Chapter 2: America’s Trade Agreements

By William Krist

Similarly, U.S. bilateral and regional free trade agreements (FTAs) expanded from a simple 1985 agreement with Israel that only addressed tariffs on nonagricultural goods to a web of agreements with nineteen other countries that almost completely eliminate all barriers to trade between the signatories and have more extensive rules on intellectual property protection, services, and investment than the multilateral rules.

The North American Free Trade Agreement (NAFTA), which went into effect in 1994, and the newly created WTO, which resulted from the Uruguay Round negotiations, created a strong backlash against U.S. trade agreements. Efforts to conclude a new round of multilateral trade negotiations—the so-called Doha Development Round—which began in 2001 have failed.

Today, the United States’ major negotiations for new agreements are with eleven other Asian-Pacific countries, in what is called the Trans-Pacific Partnership negotiations, and with the European Union, in the Trans-Atlantic Trade and Investment Partnership negotiations.

America’s trade agreements have changed dramatically over the last two decades. Before 1995, the key agreement was a relatively obscure arrangement headquartered in Geneva, known as the General Agreement on Tariffs and Trade (GATT). Though little known, the GATT had facilitated an enormous reduction in barriers to world trade through successive rounds of negotiations. By and large, however, the GATT was not a concern of the average American. 

The United States also had an FTA with Israel in 1985 that had been implemented mostly for foreign policy reasons, and an agreement with its neighbor to the north, Canada, which went into effect in 1989. Few Americans were aware of the U.S. agreement with Israel, and the agreement with Canada enjoyed public support.

Then in 1994 the United States–Canada FTA was expanded to include Mexico in a North America Free Trade Agreement (NAFTA). In 1995 the GATT evolved into the WTO, which reaches significantly further into the American economy than the GATT did. Both the WTO and NAFTA aroused enormous public concern and debate regarding the implications of globalization.[1]

The world economy has also changed during the past two decades. Several developing countries—including China, Brazil, and India—developed successful export strategies to take advantage of the global market. China joined the WTO and has now overtaken Japan to become the second-largest economy in the world, and the United States’ trade deficit today with China is far larger than its deficit with Japan.

Business has also changed. Almost all large U.S. companies today are multinational, often earning more than half their profits overseas. Along with this, they have developed global supply chains to provide them with the parts and raw materials they need, and distribution channels to sell in virtually all markets. Twenty years ago, it was possible to say what an “American” company was; today, that is far harder.

The United States’ trade agreements both contributed to this globalization and were driven by it. As trade barriers were reduced in successive rounds of GATT trade negotiations, more and more companies entered world markets. As they did, and evolved to become multinational organizations, in turn they pushed U.S. trade agreements to cover new areas, including investment rules, the protection of intellectual property, and trade in services.

Since 2000, the United States has entered into FTAs with seventeen additional countries. In addition, in February 2016 the U.S. and eleven other nations signed the Trans-Pacific Partnership Agreement (TPP), which now must be approved by the U.S. Congress if it is to go into effect. Currently, the U.S. is also engaged in advanced negotiations with the European Union to establish a free trade area between the world’s two largest trade blocs. U.S. free trade agreements—as well as other countries’ FTAs—build on the WTO rules, and FTA rules cannot conflict with WTO rules: they can go farther than the WTO rules, but they cannot undermine them.

The WTO is a broad agreement that applies to many countries, but it allows each member to maintain some restrictions on imports. In contrast, bilateral and regional FTAs remove almost all barriers to trade between the partners, providing traders with preferential access compared with exporters from other countries. The WTO is wide in its coverage of countries but leaves some trade barriers in place, whereas bilateral and regional FTAs only apply to the countries that are party to the agreement, but remove all or almost all barriers to trade between them.

Market Access and the GATT/WTO

The original 1947 GATT set out the basic principles that largely governed world trade over the next forty years and that would become the foundation for the WTO.[2] There were twenty-three original members, known as the “contracting parties.” The GATT was to be a member driven organization, but it had a very small secretariat in Geneva charged with administering the agreement for the members.

A fundamental pillar of the GATT/WTO is the most-favored-nation (MFN) concept. MFN (Article 1) requires each member to provide all other members with the most favorable trade treatment given to any member. If a member grants another member a tariff preference, it must grant the same preference to all other members. There are two important exceptions to this rule: the treatment of developing countries (e.g., the U.S. Generalized System of Preferences, which gives tariff preferences to many poor nations); and the formation of customs unions or free trade areas, such as NAFTA.

A second fundamental GATT concept is national treatment (Article 3), which requires that members provide the same treatment to products once they have been imported into a member country as is provided to a “like” domestic product. This means, for example, that members can not apply discriminatory taxes on imports after they have cleared the border.

Another important concept underlying the GATT is that barriers to imports and exports should be in the form of tariffs and not quotas that set a ceiling on the amount of possible imports (Article VIII). A fourth is that trade regulations are to be publicly available and administered in a uniform, impartial, and reasonable manner (Article X).

The first five rounds of multilateral trade negotiations under the GATT addressed tariffs, and bargaining was done on a product-by-product basis. Each country would submit a list of requests to its trade partners asking for tariff reductions on products of interest, and then it would submit a list of offers, that is, tariff concessions it was prepared to make. The goal was reciprocity, whereby countries made market access concessions roughly equivalent to the concessions made by other parties on products of interest. The negotiating process was cumbersome, and these first five rounds only resulted in a total reduction of tariffs on nonagricultural products of about 35 percent.

