Economic research and trade policy analysis
Foreword by the Director-General
This year’s World Trade Report explores the role of trade in a world characterized over the last several decades by increasing dependence among nations. This inter-dependency – what we all call globalization today – is a multi-layered and complex phenomenon involving intensive political social and economic interaction nationally and internationally. Few would contest the benefits that globalization has brought in terms of greater prosperity for hundreds of millions as well as greater stability among nations. But many individuals in different societies across the world have shared little or not at all in the benefits of globalization. The challenges facing national governments in managing globalization are formidable and success in spreading prosperity more widely requires a strong common purpose.
Acknowledgements
The World Trade Report 2008 was prepared under the general direction of Deputy Director-General Alejandro Jara. Patrick Low Director of the Economic Research and Statistics Division led the team responsible for writing the Report. The principal authors of the Report were Marc Bacchetta Chad Bown K. Michael Finger Marion Jansen Alexander Keck Roberta Piermartini Michele Ruta and Robert Teh. Trade statistics information was provided by the Statistics Group of the Economic Research and Statistics Division coordinated by Hubert Escaith Julia de Verteuil Andreas Maurer and Jürgen Richtering.
Executive summary
International trade is integral to the process of globalization. Over many years governments in most countries have increasingly opened their economies to international trade whether through the multilateral trading system increased regional cooperation or as part of domestic reform programmes. Trade and globalization more generally have brought enormous benefits to many countries and citizens. Trade has allowed nations to benefit from specialization and economies to produce at a more efficient scale. It has raised productivity supported the spread of knowledge and new technologies and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved popular nor have the benefits of trade and globalization necessarily reached all sections of society. Trade scepticism is on the rise in certain quarters and the purpose of this year’s core topic of the World Trade Report entitled “Trade in a Globalizing World” is to remind ourselves of what we know about the gains from international trade and the challenges arising from higher levels of integration.
The trade situation in 2007
Growth in world output and trade decelerated in 2007. Weaker demand in the developed economies reduced global economic growth to 3.4 per cent from 3.7 per cent roughly the average rate recorded over the last decade. At some 7 per cent growth in the developing regions was nearly three times the rate recorded in the developed regions and the contribution of the developing countries to global output growth in 2007 exceeded 40 per cent. Economic expansion in the least-developed countries fully matched the growth rate recorded by developing countries as a group in 2007 sustaining a pattern that has been maintained since 2000.
Trade in a globalizing world
Economic integration is proceeding across the world at an unprecedented pace. Globalization has brought enormous benefits for many countries and citizens. But some have been on the losing end of the process and opposition to further integration is mounting for a multitude of reasons. Trade is just one aspect of globalization and links with broader economic political and technological forces are manifold and complex. Certain arguments against open trade are fuelled by a variety of factors – including a general fear of change – that have little to do with further trade opening. Governments responding to antitrade pressures stemming from anti-globalization arguments risk making poor policy choices. Trade scepticism is clearly a cause of concern particularly at a time when WTO members are striving to complete the Doha Round. At this crucial juncture it seems appropriate to revisit the case for trade and to ask ourselves whether the traditional arguments in favour of free trade are still valid.
World Trade Report 2008
The theme of this year’s Report is “Trade in a Globalizing World”. The Report provides a reminder of what we know about the gains from international trade and highlights the challenges arising from higher levels of integration. It addresses a range of interlinking questions starting with a consideration of what constitutes globalization what drives it what benefits does it bring what challenges does it pose and what role does trade play in this world of ever-growing inter-dependency. The Report asks why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. It also considers who the winners and losers are from trade and what complementary action is needed from policy-makers to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions the Report reviews both the theoretical gains from trade and empirical evidence that can help to answer these questions.
The Harmonized System
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.
