Informal Systemic Change in the GATT

Informal Systemic Change in the GATT

Per Magnus Wijkman

CCORDING to a widespread view, the international trading system that a emerged after World War 11, the rules of which were embodied in the General Agreement on Tariffs and Trade (GATT), has changed over the past ten years. Unlike the international monetary system, which changed dramatically and formally in the mid-l970s, changes in the management system for trade have been gradual and largely informal. This article asks whether these changes have been so fundamental that one can speak of a ‘systemic’ change, by which is meant a transformation of the management system to fulfil a function fundamentally different from its original purpose.

An assertion that such a change has occurred - at least in part - is implicit in the following characterisation of the Arrangement Regarding International Trade in Textiles, better known as the Multi-fibre Arrangement (MFA), which first came into effect in 1974 and has since been renewed twice:

‘The MFA embodies some clear violations of the principles of the GATT. . . Indeed, that the Textiles Committee is located within the GATT building is as if a brothel were operated inside a cathedral. ’ What a striking image of systemic change! This image also indicates the systems

involved. The cathedral represents a system where, to pursue the analogy, behaviour is determined by commandments hewn in stone and enforced by a priesthood. The brothel represents a system in which the right to engage in behaviour deviant from the norms can be obtained through private market transactions and through compensation payments to injured parties. The image therefore presents two extreme views of the international trading system - one legalistic, the other pragmatic. These poles will prove useful in the following discussion where I propose to take ‘another view of the cathedral’ in order to determine the relative importance of legalism and pragmatism as institutional supports.

PER MAGNUS WIJKMAN: Head of the Research Secretariat, National Board of Trade, Stock- holm, Sweden, since 1982; previously Senior Fellow in Marine Policy, Woods Hole Oceanographic Institution, Massachusetts, United States of America (1978-81).

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38 PER MAGNUS WIJKMAN

It will be argued that the international trading system is being transformed, from one which is open, nondiscriminatory and liberal to one which is opaque and selectively protectionist. This transformation, although profound, has been largely informal.

Informal systemic change has been facilitated by three characteristics of the GATT: (i) the legal ‘softness’ of its basic contract, (ii) the weakness of its impartial system of adjudication and, hence, (iii) the importance of bargaining power in the settlement of disputes. The combined effect of these factors is to produce an international trading system which mixes legalism and pragmatism in proportions to suit the dominant members of the system. During the past decade or so the interests of the dominant actors have become more protectionist. This, in short, explains the nature of the current transformation.

The next section describes the elastic nature of the management system for trade which allows it to stretch without breaking, avoiding a collapse of the system. The article goes on to consider the weakening of the GATT’s mechanism of compliance, resulting in selective application of GATT principles. The final section suggests some measures to reverse this trend, assuming that this is desirable.

THE GATT AS ‘SOFT’ LAW

What is the ‘true’ nature of the management system for trade? This is not easy to determine since the GATT is inherently ambiguous and potentially schizophrenic. On the one hand, the articles of the GATT define fundamental principles for the conduct of international trade. On the other hand, they contain numerous ‘escape clauses’ exempting member countries from the observance of these principles. The General Agreement has been described by one authority as ‘a grotesquely complicated document . . . that all too often [sees] a free-trade principle followed immediately by an exception authorizing trade restrictions’. The basic legal document, therefore, does not define the management system unambiguously - as open or closed, liberal or protectionist, multilateral or bilateral. Rather, the document is best described as an example of soft law, a compromise product full of ifs, buts and loopholes. In consequence, the character of the international trading system at any given moment is determined by whether the GATT’s basic principles are widely observed or whether, instead, exceptions to basic principles become the rule. This, in turn, is largely determined by the GATT’s compliance mechanism; that is, by how the institution interprets, applies and enforces its legal code (see the next section). The present section considers the basic GATT principles and then their gradual erosion.

Basic GATT Principles

The architects of the GATT, especially the representatives of the United States, sought to establish an international trading system that was distinguished from the

INFORMAL SYSTEMIC CHANGE IN THE GATT 39

inter-war experience in several important respects. This was to be achieved through the observance of three basic principles.