These tariff reductions, and the results of all subsequent rounds, were then bound, which meant that member countries notified their tariff schedules to the GATT and these were listed in annexes to the agreement. Under GATT/WTO rules, countries can apply tariffs lower than their bound rate, but they cannot apply higher duties unless they provide off-setting concessions to countries that are adversely affected by the new rates. In these situations, the country raising its duty past the bound rate and the affected countries enter into negotiations to resolve the issues, generally through off-setting concessions in other products. If an agreement cannot be reached, the adversely affected country may be authorized by the GATT to apply sanctions equal to the injury suffered.

The sixth round, the Kennedy Round, largely focused on tariffs, but instead of a product-by-product approach, the negotiators agreed to a formula that reduced tariffs by about one-third on industrial goods across the board. Countries could negotiate exceptions to the formula cuts, with negotiations again focused on achieving an overall balance of concessions between countries. Subsequent rounds—the Tokyo Round, the Uruguay Round, and now the Doha Round—all followed the approach of negotiating tariffs on the basis of a formula.

Along with the formula cuts, negotiators in the Tokyo Round agreed to eliminate barriers to trade for aircraft and parts; unlike the broader formula reduction on tariffs that applied to all members, however, this was a plurilateral agreement that only applied to the thirty countries that signed the agreement.[3] In the Uruguay Round, agreements applying to pharmaceuticals, medical equipment, steel, and paper products were also agreed to, whereby developed countries eliminated or enormously reduced all tariffs on these products.

In contrast to these sectors where greater than formula liberalization was achieved, footwear, textiles, and apparel were exempt from the Tokyo Round’s formula cuts. These sectors employ relatively large numbers of unskilled workers and U.S. firms generally have difficulty competing with firms in low-wage countries in these sectors. Further, these sectors have a great deal of political clout in a number of countries, and at that time they could have blocked approval of an agreement that they strongly opposed.  Accordingly, not only were these sectors largely omitted from trade liberalization, but in 1974 some developed countries—including the United States, the EU member states, Canada, and Norway—imposed the Multi-Fibre Arrangement, which placed quantitative restrictions on the amount of textiles and apparel that could be imported.

Addressing Nontariff Measures

By the time of the Tokyo Round in 1973, tariffs on nonagricultural products had been substantially reduced. Accordingly, the negotiators increasingly turned attention to nontariff measures that restricted trade. Dealing with nontariff measures proved to be more complex than tariff negotiations, because many nontariff measures are generally qualitative and may have a legitimate purpose, although often they have a deliberately protectionist objective.[4] To separate protectionist aspects from legitimate functions, negotiators developed “codes of conduct,” which specified what could and could not be done in applying the various nontariff measures.  (See table 2.1 for a listing of the areas covered in each round.)

For example, standards have a legitimate purpose of ensuring consistent quality for a country’s consumers, but they can also easily be designed to prevent products produced in other countries from entering the market. Testing and certification procedures can also easily be used to block imports.[5]  The standards code (known as “Technical Barriers to Trade”) encouraged the use of international standards to the greatest extent possible. It also required that standards be adopted in a transparent way and be publicly available, that standards be the “least restrictive” necessary to achieve their objective, and that testing products for compliance not discriminate against imports. However, the code does not limit the ability of countries to adopt legitimate standards or to test domestic and imported products for compliance.

A second code of conduct developed in the Tokyo Round dealt with customs valuation. Up to that time, countries were free to determine how to value imports for the purpose of duty assessments. For example, the United States had a system called “American Selling Price” in effect for imports of chemicals; under this system, an imported product was arbitrarily valued at the same level as the price in the U.S. market for the same product, if that was higher than the import price. Clearly, arbitrarily raising the basis for assessing a duty could easily be used to minimize the impact of a lower tariff. Under the Tokyo Round code, a clear methodology for determining the value of an import was specified, which required the United States to give up the American Selling Price system of import valuation.[6]

Another code of conduct applies to import licensing. This code allows countries to maintain import licensing systems where they are legitimate, but prohibits the trade protectionist aspects of such systems.

Still another code negotiated in the Tokyo Round applies to government procurement. Basically all countries favor domestic suppliers in government procurement, and this code aims to open parts of this market segment to international competition. In the United States, procurement by government agencies accounts for roughly 20 percent of the economy, although a great deal of this is either defense related or salaries and transfer payments, which are not covered by this code. In many other countries, government procurement is a larger portion of the economy than is the case for the United States.

The government procurement code differed from all other codes up to that time, which applied to conditions at the border, whereas the government procurement code applies to goods after they have cleared customs at the border. However, the philosophy behind liberalizing government procurement is the same as for goods going to the private sector, and that is to promote global efficiency.

The EU and its 28 members, 15 other countries and the United States are all signatories to the Government Procurement Code, as of April 2016.[7]  Additionally, 30 WTO members and four international organizations have observer status to the Code.  Each of the signatories has submitted a list of government agencies that will consider bids from firms in other code signatories on an equal footing with domestic bidders. The U.S. federal government notified a broad list of entities under the code, and thirty-seven states committed to open procurement to firms in other code signatories on listed entities. Other countries, such as the EU member states and Japan, made commitments comparable to that of the United States.

