.

Tariff water –the difference between bound and applied duties– provides relevant information on domestic trade policy and WTO trade negotiations. This paper examines the general and sectoral tariff structure of 120 economies, using exploratory data analysis.

We consider the purpose and design of the World Trade Organization (WTO) and its predecessor, GATT. We review recent developments in the relevant theoretical and empirical literature. And we describe the GATT/WTO architecture and briefly trace its historical antecedents. We suggest that the existing literature provides a useful framework for understanding and interpreting central features of the design and practice of the GATT/WTO, and we identify key unresolved issues.

I propose a framework within which to interpret and evaluate the major reforms introduced to the GATT system in its transition to the WTO. In particular, I examine the WTO Agreement on Safeguards that has replaced the GATT escape clause (Article XIX), and the Dispute Settlement Process (DSP) that resembles a court of law under the WTO. Using this framework, I interpret the weakening of the reciprocity principle under the Agreement on Safeguards as an attempt to reduce efficiency-reducing trade skirmishes. The DSP is interpreted as an impartial arbitrator that announces its opinion about the state of the world when a dispute arises among member countries. I demonstrate that the reforms in the GATT escape clause should be bundled with the introduction of the DSP, in order to maintain the incentive-compatibility of trade agreements. The model implies that trade agreements under the WTO lead to fewer trade skirmishes but this effect does not necessarily result in higher payoffs to the governments. The model also implies that the introduction of the WTO court, which has no enforcement power, can in fact improve the self-enforceability of trade agreements.

The article analyses the role of international supply chains as transmission channels of a financial shock. Because individual firms are interdependent and rely on each other, either as supplier of intermediate goods or client for their own production, an exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain. The transmission of the initial financial shock through real channels is tracked by modelling input-output interactions. The paper indicates that when banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and if assets are priced to market, then a resonance effect amplifies the back and forth transmission between real and monetary circuits. The paper illustrates the proposed methodology by computing a supply-driven indicator (IRSIC) and indirect demand-driven impacts on five interconnected economies of different characteristics: China, Japan, Malaysia, Thailand and the United States.

Using a dataset of 138 countries over a period from 1966 to 2004, this paper analyses the relevance of country specific shocks for income volatility in open economies. We show that exposure to country specific shocks has a positive and significant impact on GDP volatility. In particular, we find that the degree to which the cycles of different trading partners are correlated is more important in explaining exporters’ GDP volatility than the volatility of demand in individual export market. We also show that geographical diversification is a significant determinant of countries' exposure to country specific shocks. Keywords: income volatility, geographical export diversification, external shocks.

Two institutions provide multilateral venues for countries to discuss food safety measures at the international level: the Codex Alimentarius Commission (Codex) and the World Trade Organization. Both institutions encourage their members to base food safety standards on scientific evidence. In this paper we provide a description of how food safety related scientific evidence is generated and how it is used in the context of risk assessment for international standard-setting at CODEX and in WTO trade disputes. In particular, we discuss the processes leading to policy conclusions on the basis of scientific evidence, with a focus on the interactions involved between private and public sector actors and those between “scientific experts” and others. We identify weaknesses in the current institutional set-up and provide suggestions on how to improve the interaction between different players at the national and international level so as to strengthen the existing system and increase its cost efficiency.

Recent empirical evidence has shown that trade liberalization promotes innovation and productivity growth in individual firms. This paper argues that different types of trade liberalization – multilateral versus regional – may lead to different R&D and productivity levels of firms. Trade agreements between countries are modelled with a network: nodes represent countries and a link between the nodes indicates the existence of a trade agreement. In this framework, the multilateral trade agreement is represented by the complete network while the overlap of regional trade agreements is represented by the hub-and-spoke trade system. Trade liberalization, which increases the network of trade agreements, reinforces the incentives for firms to invest in R&D through the creation of new markets (scale effect) but it may also dampen these incentives through the emergence of new competitors (competition effect). The joint action of these two effects within the multilateral and the regional trade systems gives rise to the result that, for the same number of direct trade partners, the R&D effort of a country in the multilateral agreement is lower than the R&D effort of a hub but higher than the R&D effort of a spoke. This suggests that a ”core” country within the regional trade system has higher R&D and productivity level than a country with the same number of trade agreements within the multilateral system whereas the opposite is true for a ”periphery” country. Additionally, the paper finds that while multilateral trade liberalization boosts productivity of all countries, regional trade liberalization increases productivity of core economies but may decrease productivity of periphery economies if the level of competition in the new trade partner countries of the periphery economy is ”too high”. Furthermore, the aggregate level of R&D activities within the multilateral trade agreement exceeds that in the star – the simplest representative of the hub-and-spoke trade system.

WTO arbitrators rely on economics to establish the permissible retaliation limits authorized by the Dispute Settlement Understanding (DSU) which arguably serves to enforce the overall agreement. We examine how theoretical and quantitative economic analysis has and can be used in this stage of the DSU process. First, we identify, characterize, and categorize the major classes of disputes – e.g., those affecting import protection versus export promotion – and use the Bagwell and Staiger interpretation of the WTO principle of reciprocity to provide a theoretical framework that arbitrators can use to identify the maximum level of retaliatory countermeasures. Second, we allocate each of the ten DSU arbitrations that have taken place thus far into one of these categories and compare the arbitrators’ actual approach with the theory. Third, we use this framework to identify three crucial elements to the arbitrators' decisionmaking process for each case: i) the formula that they decide to adopt for identifying appropriate countermeasures, ii) their political-legal-economic decision on a WTOconsistent counterfactual to use to implement the formula, and iii) the quantitative methods they use to necessarily construct the (unobserved) WTO-consistent counterfactual. We examine not only the arbitrations that have taken place thus far, but our approach also illustrates a template for many additional types of arbitrations likely to take place under the DSU. Finally, in the disputes in which this reciprocity approach has not been used, we identify procedural difficulties that arbitrators confront thus highlighting the constraints that hinder their use of economic analysis in practice.

As an internationally standardized product nomenclature, the Harmonized System (HS) is used by WTO Members in their schedules of concessions and in the definitions of product coverage for a number of WTO agreements. The Harmonized System is normally amended by the World Customs Organization every four to six years. These amendments pose considerable challenges for the WTO and its Members. On the one hand, Members need to periodically update their historical schedules of concessions into the latest nomenclature. On the other hand, these amendments may have implications for the definition and thus also the implementation of some WTO agreements where the product coverage is defined in terms of the HS. In either case, the product codes and/or descriptions in the old HS version need to be transposed precisely into those in the new version of HS nomenclature in order to retain the historical concessions or the product coverage unchanged. Given the complexity of HS amendments, this process could be very technical and sometimes tricky. This paper starts by providing an overview of the HS amendments and proposing a categorization of those HS changes in the context of transposition. It then looks back at the history of the introduction of the HS and its subsequent amendments into the WTO schedules and assesses the difficulties and problems which have been faced by WTO Members. On the basis of such analysis, it introduces the successful procedures and methodologies used by WTO Members and the WTO Secretariat to deal with the recent HS2002 transposition. The paper also discusses the implications of the HS amendments to three WTO agreements and the possible approaches to transpose their product lists into a new HS nomenclature.