The principle of trunspurency banned the use of non-tariff measures, leaving the tariff as the sole permissible instrument of protection. Protective measures were consequently not prohibited in principle but rather were required to be transparent so that enterprises faced apparent and predictable costs and society could more easily ascertain whether the costs of protection justified its benefits. The purpose of the principle of transparency was to ensure an open trading system. Openness improves the odds that a domestic political system will provide a level of protection which reflects the general interest of a society rather than a few of its special interests.

The principle of reciprocity meant that participants in bilateral negotiations had the right to expect tariff concessions of equivalent value in exchange for the tariff reductions offered. The purpose of this principle was to provide countries with an extra incentive to reduce their tariffs over time and thus to build a liberulising momentum into the trading system. Once tariff reductions were agreed upon, rates were ‘bound’ against increase, thereby endowing the international trading system with a measure of stability.

The principle of non-discrimination required any tariff reductions agreed in a bilateral negotiation to be extended unconditionally on a most-favoured-nation (MFN) basis to all other member countries. The purpose of this principle was to ensure a multiluterul trading system. Multilateralism limits the scope for power politics and for economic inefficiency, factors which are inherent in discrimination against foreign producers. At the same time, however, this principle dilutes the incentives for tariff reductions by providing an opportunity for ‘free riding’; some countries benefit from the reductions made by others without making concessions of their own.

In the post-war decades, the tendency to observe these basic GATT principles on balance made the international trading system more open, multilateral, liberal and stable. In the years before the first oil-price rise these features appeared to many to be the ‘true’ nature of the international trading system. But in the late 1960s, and especially after 1973, countries made increasing use of the right to be exempted from the observance of basic GATT principles.

Role of Exceptions

Most contracts contain escape clauses which release signatory countries from some of the contract’s obligations. The GATT likewise provides exceptions to its basic principles and allows concessions to be withdrawn. Exceptions are an important means of increasing the number of rules in a system. A country is more likely to enter a commitment to reduce and to bind tariffs or to avoid discrimination if it can modify or waive these commitments should circumstances change.


Exceptions serve to increase the number of commitments a country is prepared to enter into, much as the possibility of divorce increases the likelihood that a risk-averse individual will marry. Furthermore, exceptions broaden the range of countries prepared to accept a system of rules by enabling a country with circumstances different from the majority’s to satisfy its vital interests.

Thus the existence of exceptions serves to increase both the number of rules in a trading system and the number of countries that will accept them. The price of universality, however, is the potential discrepancy between the acceptance of rules and the observance of rules. Such discrepancy threatens the integrity of the system. Excessive use of the following exceptions to the basic principles of the GATT have had this effect.

Increased Discrimination

The 1970s witnessed the rapid erosion of the principle of non-discrimination, considered by many to be the cornerstone of the GATT system. Today a larger share of world trade is covered by preferential trading arrangements than at any time in the GATT’s history. This has been the result of widespread legal or extra-legal use of exceptions to the principle of non-discrimination or outright circumvention of it.

The GATT provides many exceptions to the principle of non-discrimination, either in the original articles or through later amendments to them. For instance, Article XXIV permits the formation of customs unions and free trade areas if certain conditions are satisfied. ’ Other preferential trading arrangements are forbidden unless they existed prior to the country’s accession to the GATT or have subsequently received a ‘waiver’ from the GATT, More or less controversial departures from the principle of non-discrimination are the formation of the European Community and the European Free Trade Area (EFTA), the free trade agreements of individual EFTA countries with the Community, the preferential treatment by the Community of former colonies in Africa, the Caribbean and the Pacific through the LomC Convention et ceteru. The conditions have seldom been fulfilled. Kenneth Dam’s judgment in this context is devastating:

‘The dismaying experience of the GATT has been that, with one possible exception [the Anglo-Irish Free Trade Area Agreement], no customs-union or free-trade area agreement thus far presented for review has complied with Article XXIV, yet no such agreement has been disapproved.” A second legal exemption from the principle of non-discrimination was made

possible through an agreement adopted at the end of the Tokyo Round of multilateral trade negotiations conducted in 1973-79, the so-called ‘enabling clause’. Until then, developed countries depended on a 1971 waiver of the MFN clause in order to grant developing countries tariff preferences on an individual and temporary basis (under the Generalised System of Preferences), as recommended by a resolution of the United Nations Conference on Trade and Development in


1968. The enabling clause sanctioned the use on a permanent basis within the GATT of such preferences for developing countries as well as permitting developing countries to grant each other preferences which previously were incompatible with the GATT.