Under the code as negotiated in the Tokyo Round and as updated in the Uruguay Round, all signatories are required to accept bids from other signatories for all projects of listed entities over the threshold value. For the procurement of goods and services other than construction services by the United States, Canada, EU members, and a number of other signatories, this threshold is SDR 130,000 (SDRs are Special Drawing Rights)—equivalent to about $191,000 as of April 2016—and for construction services, it is SDR 5 million, or just under $7.5 million.[8] Procurement by agencies not listed may be done under each country’s own domestic laws.

Before the Government Procurement Code entered into force, the United States applied a preference margin of 6 percent to domestic suppliers and 12 percent for domestic small businesses, as set out by the Buy America Act of 1933. For defense procurement, the U.S. preference margin was 50 percent. Under the code, firms in other countries that are party to the agreement can now compete on bids above the threshold level on an equal footing with U.S. firms for those entities that the United States has listed. For entities not listed by the United States, firms in code signatories may still bid, but the historic 6/12/50 percent preference margins apply.

Signatories to the Government Procurement Code are free to discriminate against non-signatories for all procurement. Non-signatories to the code generally cannot bid on U.S. government contracts, regardless of whether the procurement is by a covered entity or not. This discrimination is deliberate and is intended to provide an incentive for countries to adhere to the code.

The standards, import licensing, customs valuation, and government procurement codes were all “plurilateral”; that is, members of the GATT could choose to sign on or not. The codes were designed to encourage countries to sign by limiting some benefits to signatories, such as opportunities to sell to governments under the procurement code or participating in the committee overseeing each code. However, non-signatories enjoyed some of the benefits; for example, non-signatories to the customs valuation code did not have to change their own system of valuation, yet they still enjoyed the certainty of the rules pertaining to valuation by those that did sign. Though most developed countries signed these codes, most developing countries in fact chose not to sign.

At the end of the Tokyo Round, the size and scope of the GATT had expanded enormously. When the GATT was launched in 1947, there were only twenty-three member countries, mostly the developed countries that had won the war, but also some developing countries, including

India, Pakistan, South Africa, and Southern Rhodesia (now Zimbabwe). In the early 1950s, Germany, Austria, and Italy joined, and then in the early 1960s a wave of newly independent states, mostly poor developing countries, became members.

The Uruguay Round

The issues addressed in the Uruguay Round were extensive. Once again, tariffs on most nonagricultural products were reduced across the board on the basis of a formula; and this time, trade in textiles and apparel was opened up. The Multi-Fibre Arrangement on textiles and apparel was renamed the Agreement on Textiles and Clothing, which required that quotas on textiles and apparel be eliminated by 2005. (This happened on schedule, although the United States and a number of other countries still retain high tariffs on textiles and apparel products.)

For the first time, the Uruguay Round addressed trade in agricultural products in a comprehensive way, as only minimal agricultural liberalization had been achieved in previous rounds. The European Union had developed a highly protectionist Common Agricultural Policy, which included import restraints and domestic and export subsidies.[9] The United States and many other developed countries also have high tariffs on most agricultural imports, and the United States, as well as several other countries, doles out huge subsidies to domestic producers that allow them to underprice other country producers in world markets. Not only had almost no progress been made in the agricultural sector, there was not even a framework for how to consider agricultural subsidies, which varied enormously from country to country.

However, in the Uruguay Round the negotiators agreed to reduce tariffs on agricultural products by 36 percent for the developed countries and by 24 percent for the more advanced developing countries. All members agreed to bind all their tariffs on agricultural products, although generally at high levels. 

The negotiators also developed a framework for the various kinds of subsidies, categorizing them based on the extent to which they distorted trade and production. Direct export subsidies, such as payments based on the quantity of a product exported, were considered to be the most distortive. The developed countries agreed to reduce these by 36 percent by value, and the advanced developing countries agreed to cut their direct export subsidies by 24 percent.[10]

A second category were subsidies that distorted trade, but where the country had placed limits on how much could be produced; these were placed in a so-called blue box. The United States notified only one blue box subsidy practice, and this practice was discontinued in 1996. The third category was the “amber box,” which pertains to subsidies that have an impact on production but do not directly distort trade. Countries agreed to limit amber box subsidies to an index, the “Aggregate Measurement of Support”; the United States committed not to provide more than $19.2 billion in such programs, while the EU agreed to a level in euros equal to about $93 billion at that time, and Japan committed to a level in yen equivalent to about $43 billion.

Subsidies that did not distort production or trade were placed in a “green box,” which had no limits on the amount of subsidy that could be provided. These included practices such as research, food stamps, and conservation.

Finally, there were two categories that the negotiators recognized were distorting but for domestic political reasons could not be addressed. The first was defined as support for a commodity that is less than 5 percent of the commodity’s production value for developed countries and 10 percent for developing countries, and the second allowed non-product specific support provided it is less than 5 percent of the total value of agricultural production for developed countries or 10 percent for developing nations.

Moving Beyond Trade: Investment

In a very important move, however, the negotiators at the Uruguay Round broke radically new ground by addressing some extremely significant issues outside the traditional GATT focus on trade in goods—namely investment, services, and intellectual property protection. 