Bilateralism in Services Trade
In most of the current literature the spread of regionalism in international trade relations is iscussed in terms of a rapidly rising number of preferential trade agreements (PTAs). Far less attention is given to the even more rapid proliferation of bilateral investment treaties (BITs) and their overlap with obligations assumed by WTO Members under the General Agreement on Trade in Services (GATS). About 60 per cent of world foreign investment stocks are in services and thus covered by mode 3 (commercial presence) of the GATS. A closer look reveals that BITs generally apply across a far wider range of sectors in particular in the case of LDCs and developing countries than those scheduled under the GATS. Furthermore a number of obligations enshrined in BITs go beyond their potential counterparts under the GATS. At the same time since most WTO Members have not listed relevant exemptions from the Most-Favoured-Nation (MFN) clause of the Agreement their BIT obligations are to be applied on an MFN basis. While this extension may not cause problems in many cases given generally liberal investment regimes and the focus of most treaties on protecting rather than liberalizing access inconsistencies remain between the two frameworks. Based on an assessment of relevant provisions this article discusses options on how WTO Members could proceed.
Boosting Trade Finance in Developing Countries
The paper discusses the efforts deployed by various players mainly multilateral financial institutions regional development banks export credit agencies to mobilize greater flows of trade finance for developing countries with a view to help them integrate in world trade. As an institution geared towards the balanced expansion of world trade the WTO is in the business of making trade possible. Its various functions include reducing trade barriers negotiating and implementing global trade rules and settling disputes on the basis of the rule of law. The WTO is also interested in strengthening the "supply-side" of developing countries so that they can respond to new market opportunities. To this end it supports various initiatives aimed at improving the "trade infrastructures" of developing countries ranging from the ability to meet international product safety and sanitary standards to run efficient customs or to participate effectively to the multilateral trade negotiations by training public servants. The WTO carries out various initiatives with other partners (public and private sector institutions) in the context of its own technical assistance program or in the context of multi-agency projects such as the Integrated Framework or the Aid-for-Trade Initiative. Since more than 90% of trade transactions involve some form of credit insurance or guarantee one can reasonably say that trade finance is the lifeline of trade. Producers and traders in developing or least-developed countries need to have access to affordable flows of trade financing and insurance to be able to import and export and hence integrate in world trade. From that perspective an efficient financial system is one indispensable infrastructure to allow trade to happen. In line with the above initiatives the WTO has been following actively and at times directly supporting initiatives to boost the availability of trade finance in developing and least-developed countries wherever it was needed. Since the WTO is not a financial institution it has been supporting in the past few years partners engaged in this effort such as international financial institutions export credit agencies large banks and regional development banks. Initially the WTO has been asked by its members at several points in recent years to examine the issue of availability of trade financing – as a key infrastructure needed by developing and leastdeveloped countries to integrate in world trade. Paragraph 36 of the Ministerial Declaration of Doha requested WTO Members to examine and if necessary come up with recommendations on measures that the WTO could take within its remit to minimize the consequences of financial instabilities on their trade opportunities. In the context of the newly created Working Group on Trade Debt and Finance (WGTDF) the interruptions of the flows of trade finance in emerging markets during the Asian and Latin American financial crises were quickly identified as concerns by Members as well as the chronic difficulties of low income Members to secure more affordable flows of trade financing in the long-run. These concerns were channelled to the WTO Ministerial Meetings in Cancun (2003) and Hong-Kong (2005).2 During this period of examination the Heads of the IMF World Bank and the WTO agreed at the General Council Meeting on Coherence of 2002 to form an expert group including all interested parties multilateral and regional public institutions export credit agencies private banks to examine what went wrong in this segment of financial markets and how to create an enabling environment in local markets to provide adequate flows of trade finance on a on-going basis. In chairing one of these meetings the Director-General of the WTO defined the role of the WTO in this area: encouraging liberalization of this type of financial services under the financial services agreement being a regulator of export credit and guarantee subsidies under the ASCM and serving as a forum to discuss WTO-compatible ways of providing support to developing countries. Conclusions by the Working Group were presented at the WGTDF and later at the General Council. WTO Secretariat work on this topic up to 2003 in particular its contribution to the WGTDF and to the expert group was summarized in WTO Discussion Paper 2.4 While the liquidity in financial markets improved from 2002 until the recent turmoil created by the crisis of the sub-prime mortgage markets trade finance remained an issue for concern for WTO Members in particular the poorest which do not have access to international financial markets or for emerging markets which remain prone to changes in market sentiment and hence credit