An increasing number of departures from the principle of non-discrimination has occurred in the area of non-tariff measures. In several industries (footwear, steel, electronics and motor cars), increased use of selective quantitative restrictions outside the GATT framework has replaced non-discriminatory treatment by treatment based on relative negotiating strength. Discrimination has also been accepted within the framework of the GATT, as in the trade in textiles and clothing under the MFA. Spokesmen for the American steel industry have suggested establishing a special system of protection for steel products.

Some of the codes of conduct regulating non-tariff measures adopted at the end of the Tokyo Round negotiations contain provisions which have been interpreted as leading to conditional MFN treatment.

We can expect to witness continued infringement of the principle of non- discrimination. Additional preferential trading arrangements are currently under negotiation or being implemented. The Caribbean Basin Economic Recovery Act of the United States was signed by the President in the summer of 1983. It has since received a waiver of GATT rules and is in the process of implementation. The United States has negotiated a free trade agreement with Israel and is discussing plans with Canada for extending free trade in automobiles to other sectors. Like the North American Free Trade Agreement on Automobiles and Parts, this may require a GATT waiver.

Australia and New Zealand have agreed to establish free trade between them by 1995 through the Closer Economic Relations Act of 1983. (The act appears to meet GATT requirements. 9 , Several developing countries can be expected to introduce preferential treatment for each other in the future. The countries on the Arabian peninsula have already taken the first steps to implement a planned customs union (the Gulf Cooperation Council). A network of bilateral and regional preferential treaties is emerging in South-east Asia. Long-standing plans for economic integration in North Africa and Latin America are being re-activated.

Exhausted Momentum of Liberalisation

The principle of reciprocity has been the driving force in past ‘rounds’ of multilateral trade negotiations within the GATT framework. These negotiations have reduced average tariff rates on industrial goods to negligible levels in industrial countries. lo Tariffs no longer constitute a significant barrier for the major portion of world trade, but they are nevertheless important for trade in certain goods (for example, agricultural goods) and with certain countries (in particular, developing countries). But waivers have brought attempts at liberalisation in these areas to a standstill.


At an early stage, agriculture received special treatment in the GATT. A waiver granted to the United States in 1955 had the effect of virtually exempting agricultural products from liberalisation and in most developed countries the agricultural sector remains heavily protected by tariffs and non-tariff measures.

Similarly, tariffs remain high in most developing countries. These countries have not participated actively in tariff negotiations in the GATT since they were seldom ‘principal suppliers’. Furthermore, developing countries were exempted from certain GATT obligations, especially as a result of the addition to the GATT in 1965 of Part IV entitled ‘Trade and Development’. The level of protection for manufactured goods in developing countries is therefore considerably higher than that in developed countries.

The incentives for lowering tariffs in those areas where they remain high have recently been reduced. Two factors, in particular, are responsible:

First, the obligation of reciprocity had already been waived for developing countries in Part IV of the GATT and was virtually eliminated in the enabling clause of 1979. Incentives for developed countries to negotiate tariff reductions with the remaining group of high-tariff countries were weakened. The effect of the enabling clause is to raise the price to developed countries of achieving further liberalisation. This will obviously reduce their demand for liberalisation.

While it is theoretically incorrect to view a country’s tariff reduction as a concession and methodologically difficult to compare the value of two such concessions, the prospect of obtaining an equivalent tariff reduction in exchange provides a country with an additional incentive to reduce its own tariffs. The principle of reciprocity therefore provided a powerful momentum for tariff reductions in successive GATT rounds. Waiving reciprocity inevitably weakens this liberalising momentum.

The second factor reducing incentives for a high-tariff country to lower its tariffs is the spread of preferential trading arrangements. A country awarded a tariff preference obtains a vested interest against general tariff reductions since these erode its preferential margin. Interest in general tariff reductions therefore weakens as preferential trading arrangements spread. We can observe today how the Lome countries - and even EFTA countries - guard their preferential access to the markets of the European Community. As a group, the developing countries have less interest in general tariff reductions now that they have been accorded the right to enjoy preferential access to the markets of the developed countries and to grant preferences to each other (South-South preferences).