The original GATT only addressed investment in a minor way, and only insofar as an investment distortion might have an impact on trade.[11]  For example, the original GATT theoretically would have prohibited a local content rule that required all automobiles on the market to be manufactured in the country with 80 percent of the content from parts and components manufactured in the country. Such a rule, of course, would nullify the potential benefit of a tariff concession on automobile parts and components. However, the prohibitions in the original GATT were largely ignored and by the 1980s, a number of investment practices had proliferated that had the effect of distorting trade and nullifying the benefit of trade concessions.

Investment rules have an enormous potential to distort trade. The WTO estimated that in 1995 about one-third of the $6.1 trillion total world trade in goods and services was intercompany trade, such as between a subsidiary of a company and its headquarters in a different country.

Accordingly, Uruguay Round negotiators developed the agreement on Trade-Related Investment Measures (TRIMs), which basically clarifies GATT Articles III and XI, particularly by including a short illustrative list of practices that are prohibited under these articles. For example, the TRIMs agreement makes it a clear violation of rules to require that an investor use products of domestic origin rather than imported products, or to require that an enterprise limit the use of imported products to the value of local products exported.

However, the TRIMs agreement is extremely limited. For example, it does not prohibit export performance requirements, limitations on the amount of equity that the foreign investor may hold, rules that a foreign investor must transfer technology to the country, or requirements that the foreign investor must conduct research and development locally. Additionally, the agreement does not address broader investment issues, such as the right to establish a foreign subsidiary or repatriate profits.

Unfortunately, these loopholes continue to distort trade and investment today.

Trade in Services

The original GATT also did not address services other than in a very minor way.[12] By the time negotiations in the Uruguay Round began in 1986, however, GATT members had come to realize the importance of trade in services and had agreed to comprehensive negotiations.

Barriers to trade in services are radically different from barriers to trade in goods. All goods trade crosses borders in a highly visible way and all governments—even those of the least developed countries—have customs officers at border posts to collect tariffs on imported products.  Most measures to control trade in goods are imposed at the border, including tariffs, quotas, and import licensing.

In contrast, trade in services does not pass through customs posts. The ways that services can be traded are varied, and the potential barriers to this trade are very diverse. Generally, rules that affect trade in services are embedded in domestic regulations that affect the provision or consumption of services, such as regulations on banking, telecommunications, or electricity or water delivery, or rules aimed at protecting health or the environment. Services regulations may be imposed at the national level, or a subnational level, or they may not be imposed by the government, but by an industry association. Often these rules have been constructed from a domestic perspective without consideration of the potential impact on foreign suppliers.

And, of course, sometimes these rules have been constructed in a way to deliberately hold down the number of potential suppliers—often for valid reasons—such as requirements that doctors must be adequately trained. Even rules in such areas as visas can affect services trade by limiting the ability of customers to travel to other countries or the ability of providers to travel to consuming countries.

Regulations that can be barriers to services trade are not necessarily discriminatory. For example, a rule limiting currency exchange might have no effect on a local service provider but could discourage foreign providers from supplying the market. Conversely, regulations that are discriminatory may have a very legitimate domestic justification. For example, a central bank may impose more stringent capital requirements on a branch of a foreign bank than a domestic branch for valid prudential reasons.

In the Uruguay Round, however, trade negotiators managed to devise a framework for defining trade in services that set the stage for reducing barriers and distortions in the future. The subsequent agreement—the General Agreement on Trade in Services (GATS)—follows some of the basic principles that govern trade in goods contained in the GATT.  First, GATS extends MFN treatment to all the services and services suppliers of all other WTO members. The second principle is transparency: Members are required to publish all measures that have an impact on services trade of general application and to establish a national inquiry point to respond to requests from other member-country service providers.  Additionally, members are required to set up appeals procedures that can be used by a firm that does not believe it is being treated fairly.

However, the real genius of the Uruguay Round negotiators was to categorize services trade by how it is supplied, and they defined four “modes” under which trade in services takes place. Mode 1 is where the service is exported from the provider in one country over the Internet, by mail, or via some other delivery mechanism directly to the consumer in another country. An example might be professional tax advice provided over the Internet to a consumer in another country.

Mode 2 pertains to consumption abroad, where the consumer of a service from one country travels to another country to purchase the service.  An example would be a patient who travels to another country to have an operation performed by a specialist not available at home.

Mode 3 pertains to services provided through a commercial presence, whereby a firm establishes a facility in another country. For example, a Mode 3 commitment might be to allow foreign firms to make an investment in a specific services sector or to repatriate profits from those investments.  Note that Mode 3 addresses the movement of a basic factor of production—that is, capital—and in this limited way, this aspect of GATS goes farther than the WTO investment provisions applicable to goods.

Mode 4 pertains to the presence of natural persons. For example, a doctor may travel overseas to oversee a highly technical operation, or migrant workers may travel from one country to another to assist on farms. Mode 4 represents movement across borders of another key factor of production: human capital.

The Uruguay Round negotiators defined services in 12 broad sectors which could be delivered through any of the four modes. The 12 broad sectors are business, communication, construction, distribution, educational, environmental, financial, health-related and social services, tourism, recreational-cultural-sporting, transportation, and other. Within these 12 broad sectors, there are some 155 specific service areas.[13] For example, business services include legal, taxation, architectural, engineering, accounting, and other specific service areas.