rating. Despite the rapid development of "trade finance facilitation" schemes developed by regional development banks and the IFC with immediate success in low income countries the issue of availability of trade finance came back among other "supply-side" constraints identified by the Aidfor- Trade Task Force after the WTO Ministerial Meeting in Hong-Kong. While the mandate of the WTO under the Aid-for-Trade is essentially one of evaluation and monitoring it may be in cases one of advocacy. Based on the work being carried out since 2002 and after consultation with partners (regional development banks multilateral institutions export credit institutions...) input by the WTO Secretariat to boost the availability of trade finance for developing countries under the Aid-for-Trade umbrella was welcomed by Members. Lack of trade financing and guarantee infrastructures were identified as one of the barriers to integration of low income countries in world trade by each of the three regional Aid-for-Trade Reviews. It was acknowledged that the current Aid-for-Trade Initiative could provide the extra leverage to convince WTO partners to deliver more plentiful of trade credit and guarantees to WTO members that need it the most. This paper provides background on the difficulties of some countries and traders to access affordable trade credit and finance on the growing divide between these low income countries and economically advanced countries in handling modern trade finance instruments and on the joint reflection undertaken by the WTO most recently under the Aid-for-Trade programme and previously under the umbrella of the WGTDF and the Coherence Mandate to help strengthen developing countries' capacities in this area.
Indisputably Essential
Economic theory has made considerable progress in explaining why sovereign countries cooperate in trade. Central to most theories of trade cooperation are issues of self-enforcement: The threat of reprisal by an aggrieved party maintains the initial balance of concessions and prevents opportunism. However economic scholarship has been less coherent in explaining why countries choose to settle and enforce their trade disputes with the help of an impartial third party a “trade court”. Typically economists focusing on the purpose of trade agreements have assumed away the very reasons why institutions are needed since under standard assumptions neither defection from the rules nor disputes are expected to occur. This paper is a step towards the formulation of a coherent economic theory of dispute settlement. It challenges traditional models of enforcement (primarily concerned with acts of punishment) for being insufficient in explaining the existence of dispute settlement institutions. We perform a comprehensive analysis of the economics of dispute settlement institutions and demonstrate to what extent the literatures of trade cooperation and dispute institutions are (and should be) interlinked. On the basis of these theories we show that dispute settlement institutions in trade agreements may assume a variety of roles including that of an information repository and disseminator an honest broker an arbitrator and calculator of damages an active information gatherer or an adjudicator.
Trade Remedy Provisions in Regional Trade Agreements
This paper maps and examines the provisions on anti-dumping countervailing duties and safeguards in seventy-four regional trade agreements (RTAs). The RTAs vary in size degree of integration geographic region and the level of economic development of their members. The key policy concern of the paper is that the elastic and selective nature of trade remedies may lead to more discrimination with reduced trade remedy actions against RTA partners but a greater frequency of trade remedy actions against non-members. The adoption of RTAspecific trade remedy rules increases this risk of discrimination with trade remedies against RTA members being abolished outright or being subjected to greater discipline. The templates used for mapping the trade remedy provisions reflect this central concern. The results of the mappings suggest the need to be vigilant about increased discrimination arising from trade remedy rules in RTAs. A number of RTAs have succeeded in abolishing trade remedies. Probit and multinomial logit model estimations suggest that these RTAs are characterized by a higher share of intra-RTA trade and deeper forms of integration that go well beyond the dismantling of border measures. A fairly large number of RTAs have adopted RTA-specific rules that tighten discipline on the application of trade remedies on RTA members. In the case of anti-dumping for example some provisions increase de minimis volume and dumping margin requirements and shorten the duration for applying anti-dumping duties relative to the WTO Anti-dumping Agreement. In similar fashion many of the provisions on bilateral safeguards lead to tightened discipline or reduce the incentives to take safeguard actions. Safeguard measures can be imposed only during the transition period have shorter duration periods and require compensation if put in place. Further retaliation is allowed if there is no agreement on compensation. RTA provisions on global safeguards require that under certain conditions RTA partners be exempted from multilateral safeguard actions. This conflicts with multilateral rules which require that safeguard measures be applied to all sources of imports and highlights the problem of trade diversion. A small number of RTAs give a role to regional institutions to conduct anti-dumping and countervailing duty investigations and to review final determinations of national authorities. There is a theoretical presumption and some empirical evidence to suggest that this reduces the frequency of anti-dumping initiations and final determinations against RTA members. In the case of CVDs we are unable to find major innovations in CVD rules and practice by past and present RTAs. A major reason for this may be the absence of commitments in the RTA on meaningful or significant curbs on subsidies or state aid.