Thus the changed balance between rights and obligations brought about by the enabling clause of 1979 has reduced the demand for general tariff reductions by developed and developing countries alike. This, and the generally low level of tariffs on industrial goods, combine to exhaust the momentum for further tariff liberalisation. Agricultural production is protected also by non-tariff measures, which are discussed below.


Decreased Transparency

Non-tariff measures now constitute a greater barrier to trade than tariffs and pose a much more serious policy problem. The prohibition of non-tariff measures in the GATT has been increasingly circumvented during the past decade or so. While some use has been made of the GATT’s main escape clause (Article XIX), most measures have been extra-legal (‘grey area’) measures. These last have been used with such frequency that commercial policy arguments are now mainly concerned with the pros and cons of negotiating this ‘voluntary’ export-restraint agreement or that ‘orderly’ marketing arrangement. This development, frequently referred to as the ‘new protectionism’, is well documented, for instance in the annual trade policy reviews published by the International Monetary Fund and the World Bank, and requires no elaboration here.

Two effects of the ‘new protectionism’ merit comment in this context. The first is that it increases the cost of a given level of protection and the second is that it increases the level of protection.

The use of quantitative trade restrictions means that a given protective effect costs more for the country protecting domestic production than if subsidies to domestic producers or tariffs on imports had been used instead. One reason for this is that scarcity rents give rise to expensive rent-seeking activities at home or are awarded to foreigners.

Furthermore, the system of protection becomes less transparent and its costs more difficult for the general public to assess, which tends to disenfranchise consumers in the decision-making process. Governments and the protected producer interests obtain a common interest in avoiding open debate. The balance of power between producer and consumer interests shifts in favour of the former, so giving the system a protectionist bias. This has resulted in a higher level of protection being provided at any given demand for it.

Two authoritative observers have estimated the effects of the ‘new protectionism’ :

‘Since [the mid-19704, creeping protectionism in new forms, such as “voluntary” export restraints and orderly marketing agreements, has countered (and probably more than offset) the further liberalization achieved, including the results to date [I9821 on tariff and non-tariff agreements reached in the 1974-79 Tokyo Round of trade negotiations. . . On balance the trend in the past five years has been at best ambiguous and, more probably, toward a net increase in protection - especially when defined broadly to include trade-distorting subsidies and government aids. ’ I *

This assessment is still valid. Not only has the liberalising momentum of tariff negotiations been exhausted; the use of non-tariff measures has imparted a net protectionist bias to the international trading system.


Exceptions as the Rule

The net effect of the erosion of basic GATT principles has been to make the international trading system more rather than less discriminatory, more rather than less protectionist and more rather than less opaque and uncertain since the late 1970s. This development is well illustrated by the MFA referred to in the introduction. This arrangement breaks all three basic principles of the GATT and yet has been negotiated within its framework.

First, the MFA is discriminatory. Restraints on trade are applied to individual countries after bilateral negotiations. It therefore allows importing countries with large negotiating power to deal individually with exporting countries with weak negotiating power. This is an invitation to bilateral power politics.

Secondly, the MFA is opaque. It employs quantitative restrictions which have been defined for increasingly smaller product groups for individual countries, resulting in time in high transaction and enforcement costs. l 3

Thirdly, and partly as a result of the first two factors, the MFA has become more protective with each renewal, mocking its declared aim of providing for the expansion of trade in textiles. This discrepancy between words and deeds creates a credibility gap. Individual actors in the international trading system have found it in their

interest to make use of the GATT’s provisions for exceptions and waivers. But exceptional behaviour possesses a momentum of its own. Waiving specific obligations or granting special privileges upsets an existing balance of rights and obligations. While this is the effect desired by the privilege-seekers, it creates pressures from others to restore the original balance. This occurs not by terminat- ing or phasing out the initial exceptions but by granting others ‘compensating’ favours. l 4 Exceptional behaviour therefore tends to spread through the system, unravelling the package of carefully balanced concessions. Furthermore, for- malising a departure from principle, as does the MFA, introduces a dangerous inconsistency into the trading system. The observance of rules risks becoming a matter of short-term expediency. The selective observance of rules threatens the integrity of the GATT system by diminishing the respect accorded to the system of rules as a whole.