In addition to this basic framework, GATS also includes annexes on basic telecommunications and on financial services. These annexes call for more extensive commitments than is the case for other sectors.

Finally, each WTO member was required to submit a copy of its commitments to the GATT, which could apply to any of the four modes of delivery or any of the service sectors. These commitments could have all sorts of limitations, such as the number of suppliers to be permitted to supply the service. Additionally, commitments could be horizontal (i.e., apply to all sectors), or they could apply only to the specific service sector notified.

This structure gave each member “policy space” to pursue its own objectives, other than the obligations for MFN treatment and transparency.  Accordingly, country schedules vary widely among WTO members depending on the commitments each member chose to make.  Developed countries tabled fairly extensive commitments, but generally these simply confirmed and “bound” existing practices, rather than representing real liberalization of access. Developing countries generally made far fewer commitments than developed countries. In fact, for many developing countries, commitments were limited to areas such as tourism, and more complex sectors were avoided. Even the least-developed members, however, undertook some binding commitments, such as committing to open their tourist markets to foreign hoteliers.

By and large, however, the 123 members of the newly established WTO did not liberalize trade in services, but instead only bound their current practices. Nonetheless, GATS was a breakthrough in establishing a framework for considering trade in services and including binding commitments by each member. For the first time, the trading community recognized the importance of liberalizing trade in services and set out a coherent framework for doing so.

Beyond Goods and Services to Intellectual Property

The third new issue introduced in the Uruguay Round was the protection of intellectual property, such as patents, copyrights, trade secrets, and trademarks. The original GATT did not address intellectual property, and instead rules governing intellectual property protection were developed in other international organizations, such as the World Intellectual Property Organization (WIPO). These rules covered such things as the definitions of patents, trademarks, and copyrights; the mutual recognition of intellectual property developed in other signatories; the length of protection for patents, trademarks, and copyrights; and so forth.

The rules developed in WIPO and other organizations reflected the inherent tension between protecting intellectual property and diffusion of the benefits of the technology to the general public. The argument for protection is that it gives companies and individuals a period of exclusivity during which they can raise prices to profit from their innovation and recover the costs of their research. This provides incentives for research that will benefit all of society; proponents of intellectual property protection argue that without these protections, research in new products would be sharply diminished.

Conversely, such protection raises the costs of the products protected and may reduce availability. Nowhere is this tension greater than in the pharmaceutical sector, where research has developed cures for many diseases. However, the costs of these new drugs can often be extremely high during the period the producers have patent protection, often making them unavailable to low-income individuals.

In terms of protecting intellectual property, the WIPO had two critical limitations. First, only a limited number of countries were party to the agreement, and these were mainly developed countries. Piracy of intellectual property, however, was prevalent in a number of developing countries that were not party to the WIPO agreement, and often the counterfeit products produced in these countries found their way into the markets of developed countries. Second, WIPO did not have any dispute settlement mechanism or any sanctions for noncompliance; nor did WIPO require its members to provide criminal, civil, and administrative remedies against infringement of the rules.

Generally, the Uruguay Round negotiators did not attempt to recast the substance of the rules developed in WIPO; instead, with certain exceptions, they incorporated them in the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which became an integral part of the final package. The developed countries were required to implement the TRIPS agreement within one year, and the developing countries were required to implement it within five years.  The least developed countries originally had ten years to implement it, although this deadline has been extended for pharmaceutical products.[14]

By including these rules in the Uruguay Round package, the negotiators immediately extended the requirement to protect intellectual property to all GATT/WTO members, not just the parties to WIPO. And just as important, they made compliance with these rules subject to the GATT/WTO dispute settlement procedures.

Dispute Settlement: A More Robust Mechanism

Perhaps the most important change to the GATT agreed to in the Uruguay Round, however, concerned dispute settlement. Under the original GATT, any member that felt the actions of another country “nullified or impaired” trade concessions it had received in exchange for its own concessions could bring a dispute to the membership. GATT rules required that the countries consult first to see if they could resolve the dispute; but if not, the contracting parties could establish an independent panel of experts to consider the dispute. If the panel ruled against the accused member’s action and the contracting parties accepted the panel’s report, the offending member was supposed to bring its policy into compliance with the panel’s ruling. Alternatively, the offending member could offer compensation to the party or parties injured by its action, generally by making new tariff concessions on products of export interest to the injured party. If the member refused to do this, the injured nation could be authorized to take retaliation, generally in the form of increasing duties on products imported from the offending member to restore the balance of trade concessions.

This system worked fairly well, at least initially, when the GATT membership was fairly small and the country representatives all knew each other and believed in the same underlying principles of the trading system. Over time, however, the system worked less and less well. A member facing an adverse panel report could delay consideration of the decision or of retaliation, because the GATT required a “consensus” to act, which was defined as agreement by all members. So a member whose practice was found in violation could delay the process indefinitely.

By the 1970s, however, some countries—and particularly the United States—were becoming frustrated with the GATT dispute settlement mechanism. The trade rules did not cover a broad range of nontariff barriers that countries were using to block trade, and the United States faced serious international competition from both Europe and Japan.