The Contribution of Services Liberalization to Poverty Reduction
There are various conceivable links between services liberalization and poverty reduction including the efficiency effects associated with increased competition in intermediate (infrastructural) services income transfers generated by workers moving abroad or the mobilization of private investment for social policy purposes. Arguably the most promising option for interested governments regardless of complementary moves by trading partners is the opening of and creation of favourable investment conditions in core infrastructural services. However apart from basic telecommunications both the Uruguay Round schedules and the offers submitted in the Doha Round to date have remained disappointing in this respect. Effective services liberalization as measured by the share of phase-in commitments in total commitments has occurred mainly in the context of WTO accessions and Preferential Trade Agreements. Given the apparent lack of political impetus in broader-based trade rounds this article discusses options how the submission of more meaningful offers could be encouraged.
Dictionary of Trade Policy Terms
This is an accessible guide to the vocabulary used in trade negotiations. It explains about 2500 terms and concepts in simple language. Its main emphasis is on the multilateral trading system represented by the agreements under the World Trade Organization (WTO). In addition it covers many of the trade-related activities outcomes and terms used in other international organizations such as the United Nations Conference on Trade and Development(UNCTAD) the World Intellectual Property Organization (WIPO) the Food and Agriculture Organization (FAO) and the OECD. The last five years have seen a rapid spread in the formation of freetrade areas in all parts of the world. This dictionary allocates generous space to the vocabulary associated with such agreements. It offers clear explanations for example of the concepts used in the administration of preferential rules of origin. Additional areas covered include emerging trade issues and issues based particularly on developing-country concerns.
Disclaimer
At the heart of the World Trade Organization (WTO) as an international organization is a set of rules that regulate trade between nations: a body of agreements which have been negotiated and signed by governments of the majority of the world's trading nations with the aim of promoting transparency predictability and non-discrimination in trading relations. These agreements covering trade in goods trade in services and trade-related aspects of intellectual property rights help to define and inform the multiple roles of the WTO in administering the trade agreements providing a forum for trade negotiations handling trade disputes monitoring national trade policies providing technical assistance and capacity building for developing countries and cooperating with other international organizations. Understanding these agreements and their practical policy and legal contexts therefore provides significant insights into the WTO as an institution its activities and international role its partnerships with other organizations and the way in which WTO Member governments identify and pursue their national interests through this intergovernmental forum.
Dictionary of Trade Policy Terms, 5th edition
This is an accessible guide to the vocabulary used in trade negotiations. It explains about 2500 terms and concepts in simple language. Its main emphasis is on the multilateral trading system represented by the agreements under the World Trade Organization (WTO). In addition it covers many of the trade-related activities outcomes and terms used in other international organizations such as the United Nations Conference on Trade and Development (UNCTAD) the World Intellectual Property Organization (WIPO) the Food and Agriculture Organization (FAO) and the OECD. The last five years have seen a rapid spread in the formation of free-trade areas in all parts of the world. This dictionary allocates generous space to the vocabulary associated with such agreements. It offers clear explanations for example of the concepts used in the administration of preferential rules of origin. Additional areas covered include emerging trade issues and issues based particularly on developing-country concerns.
Executive summary
This study is the product of a collaborative effort by the Secretariat of the World Trade Organization (WTO) and the International Labour Office (ILO) aimed at providing an impartial view of what can be said and with what degree of confidence on the relationship between trade and employment an often contentious issue of public debate. It attempts to do this through a review of the academic literature both theoretical and empirical. A huge amount of research has been undertaken on this subject and within this there are numerous excellent literature surveys. This study intends to distinguish itself from the existing surveys by focusing on the connections between trade policies and labour and social policies.