Several observers have claimed that this has now happened as exceptions have

‘[Bly the end of the 1960s divergence from GATT rules had become so widespread that most signatory countries had come to regard the GATT as no longer a legal framework for international trade but rather a set of principles more honoured in the breach than in the observance.’”

‘From the beginning, the GATT principles were compromised by exceptions -- these are understandable and essential in any international agree-

increasingly become the rule.


ment. But there can come a time when the exceptions are so great that the principles are lost. GATT is now faced with this possibility.”6 For an increasing number of countries, the acceptance of GATT articles

resembles the conversion of the Icelandic Vikings to Christianity. These Vikings converted collectively on the condition that they could still put out their first-born, pillage the coastal monasteries of Ireland and, as a last resort when in distress at sea, call on the aid of the old gods. Exceptions to basic trade principles threaten to gut the GATT.

GATT COMPLIANCE MECHANISM

Why has the GATT enforced existing principles so weakly, approved exceptions to existing principles so frequently and introduced new exceptions so liberally? The answer must be sought by considering the institutions’s mechanism of compliance.

The first point to be noted is that the GATT is a contract signed by a number of countries; it is not an international organisation. The institution is distinguished from the signatory countries to the contract by little more than the typographical convention of writing ‘contracting parties’ with capital letters in the former case. Thus the GATT lacks even the modest powers of compliance of most international organisations and depends to an unusual degree on the voluntary cooperation of members for the observance of rules. There are no provisions in the GATT articles for referring disputes to the International Court of Justice, for setting up tribunals to pass judgment or for the GATT to impose sanctions on member countries found to be in violation of its articles. Instead, rule compliance relies entirely on a confluence of self-interest of individual members and on collective action by members. Collective action, in turn, presupposes a core consensus on substantive issues. In the preceding section it was argued that this consensus has become increasingly tenuous.

Two procedures exist in the GATT for the settlement of disputes: consultation and adjudication. Consultation means that two parties to a dispute attempt to negotiate their differences between themselves. Their relative negotiating power largely determines the outcome of the negotiation. The emphasis on negotiation means that acceptance of an outcome by the involved parties rather than conform- ity to fundamental principles tends to be the ultimate test of the legitimacy of any action. Deviant behaviour becomes acceptable when the injured party receives sufficient compensation. Professor Dam refers to ‘retaliation as an enforcement mechanism’, meaning that it is the injured party’s power to retaliate which largely determines its ability to enforce adherence to rules and agreements. Such a system invites injury to parties with small retaliatory power. Consultation procedures tend to ‘bind the weak but not the strong’. l 9


Small countries have an obvious interest, therefore, in having a workable system of adjudication on which to fall back should consultation fail to provide a satisfactory outcome. Third-party adjudication has occurred through a highly informal system of panels. * O A panel’s verdict has persuasive value only, for the GATT lacks powers of enforcement. The decision of the panel is based on consensus. Many observers assert that this system has worked less well over the past decade or so. Panels are reluctant to issue verdicts which go against a major trading power. When they do, their results tend to be ignored. The system of adjudication itself tends to make it more of a conciliation process than a tribunal determining rights. The effect of this process on the dispute-settlement procedures of the GATT has been described by one participant as follows:

‘[Dlispute-settlement procedures have shifted from performing an essen- tially adjudicatory function, based on a widespread consensus . . . to that of achieving a diplomatically negotiated modus vivendi. . . The result of this shift has been the tilting of the whole international trading system in favour of those countries whose domestic economic and political circumstances make them able to resist pressures to conform to the rules.’2’ The weakening of the system of adjudication has resulted in a tendency to avoid

disputes by granting waivers and by encouraging conciliation by the parties to a dispute. The increased role thereby given to bargaining power in the settlement of disputes has led to the selective observance of rules rather than to uniform rule compliance. Since major trading countries or blocs have chosen to protect particular industries from competition from particular supplier countries, the international trading system bas been characterised increasingly by selective protectionism.