In the U.S. Trade Act of 1974, which provided the president authority to negotiate a new trade round, a frustrated Congress included a provision (Section 301) that authorized the president to take retaliatory action to force the removal of foreign trade actions that were discriminatory or unreasonable and that restricted U.S. commerce. The Office of the U.S. Trade Representative could initiate a case, or an industry could file a petition to launch an investigation, which would force action if the investigation confirmed the facts.

The United States used Section 301 authority aggressively, and because of the size of the U.S. market, other countries generally removed the offending practice. One of the largest Section 301 cases involved Japanese semiconductors in the mid-1980s. At that time Japan effectively blocked foreign access through a system of cartels whereby Japanese manufacturers of semiconductors and users, such as computer producers, only purchased from each other and refused to purchase non-Japanese semiconductors. In contrast, the U.S. semiconductor market was very open.

The Japanese companies used this imbalance in access to price high in their domestic market and sell at prices below cost in foreign markets, particularly the United States—a practice known as dumping. Even though the semiconductor industry had been started by the United States and long dominated by it, by the mid-1980s the U.S. semiconductor companies were on the ropes and facing the prospect of bankruptcy.

The U.S. industry initiated a Section 301 petition, and the Office of the U.S. Trade Representative launched negotiations with Japan. When the negotiations were not successful, the United States retaliated and obtained a commitment from Japan to open its market, using a benchmark that foreign suppliers would have at least a 20 percent market share, and the Commerce Department took action to prevent dumping.[15] The result of these actions, along with actions to promote research and development, was that the U.S. industry regained its competitive position. Without this action, it is very possible that companies such as Texas Instruments, Intel, and Micron would no longer be in existence.

Voluntary restraint agreements (VRAs) were another practice that had grown up by the 1990s. Under these practices, large countries used their market power to induce exporting nations to “voluntarily” limit their exports or face more severe restraints. Both the U.S. Section 301 and VRAs were strongly opposed by smaller nations; and in the Uruguay Round, as the price for the new dispute settlement mechanism, countries agreed that VRAs would now be a violation of WTO rules and the United States agreed to modify Section 301 to commit to use the WTO dispute mechanism and only retaliate when authorized by a dispute settlement panel.

Under the new dispute settlement system, time limits were placed on panel consideration and how long the contracting parties had to consider the panel report. No longer could one member block adoption of a panel report; under the new rules, all members would have to agree to a requested delay. And a new appellate review system was established, and members could appeal a decision to the appellate body. Again there were strict time limits on the time it took for an appeal to run its course. The process has some flexibility, but generally it takes about one year for a case to run its course or one and a quarter years if the panel’s decision is appealed.

The new dispute settlement mechanism represented a fundamental change, moving the organization from a system of consensus to a much more legalistic mechanism for resolving disputes.

The GATT becomes the WTO

Near the end of the Uruguay Round, the negotiators agreed to another provision that had enormous implications: to make the whole package a single undertaking. As noted above, in earlier rounds members could decide whether or not to adhere to the codes of conduct, such as the agreements on technical barriers to trade, trade-related investment measures, customs valuation, and import licensing.

The negotiators from the United States, Europe, and some other counties were concerned that this enabled some members to be “free riders,” that is, to benefit from access to markets of countries that agreed to these codes while not having to undertake comparable responsibilities themselves. Additionally, negotiators felt that to the greatest extent possible, common rules that applied to trade with all countries greatly facilitated trade because exporters would have a uniform set of rules around the world. Accordingly, it was decided that all members would have to accept the responsibilities of all the agreements or drop out of the organization. (The Government Procurement Code and the Civil Aircraft Code were exceptions to the “single undertaking” and remain as plurilateral agreements.)

Because these new agreements on agriculture, services, intellectual property protection and a binding dispute settlement mechanism fundamentally expanded the scope of the GATT, the negotiators decided to change the body’s name from the General Agreement on Tariffs and Trade to the World Trade Organization. The approximately sixty agreements reached in the Uruguay Round and previous rounds since the original GATT agreement of some 65 pages now covered some 550 pages, not including the voluminous schedules of commitments by each country appended to the agreement.[16]

Although not part of the Uruguay Round, a plurilateral agreement to completely eliminate tariffs on information technology products—the Information Technology Agreement—was reached in December 1996. Originally, twenty-nine countries signed on, and by April 2013 the number had grown to seventy-four; these economies account for 97 percent of world trade in information technology products. This plurilateral agreement is now also part of the WTO.

Establishment of the WTO, while applauded by industry and the free trade community, enormously heightened fears of globalization among some in the general public. The agreements on intellectual property and services represented an enormous change. Previously, the GATT had applied to goods traded at the border, with the exception of the government procurement agreement. Intellectual property protection and many services, however, were areas subject to domestic regulation and reached way inside markets. Many environmentalists and others were concerned that this could restrict the ability of governments to pursue other socially desirable objectives, such as protecting the environment.

And developing countries were surprised and confused by the last minute agreement that the new WTO would be a “single undertaking.” Suddenly, they were committed to a number of agreements that previously had not been mandatory and that many developing countries really did not understand, such as the agreements on customs valuation, trade related investment measures, and intellectual property protection. They would also soon learn that compliance with these agreements would be very expensive. (These concerns will be considered in chapter 6.)