Foreword
This study is the outcome of collaborative research between the Secretariat of the World Trade Organization (WTO) and the International Labour Office (ILO). It addresses an issue that is of important concern to both organizations that is the relationship between trade and employment.
Trade and Employment
On the basis of an overview of the existing academic economic literature the study provides an impartial view of what can be said and with what degree of confidence on the relationship between trade and employment an often contentious issue of public debate. Its focus is on the connections between trade policies and labour and social policies and it will be useful to all those who are interested in this debate: academics and policy-makers workers and employers trade and labour specialists.
Telecommunications Services in Africa
This paper examines the impact of telecommunications liberalization in Africa on both sectoral performance and economic growth. Besides unilateral measures we account for WTO commitments fostering the credibility of reforms. Actual regulatory quality plays a major role in bringing down prices and in improving access to telecommunication services in Africa. Competition notably in the mobile telephony segment also improves sector performance. Increasing access to mobile networks by 1 per cent translates into a 0.5 per cent increase in real GDP per capita. In Africa multilateral commitments do not reflect recent reforms. However at the global level adherence to the WTO Reference Paper entails lower prices.
Political & Quasi-Adjudicative Dispute Settlement Models in European Union Free Trade Agreements
In this paper interpretation and application dispute settlement provisions of European Union (EU) Free Trade Agreements (FTAs) signed between 1963 and 2006 are analysed. This will be through the two models of Dispute Settlement in International Law: the political and adjudicative. Political elements of dispute settlement mechanisms in Public international Law and General Agreement of Tariffs and Trade (GATT) served to establish those of the EU FTAs. Adjudicative and quasi-adjudicative elements of dispute settlement mechanisms of Public International Law and World Trade Organization (WTO) Law were used as parameters to set up those of the EU FTAs. These parameters also helped to define a new and unique hybrid model. The features of this model were found in Agreements with trade issues other than FTAs. It is possible however for future FTAs to incorporate them. The hybrid model is based on an adjudicative framework and includes both political and adjudicative elements. In conclusion it was found that even though WTO Members incorporated adjudicative elements in the Dispute Settlement Understanding (DSU) the EU did not incorporate them bilaterally for a further five years. Furthermore since the creation of the DSU in 1995 the EU has established more FTAs based on a political model than on a quasi-adjudicative. Consequently the quasi-adjudicative dispute settlement model has not represented a clear trend in EU FTAs.
Foreign Banking
The General Agreement on Trade in Services (known as the GATS) is an important new element in the international framework that affects the regulation of every WTO Member's financial sector. However except for a limited number of country-specific case studies no attempt has been made to compare WTO commitments to open the domestic banking sector to foreign banks with actual regulatory practice in a systematic and comprehensive manner on a cross-country basis. Nor has much attention been devoted to systematically and comprehensively assess the degree to which WTO Members discriminate against foreign bank. This paper draws upon a new and comprehensive dataset consisting of the commitments countries made at the WTO and the regulations actually imposed on foreign banks by those countries. The dataset covers 123 WTO Members for whom there was also information available on their current regulatory regime for banking (based on the responses to a World Bank survey as discussed in Barth Caprio and Levine (2006)). On the basis of that data the authors develop indices measuring the degree of openness to foreign banking based upon both commitments made and actual regulatory practice with a view to assessing the overall extent to which countries open their borders to foreign banks more than they are legally obliged to do based upon their WTO commitments. The dataset is also used to assess the overall extent to which countries discriminate against foreign banks by regulating them less favorably than domestic banks. Although our results are still quite preliminary they do show substantial divergences between commitments and practices. Indices of market openness and discrimination reveal wide differences among the 123 countries in the sample. The paper also identifies various factors that help explain the level of commitments that WTO Members have made.
