GATT (General Agreement on Tariffs and Trade)

• formed 1947
• over 100 national members at its peak
• organized 8 “rounds” or multilateral tariff and NTB reductions
• final round (Uruguay), 1986-93 (effective 1995):  117 nations agreed to reduce tariffs by 36% (into industrial countries) or 24% (into LDCs);  eliminate many import quotas;  restrict use of “voluntary export restraints”;  reduce agricultural subsidies;  and increase trade in services

• formed by the Uruguay Round of GATT
• will likely negotiate continuously, on specific issues
• stronger dispute-settlement mechanism (member unanimity not necessary;  clear member sanctions)

• each signatory to a GATT negotiation pledges to offer the same trade rules in trade with all other signatories (all nations are “most favored” — hence the switch to the phrase “normal trade relations”)
• exceptions are allowed for regional trading blocs that eliminate all or nearly all internal tariff barriers
• Generalized System of Preferences for LDCs’ exports to industrial countries

Motivations:

• economic growth (through dynamic effects)
• economic productivity and international competitiveness (through trade-creation effects)
• political alignment (or political isolation of a given nation)

• EFTA;  NAFTA;  Asian FTA; APEC (as planned)
• must settle issues of country of origin and percent local content to qualify as a product of one of the member countries

• MERCOSUR (Argentina, Brazil, Paraguay, Uruguay)

• EU;  Andean Group;  Caribbean Community and Common Market;  Central American Common Market

Effects (all effects are limited by the size and relative size of the national economies):

I. Trade creation based on increased specialization and trade among countries in the region (in a static sense, ignoring the likely expansion of the region’s economy)

A. Trade creation is enhanced by similarity of the combined economies (in products and efficiency), maximizing potential for gains from increased specialization.  The union of very different countries will not increase their mutual specialization as much.
B. Trade creation is enhanced by a large union of disparate countries, to increase the likelihood that the joined economies will contain true low-cost areas for various products.
C. Trade creation is enhanced by high pre-union trade barriers.
D. Trade creation is enhanced by low transport costs among the countries.
 EU:  a large union of somewhat similar countries in a compact region and with substantial non-tariff barriers, even after the Treaty of Rome.
 NAFTA:  a large union of somewhat disparate economies with very varied barriers, compact but geographically very large.  Mexico's economy was the most protected, so the adjustment costs and the potential for lowered prices is greatest.

III. Dynamic effects:  overall growth in the region’s economy, based on lower costs and prices, increased scale economies, competition, and investment in new plant and equipment.
1967:  trade creation within the EC evaluated at $2.3 B; trade diversion evaluated at $0.9 B
1988:  EC-6/US dynamic effects based on increased EC economic activity, evaluated at $28.1 B;  EC-6/US trade diversion based on increased EC agricultural protection, evaluated at $6.3b

• marketing and increased investment to meet region-wide demand
• international division of control, design, and production activities according to labor requirements
• international division of production according to region-wide (or world) product mandates
• productivity increase to meet increased international competition
• seeking temporary protection
• exit the noncompetitive activity