Under the new WTO’s dispute settlement procedures, developed countries could no longer ignore international rulings on trade practices, and this limited the ability of governments to protect domestic industries. Weakening Section 301 to take away the right of unilateral action and the prohibition on using voluntary restraint agreements concerned many U.S. industries. However, WTO rules did continue to allow some forms of import protection that had been set out in the GATT, the most important being antidumping duties, countervailing duties, and safeguard actions.[17]

Import Protection under the WTO

The fundamental purpose of the GATT/WTO is to open markets to international trade in order to promote the efficient global production of goods and services. The basic rules of the GATT and WTO were developed in accordance with economic theory, as understood at the time the rules were developed, tempered by the limits of what could be negotiated internationally and approved domestically.

The founders of the GATT recognized that some practices could distort the market and result in new inefficiencies. Two such practices were “dumping” and the subsidization of exported products, and the rules provided mechanisms whereby countries could offset the adverse impact of these two practices. A rationale for these rules was to reestablish a level playing field that would be in accordance with the intended impact of the law of comparative advantage.  (This is discussed more extensively in Chapter 3.

Further, the founders recognized that on rare occasions, trade liberalization could lead to a flood of imports, which in turn could cause substantial injury to a domestic industry, and they provided a mechanism to allow countries to take temporary relief. Such a “safeguard” action, of course, is a temporary step away from efficient global production.

In agreeing to the original GATT and the results of the subsequent rounds of multilateral negotiations, the contracting parties considered the provisions on dumping, subsidies, and safeguards as integral to the balanced package. For the United States, the existence of these provisions was also necessary to gain a domestic political consensus sufficient to obtain approval of each trade round. Without assurance that they would be protected against unfair competition, a number of industries would have opposed the agreement. And some industries and labor organizations demanded the provisions allowing temporary relief to prevent serious disruption of an industry.

“Dumping,” in GATT/WTO terminology, occurs when a company exports its products “at a price lower than the price it normally charges on its own home market.”[18] Often, dumping may be a normal business practice; for example, at the end of the year, if a toy manufacturer has excess inventory of a product that will no longer be continued, it may well decide to clear out its warehouse and make room for next year’s product by selling the remaining toys at less than it cost to manufacture them. A company may “dump” its products in its domestic market or in an export market.

Sometimes, however, dumping can be anticompetitive. For example, a large company may decide to squeeze out a less-well-financed competitor by selling below cost until the competitor leaves the market when the large company can raise prices. Even if this is not the case, dumping can cause material injury to other companies, either in the domestic market or in its export markets. Though dumping can cause injury to firms competing with the dumped product, the lower prices can be a boon to consumers, who are able to buy the product at a lower price, although the lower price may be temporary.

Under the GATT/WTO, contracting parties may impose antidumping duties to prevent material injury or the threat of material injury, provided that the duties are no greater than the margin of dumping. The rules only pertain to dumped products that are exported; each member is free to deal with dumping in its domestic market as it wishes.

In the United States, the EU member states, and many other countries, dumping as such is not illegal. However, predatory business practices are subject to laws on competition policy, and companies violating antitrust laws can be subject to substantial fines and also ordered to cease and desist. However, the WTO does not have rules governing competition policy.

Antidumping duties are specific; that is, they apply to imports of the specified product from a specified producer. Accordingly, imports from a foreign company found to be dumping are priced higher than imports from other companies, including companies from the same country. Antidumping duties are additional to the regular MFN duty. The rationale is that this is intended to restore a “level playing field” in which companies gain or lose market share based on their competitiveness, or to remove the injury to the domestic industry, whichever is the lesser amount.

The WTO Agreement on Subsidies and Countervailing Measures is somewhat different from the Agreement on Antidumping.[19] Unlike dumping, which is an action taken by a company, a subsidy is an action taken by a government. Because the WTO cannot set rules for companies, which is the responsibility of each contracting party, the Anti-Dumping Agreement only addresses actions that countries may take to offset dumping (i.e., impose antidumping duties), and it does not prohibit the actual dumping itself. However, the Agreement on Subsidies and Countervailing Measures dictates what governments are allowed to do with regard to subsidies and also defines what countervailing actions countries may take to offset injurious subsidies.

Under this agreement, subsidies that directly benefit exports and subsidies that favor the use of domestic content over imported products (“local content subsidies”) are prohibited. These two categories of subsidy are subject to rapid dispute settlement procedures.

Other types of subsidies are defined as “actionable.” If a contracting party believes its exports are being injured in a third market or in the market of the subsidizing country, it can bring a complaint under the regular WTO dispute settlement procedures. If it believes it is being injured in its home market, it can either bring a dispute settlement case or it can impose a countervailing duty to offset the injury, which cannot be greater than the amount of the subsidy. The imposition of countervailing duties and antidumping duties requires a transparent process to determine the amount of subsidy or dumping margin and whether there is material injury. Countervailing duties are imposed on all the imports of the specified product from the subsidizing country.

The Agreement on Safeguards provides the opportunity for a member to impose temporary relief in the form of increased tariffs or quotas to restrict imports that cause, or threaten to cause, serious injury to a domestic industry.[20] The term “serious injury” is defined as “significant impairment in the position of a domestic industry.” “Serious injury” is considered to be a higher threshold than the “material injury” test for antidumping or countervailing duties, which is defined as an “important . . . deterioration in the operating performance of the domestic industry.”