Determining "Likeness" under the GATS
The concept of "like services and service suppliers" used in the General Agreement on Trade in Services (GATS) is still very much uncharted territory. The few dispute cases involving national treatment and most-favoured-nation treatment claims under the GATS are vague concerning the criteria which should be used to establish "likeness". Discussions among WTO Members on this subject have remained limited and inconclusive. Perhaps the only point on which everybody agrees is that a determination of "likeness" under the GATS gives rise to a wider range of questions – and uncertainties – than under the GATT. The intangibility of services the difficulty to draw a line between product and production the existence of four modes of supply the combined reference to like services and like service suppliers and the lack of a detailed nomenclature are some of the factors which complicate the task of establishing "likeness" in services trade. This contribution focuses on the concept of “likeness” in the context of the national treatment obligation (Article XVII of the GATS). It discusses the possible implications of the combined reference to “like services and service suppliers” as well as the relevance and role of the modes of supply in determining “likeness”. It also examines whether the criteria developed by GATT case-law (physical properties classification end-use and consumer tastes) can be mechanically transposed to services trade and how far they may contribute to establishing “likeness” under the GATS. It then discusses whether other parameters such as the regulatory context or an “aim and effect” type approach could be relevant.
Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs)
This paper attempts to fill a gap in the trade literature by providing a comprehensive overview of services liberalization commitments in the new generation of preferential trade agreements (PTAs) as compared to prevailing GATS commitments and Doha Round offers. By developing a new database the paper reviews the commitments undertaken by 29 WTO Members (counting the EC as one) under mode 1 (cross-border supply) and mode 3 (commercial presence) in 28 PTAs negotiated since 2000. The paper presents a general analysis from both a cross-country and cross-sector perspectives and also examines in more detail the GATS+ commitments undertaken in a number of key sectors (audiovisual distribution education financial professional and telecommunication services). The paper also discusses the potential economic costs arising from these preferential agreements as well as the potential implications for the multilateral trading system and for the Doha round of negotiations in particular. The paper concludes by discussing possible approaches to overcome the potential downsides of PTAs including proposals for a more pro-active role for the WTO in the surveillance of these agreements.
Some stated objectives of governments for using subsidies
This Section discusses the main objectives governments claim to pursue with subsidies including industrial development innovation and support for national champions environment related objectives and redistribution. Under the broad category “redistribution” three more specific objectives are examined: the use of subsidies for regional policy purposes adjustment support for declining industries and universal service obligations. This selection does not pretend to be exhaustive but it covers some of the most important objectives pursued by governments in developing and developed countries.
Acknowledgements
The World Trade Report 2006 was prepared under the general direction of Deputy Director-General Alejandro Jara. Patrick Low Director of the Economic Research and Statistics Division led the team responsible for writing the Report. The principal authors of the Report were Marc Bacchetta Bijit Bora K. Michael Finger Marion Jansen Alexander Keck Clarisse Morgan Roberta Piermartini and Robert Teh. Trade statistics information was provided by the Statistics Group of the Economic Research and Statistics Division coordinated by Guy Karsenty Julia de Verteuil Andreas Maurer and Jürgen Richtering.
Executive summary
The World Trade Report 2006 begins with a short summary of salient trends in international trade based on the Secretariat’s earlier Report issued in April. We also provide brief analytical commentaries on certain topical trade issues which this year cover recent trends in trade in textiles and clothing an examination of the evolution of international royalty and fee payments developments in the trade of least-developed countries and an analysis of the effects of natural disasters and acts of terrorism on international trade flows. The core topic for analysis in WTR 2006 is subsidies. The Report explores this area of policy in terms of how subsidies are defined what economic theory can tell us about subsidies why governments use subsidies the most prominent sectors in which subsidies are applied and the role of the WTO Agreement in regulating subsidies in the context of international trade.
Recent trends in international trade
The world economy expanded by 3.3 per cent in 2005 less rapidly than in 2004 but still slightly faster than the decade average. Economic growth remained strong in most regions although less buoyant than in the preceding year. Only Europe’s economy continued to record low GDP growth – less than half the rate observed in North America. In contrast to Europe Japan experienced a strengthening of economic activity. In light of slower economic growth worldwide in 2005 and of oil market developments merchandise trade growth – like GDP growth – decelerated in real terms but still exceeded the average for the last decade.