TURNING THE TIDE

What can be done to reverse this drift away from an open, liberal and multilateral trading system? To reply that this requires stricter adherence to the basic principles of the GATT is to assume away the problem. Governments currently perceive deviation from these principles to be in their interest and deviate with impunity because the GATT’s compliance mechanism is weak. Since the GATT’s enforcement system is based on retaliation, changing this perception requires measures which reshuffle the balance of negotiating power between trading countries. This can be done by placing on the negotiating table issues which bring new negotiators to it and, in particular, issues where ‘old’ and ‘new’ negotiators have conflicting interests. The approaching round of GATT negotiations provides an opportunity to do this and turn the tide.

This concluding section suggests a principle for organising the negotiations so that they restore a liberalising momentum to the international trading system.


Negotiation involves giving and taking. The more issues that are negotiable, the greater the likelihood that a country will find something, of interest to take and something expedient to give in exchange. The greater the number of issues, the more likely there will be something for everybody and the less likely that the negotiations will be dominated by a small number of single-issue coalitions (trading blocs). The more countries represented at the negotiating table, the more likely that each country will find a negotiating partner with which it can strike a bargain. These considerations suggest that, far from avoiding contentious issues, the Preparatory Committee for the new GATT round should place them on the agenda. They also suggest that negotiations on different issues should proceed simultaneously in order to facilitate the trading of concessions over different issues.

An organising principle which sets up simultaneous negotiations on a broad range of issues and allows linkages between them will result in a complex and high-risk undertaking.22 Progress on ‘easy’ issues will be held hostage to progress on ‘difficult’ issues and may provide insufficient leverage to solve them. The message of the preceding sections, however, is that this ‘all or nothing’ strategy could reverse the current protectionist trend. The ‘new protectionism’ is largely a result of decision-making processes which isolate problem areas from each other, thereby allowing powerful sectoral coalitions of domestic and foreign interests to advocate protectionism unopposed. Considering each industry’s prob- lems as a special case results in special treatment. By contrast, bringing together several issues in a single negotiation favours general treatment, for it pits sectoral interests against each other. The pressures released favour the application of a system of rules rather than the selective observance of rules.

In conclusion, let me illustrate in general, but concrete, terms the possible implementation and results of this organising principle. At least two issues of principle and three sectoral issues could be placed on the agenda of the new GATT round: phasing out quantitative restrictions, ‘graduation’ of developing countries, agriculture, textiles and clothing and services. These are the most contentious issues currently facing the GATT and provide substantial scope for negotiation. Advocates and opponents of each issue, however, are grouped in such a way that a large number of countries have an interest in comprehensive negotiations.

A likely outcome might consist of phasing out quantitative restrictions, either through negotiating their elimination on a reciprocal basis or by replacing them by tariffs representing an equivalent level of protection (‘re-tariffication’) . 23 Transparency would ensure that an electorate and its government perceive the costs of protection and may well result in future negotiations to reduce the levels of tariffs. Agreement to phase out the complex system of quotas on textiles and clothing, negotiated bilaterally under the MFA, will be easier to achieve in a negotiating setting which provides exporters in developed countries with access


to other markets in exchange. Whether phasing out takes the form of coordinated liberalisation of quotas under a new MFA or through re-tariffication on an MFN basis is a matter for negotiation. 24 The type of market access provided in exchange is also a matter for negotiation. Some developed countries will find access to markets for services more interesting than reduced tariffs on industrial goods and vice versa. Some developing countries will find improved trading terms for agricultural products of greater interest than for textiles and vice versa. Some developing countries will share the interest of some developed countries in services while some developed countries will have an interest in common with developing countries in agriculture. This diversity of interest suggests that cross- trading may result in mutually advantageous bargaining. Such bargaining requires that the more successful developing countries should accept the principle of reciprocity and abstain from some of the preferential treatment accorded them under Part IV of the GATT.

The vehemence with which various parties now insist that each of the above issues are not negotiable suggests that extremely fruitful negotiations could be achieved by putting all these issues simultaneously on a single negotiating table.