The economics of subsidies
The purpose of this Section is to assist the reader to better understand the twin questions of why governments use subsidies and how subsidies impact international trade. As is frequently the case in economic analysis the starting point for what follows is a “benchmark” economy featuring perfectly competitive markets. This approach provides the basis for general insights into the impact of policy interventions such as subsidies. As discussed further below under the condition of a perfectly competitive market no case can be made for a subsidy. Introducing a subsidy or some other government measure within a perfect market framework will be inefficient and welfare-diminishing. But if the perfect market assumption is relaxed situations may arise where a government measure like a subsidy improves welfare. An efficient subsidy would correct a market failure bringing social and private costs and benefits into alignment.
Defining subsidies
At the origins of the GATT little attention was given to the trade impact of subsidies. However contracting parties soon appreciated the need to deal with subsidies in order to secure the value of their agreed tariff concessions. A country can undermine its market access commitments by providing subsidies to import-competing industries. In addition subsidies given to competing exporters in third countries can divert trade away from a country that had relied on negotiated market access to another market. These concerns led to the development of more stringent disciplines on subsidies than those initially provided for under the GATT (1947). A major step was the negotiation of the plurilateral “Subsidies Code” during the Tokyo Round and thereafter of the WTO Agreement on Subsidies and Countervailing Measures (SCM) and the Agreement on Agriculture (AoA).
The incidence of subsidies
This Section provides an overview of the use of subsidies both at the global level and at different levels of geographical and sectoral disaggregation. Given the quantity and quality of the available data it is not possible to provide a comprehensive and systematic picture of the incidence of subsidies.
Selected trade developments and issues
The Agreement on Textiles and Clothing (ATC) came to an end on 1 January 2005. Much interest not to mention concern was expressed about the likely impact on production and trade of the removal of quota restrictions. It was apparent to most observers that there would be winners and losers from the additional liberalization. It is too early to say how the market will look beyond the relatively short period upon which we can base our observations but this note looks at what we know so far about the pattern of trade that has emerged since the quantitative restrictions were (largely) removed. A caveat is in order here: there can be little doubt that the termination of the AT C affected the patterns of trade observed in 2005 but we have not developed a rigorous analytical approach to the question of what other factors might also influence the pattern of trade flows.
Foreword
The World Trade Report 2006 is the fourth in a series launched in 2002. As in previous years the present Report has taken up a current issue in trade policy. This year we have looked at subsidies. The contribution we hope to make with these Reports is to aid understanding of complex trade policy issues facing governments. This is not intended primarily as a prescriptive Report but rather as an invitation to deeper reflection and it is aimed not just at policy-makers but also the public they represent and the individuals and organizations that actively seek to influence government policies. In addition to the core topic the Report also takes a brief look at recent developments in trade and discusses some salient features of recent trade developments or a particular aspect of trade. This year the Report looks briefly at trade in textiles and clothing flows of international receipts and payments of royalties and license fees trends in the trade of least-developed countries and the impact of natural disasters and terrorist acts on international trade flows.
Subsidies and the WTO
We have discussed the economic arguments for and against different kinds of subsidization earlier in the Report. Economic analysis tells us that market failures of various kinds can sometimes be addressed efficiently with subsidies. It also tells us that subsidies can distort trade flows if they give an artificial competitive advantage to exporters or import-competing industries. Whether a subsidy is viewed as a desirable intervention for correcting a market failure or as an undesirable trade distortion depends sometimes upon who is making the judgement. But economic analysis ought to be able to help both in determining the desirability of an intervention from a welfare perspective and in assessing the merits of alternative forms of intervention. Governments may however decide to grant certain kinds of subsidies that have little to do with efficiency considerations and in such cases economic analysis based on a simple welfare analysis may be of limited use. Also in these cases the analysis is probably most helpful in ensuring that policy-makers are aware of the costs of pursuing particular objectives and of alternative lesser-cost ways of doing so. We also know that judgements about what to subsidize by how much and for how long are complex technical questions on which governments frequently lack adequate information.