1. The author thanks J. Michael Finger, Peter Hagstroem, Peter Kleen and Michael Lehmann for their comments on an earlier version of this article which was presented as a paper at the founding conference ofthe European Association of Law and Economics in Lund, in Sweden, on 19-2 1 March 1984: The views expressed are those of the author and do not necessarily reflect those of the National Board of Trade in Sweden.

2. Gerard Curzon, Jose de la Torre, Juergen B. Donges, Alasdair I. MacBean, Jean Waelbroeck and Martin Wolf, MFA Forever? Future of the Arrangement for Trade in Textiles, International Issues No. 5 (London: Trade Policy Research Centre, 1981) p. 32.

3. Kenneth W. Dam, The GAlT: Law and International Economic Organization (Chicago and London: Chicago University Press, 1970) p. 14.

4. The inter-war non-system was characterised by bilateralism, protectionism and quantitative restraints. Different authors stress different principles of the GATT system. For interpretations similar to mine, see Dam, up. cit . , ch. 3 ; Richard H. Snape, Australia S Role in the International Economy, Seminar Paper No. 5/83 (Melbourne: Monash University, 1983); David Greenaway , International Trade Policy: from Tariffs to the New Protectionism (London: Macmillan, 1983); and the article by Gerard and Victoria Curzon, ‘Diffusing Conflict between Traders and Non-traders’, in this number of 7he World Economy. While reciprocity and non-discrimination were familiar concepts at the time of the negotiations for the International Trade Organisation, ‘transparency’, ‘openness’ and ‘stability’ are more recent names for the issues that concerned the negotiators.

5 . A country benefits from a tariff reduction of its own through cheaper imports. If that tariff reduction elicits a tariff reduction abroad, the country will benefit, in addition, from the increased price or volume of its exports. Reciprocity therefore provides an extra incentive for trade liberalisation.

6 . In fact, countries developed strategies for negotiation to limit free-riding and maximise the pay-off from a tariff reduction. See J. M. Finger, ‘Trade Liberalization: a Public Choice Perspec- tive’, in Ryan C. Amacher, Gottfried Haberler and Thomas D. Willett (eds), Challenges to a Liberal Internationul Economic Order (Washington: American Enterprise Institute, 1979).


7. In brief, these conditions are that tariffs and other barriers to trade must be eliminated on all trade between members over a pre-determined and reasonable length of time. For customs unions the common external tariff must not exceed an average of the tariffs of individual members before the union. Other preferential trading arrangements are prohibited unless they existed at the signing of the General Agreement. These exceptions were justified by a widespread belief that free trade on a regional basis would improve the allocation of resources in the world economy and thereby increase potential world welfare. Not until later did Jacob Viner’s work contribute to a more general appreciation of the possibility that the losses from trade diversion caused by regional integration could offset the gains from trade creation.

8. Dam, op. cit., p. 275-76. 9. See D.J. Thomas, ‘The GATT and NAFTA Agreement’, Journal of Common Market Studies,

September 1976; and The Economic Significance of Closer Australian-New Zealand Relations (Canberra: Australia-New Zealand Businessmen’s Council, 1983).

10. Trade in manufactures between industrial countries constituted one third of world trade in 1984.

1 1 . Scarcity rents awarded to foreigners, for instance through a ‘voluntary’ export-restraint agreement, can also give rise to rent-seeking activity. This activity, however, occurs abroad and is not a cost for the importing country.

12. C. Fred Bergsten and William R. Cline, Trade Policy in the 1980s, Policy Analyses in International Economics No. 3 (Washington: Institute for International Economics, 1982) pp. 10- 1 1 and 17.

13. The European Community had a total of 2,700 individual quotas under the second MFA (1978-81). A complex system of quotas is sufficient by itself to deter exporters and to make it difficult for the general public to assess the system’s costs.

14. The Director-General of the GATT, Arthur Dunkel, has aptly noted: ‘To take away a privileged position is always more difficult than to refuse it in the first place.’ GATTPress Release, GATT Secretariat, Geneva, No. 1312, 5 March 1982.

15. Colin F. Teese, ‘A View from the Dress Circle in the Theatre of Trade Disputes’, The World Economy, March 1982, p. 49.

16. Snape, op. cit., p. 6. 17. Furthermore, the status of the GATT in international law is unusual. The GATT’s articles are

applied by means of a protocol of provisional application whose legal status is unclear. 18. Suggestions for improvement of the GATT’s dispute-settlement procedures, including the

establishment of a tribunal, are set out in Guy Ladreit de Lacharritre, ‘Case for a Tribunal to Assist in Settling Trade Disputes’, 7he World Economy, December 1985.

19. Robert E. Hudec, Adjudication of International Trade Disputes, Thames Essay No. 16 (London: Trade Policy Research Centre, 1977).

20. Adjudication is traditionally performed by a panel of experts selected from countries neutral to the dispute at hand and acting in their personal capacity.

21. Teese, loc. cit., p. 51. 22. The Third United Nations Conference on the Law of the Sea provides an example. A decade

of negotiations failed to realise its ambition of a comprehensive settlement by consensus of a broad range of maritime issues. Similar trade negotiations could be advantageous, provided that they were as prolonged, regardless of their ultimate outcome.

23. Since quantitative restrictions often are selective and aimed at developing countries, few pairs of countries may exist which maintain equivalent quantitative restrictions against each other, in which case multilateral chains of negotiation or cross-trading over issues may prove useful. Re-tariffication may provide greater potential for ultimate liberalisation. Article XXVIIl of the GATT permits a country to renegotiate a tariff level with other signatory countries ‘primarily concerned’. Such renegotiations would increase the transparency of the system without changing the level of protection afforded to domestic industry.

24. For a detailed presentation of alternative ways in which this might be done, see Wolf, ‘How to Unravel the Multi-fibre Arrangement’, The World Economy, September 1985.

50 TRADE POLICY RESEARCH CENTRE

Occasional papers of the Trade Policy Research Centre, sometimes products of programmes of studies, are published under the omnibus heading of

Thames Essays and set out below are the particulars of the latest titles.

29. Isaiah Frank, Trade Policy Issues of Interest to the Third World (1981), 76

30. Geoffrey Shepherd, Textile-industry Adjustment in Developed Countries

3 1 . Charles Collyns, Can Protection Cure Unemployment? (1982), 95 pp.,

32. Brian Hindley, Economic Analysis and Insurance Policy in the Third World

34. Brian Hindley and Eri Nicolaides, Taking the New Protectionism Seriously

35. Kent Jones, Impasseand Crisis in Steel Trade Policy (1983), 108 pp., f3.00. 36. Charles Pearson, Emergency Protection in the Footwear Industry (1983), 99

37. Martin Wolf, Hans Hinrich Glismann, Joseph Pelzman and Dean Spinanger,

38. JosC de la Torre, Clothing-industry Adjustment in Developed Countries

39. Kenneth W. Clements and Larry A. Sjaastad, How Protection Taxes

40. T. G. Congdon, Economic Liberalism in the Cone of Latin America (1989,

41. Ingo Walter, Barriers to Trade in Banking and Financial Services (1985),

42. Basil S. Yamey, Richard L. Sandor and Brian Hindley, How Commodity

43. David Greenaway and Brian Hindley, What Britain Pays for Voluntury

44. Elliot Schrier, Ernest Nadel and Bertram Rifas, Outlook for the Liberalisation

pp., f2.00.

(1981), 68 pp., f2.00.

f3.00.

(1982), 68 pp., f2.00.

(1983), 98 pp., f3.00.

pp., f3.00.

Costs of Protecting Jobs in Textiles and Clothing (1984), 163 pp., f7.00.

(1984), 286 pp., flO.OO.

Exporters (1984), 87 pp., €8.00.

130 pp., f5.00.

136 pp., f6.00.

Futures Markets Work (1983, 80 pp., g4.00.

Export Restraints (1989, 179 pp., f8.00.

of Maritime Transport (1985), 83 pp., f4.00.

The publications may be obtained from the Trade Policy Research Centre at 1 Gough Square, London EC4A 3DE (Telephone 01-353 6371), or from its distribution office at 6 Frant Road, Tunbridge,Wells, Kent TN2 5SH (Telephone 0892 26658).

Informal Systemic Change in the GATT

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