World Trade Report 2006
The annual World Trade Report focuses on trade policy issues - the core topic addressed in 2006 is subsidies. The Report also takes a look at recent trade developments and examines a range of trade topics including trade in textiles and clothing flows of international receipts and payments of royalties and license fees trends in the trade of least-developed countries and the impact of natural disasters and terrorist acts on international trade flows. The World Trade Report is useful for policymakers and for any individuals or groups interested in global trade policy.
Introduction
Subsidies are one of many policy instruments subject to rules in the multilateral trading system but they present more complex issues for policy-makers than many other instruments subject to GATT /WTO rules. One reason for this is that subsidies can be defined in different ways. Another is that that they are used in pursuit of a wide array of objectives. Even where they are not aimed at trade they can affect trade flows. The kinds of subsidies of primary concern to this Report are those that impart an advantage to some domestic producers and thereby affect trade. The challenging task of determining which sorts of subsidies are problematic from the perspective of the trading system and what might be done about them has occupied an important place on the agenda of the WTO /GATT system.
Services Trade Liberalization at the Regional Level
This paper discusses the opportunities and challenges for Southern and Eastern African ACP countries of services negotiations in the context of European Partnership Agreements. The paper provides an overview of existing flows in services from and to Southern and Eastern Africa an overview that suffers from the paucity of relevant data. Given the significant differences among services sectors the paper provides a separate discussion for several of them including financial services tourism and business services. The latest developments in each sector are described and the issues that are at stake in trade negotiations. In this context the competitive position of Southern and Eastern African countries is compared with the position of the European Union and other global players. The paper attempts to identify possible export opportunities for Southern and Eastern African ACP countries and discusses the advantages and disadvantages of giving preferential access to EU suppliers in those services sectors where African countries are likely to import. Particular attention is paid to the role of mode 4 in the discussed services sectors.
Forecasting Trade
This paper develops a set of time series models to provide short-term forecasts (6 to 18 months ahead) of international trade both at the global level and for selected regions. Our results compare favourably to other forecasts notably by the International Monetary Fund as measured by standard evaluation measures such as the root mean square forecast error. In comparison to other models our approach offers several methodological advantages inter alia a focus on import growth as the core variable the avoidance of certain difficulties affecting the performance of structural models the selection of variables and lags on the basis of theoretical considerations and empirical testing as well as a full documentation of the modelling process.
The Impact of Disasters on International Trade
In this paper we examine the impact of major disasters on international trade flows using a gravity model. Our panel data consists of more than 170 countries for the years 1962-2004 yielding approximately 300000 observations. We find that the driving forces determining the impact of such events are the democracy level and to a lesser extent the area of the affected country. The less democratic and the smaller a country the more are its trade flows reduced in case it is struck by a disaster. We are also able to distinguish between the effect of a disaster on an importing and an exporting country.
Non-Reciprocal Preference Erosion Arising from MFN Liberalitzation in Agriculture
This paper estimates the risk of preference erosion for non-reciprocal preference recipients in the agricultural sector as a consequence of MFN tariff cuts. It is based on a simulation of a single tariff-cutting scenario. The measure of preference erosion risk is the difference in preference margins enjoyed by individual suppliers to the QUAD (Canada EU Japan United States) markets before and after a MFN tariff reduction multiplied by the associated trade flow. The paper does not attempt to determine how losses in preference margins translate into trade outcomes but it does highlight which products and which non-reciprocal preference beneficiaries are the most vulnerable to erosion effects in the major developed country markets. Overall the paper finds that the risk of preference erosion is small but some countries are strongly affected in particular product lines (notably sugar and bananas).
Liberalizing Financial Services Trade in Africa
This paper analyses the possible gains from regional and multilateral liberalization of financial services trade for African countries taking into account the implications of such liberalization for financial regulation and capital account liberalization. It also describes existing efforts to integrate financial markets within four African regions (WAEMU CEMAC SADC and COMESA) and discusses the existing GATS commitments of the relevant countries with respect to financial services. Although the regions differ significantly there is scope for further regional integration in all of them. Significant scope also exists for further multilateral liberalization of financial services in particular with respect to Mode 3.