A safeguard action does not require a finding of “unfair,” but it does need to be applied to all WTO members universally, consistent with MFN, although in practice in some circumstances it may be applied in a manner that has an impact on specific countries that are the source of the increased imports.[21] It has to be time limited—no more than four years, with a possible four-year extension. And it may require that the member taking a safeguard action provide compensation to those countries adversely affected by the action or face possible retaliation.

Negotiations without End: The Doha Round

When the Uruguay Round negotiations ended, it was recognized that there was still much more that needed to be done, particularly in the areas of agriculture and services. Accordingly, the Uruguay Round agreement committed the WTO members to begin negotiations on these two areas in 2000, whether or not a new round had been started by that time.

Additionally, the EU member states and several other countries pressed for new negotiations on investment, competition policy, government procurement, and customs procedures that restrict trade. However, developing countries strongly opposed negotiations on these issues. A compromise was reached at the 1996 WTO Ministerial Meeting to set up working groups to examine these four issues to see if a consensus could be reached to include them in the next round of trade negotiations.

A major effort to launch a new round was subsequently made at the WTO’s Ministerial Meeting in Seattle in 1999 but, as noted in chapter 1, this ended in chaos and failure. Finally, at the November 2001 Ministerial Meeting in Doha, a new round was launched, and the negotiations on agriculture and services, which had started on schedule, were incorporated into the new negotiating mandate.

To gain developing countries’ support for the new round, it was agreed that a primary objective of the negotiations would be to better enable developing countries to benefit from the growth of world trade.[22] The second paragraph of the Ministerial Declaration emphasized this point: “The majority of WTO Members are developing countries. We seek to place their needs and interests at the heart of the Work Programme adopted in this Declaration…We shall continue to make positive efforts designed to ensure that developing countries, and especially the least-developed among them, secure a share in the growth of world trade commensurate with the needs of their economic development.”

In addition to general language that Doha was to be a development round, negotiators had to address serious concerns raised by the developing countries that the TRIPS agreement was preventing many countries from obtaining the drugs necessary to deal with the AIDS crisis. Patented antiretroviral drugs used to help patients with AIDS are extremely expensive and far beyond the reach of most people in developing countries, where incomes are often less than $1 a day. Though the TRIPS agreement allows for compulsory licensing in cases of national emergency (which the AIDS epidemic clearly is for many African nations), developed countries as a general matter were pressing developing countries not to use this provision to license inexpensive generic drugs. Additionally, TRIPS only allowed compulsory licensing for producing drugs for the domestic market, and many African countries facing an AIDS epidemic have far too small a market size to support a generic drug industry.

Accordingly, the trade ministers agreed to a separate Declaration on the TRIPS Agreement and Public Health, issued in parallel to the Doha Ministerial Declaration.[23] This declaration reaffirmed that the TRIPS agreement should be interpreted and implemented in a manner consistent with WTO members’ right to protect public health and, in particular, to promote access to medicines for all. The ministers were unable to agree on how to address the concern of small countries with no domestic manufacturing base regarding compulsory licensing, but they recognized the issue and agreed to resolve it within two years.

At the Cancun Ministerial Meeting in September 2003, an agreement on compulsory licensing was reached. Under this agreement, countries that want to produce generic drugs for export must issue a compulsory license and notify the WTO’s TRIPS Council regarding the quantities being shipped and to whom. Additionally, a WTO member that wants to import the generic drug has to notify the TRIPS Council of its intent to use the system and specify the name and quantity of the generic product. It also must have measures to prevent re-exportation.

The Doha meeting took place just two months after the September 11, 2001, terrorist attacks on the World Trade Center and the Pentagon. U.S. policymakers believed that poor unstable countries could become havens for terrorists, and accordingly there was support for the idea of helping the developing countries—and particularly the least-developed ones—grow economically. A new round focused on development made sense in this context. Politically, it was also a necessity if a new round was to be launched. The developing countries, which were feeling shortchanged by the results of the Uruguay Round and now constituted a majority of the WTO’s membership, would not have agreed to launch new negotiations without this commitment.

Although the mandate agreed to at Doha in 2001 set out the broad parameters for the negotiations, a number of issues were still unresolved. In particular, the European Union wanted the negotiations to include investment, competition policy, government procurement, and customs procedures that restrict trade. In the face of strong opposition from the developing countries at the 2003 Ministerial Conference, however, it was agreed that only negotiations on improving customs procedures (called “trade facilitation”) would be included in the Doha Round, and that investment, competition policy, and government procurement would be dropped from the agenda.

The initial deadline for completing the negotiations was to be January 1, 2005, but this was missed. A new deadline for completing the Doha Round in 2006 was also missed, intense work in 2007 and 2008 failed to produce an agreement. However, a great deal of work had been done, and the negotiators developed a broad outline of a potential deal, although the political will to bring the round to a conclusion is lacking.

Even if the political will were there, however, the results would still have been minimal. Based on the negotiations, the developed countries would reduce tariffs on nonagricultural goods across the board by an agreed-on percentage. However, the advanced developing countries—including nations such as China, India, and Brazil—would reduce their bound rates by a smaller amount but would make virtually no cuts in their actual applied rates, because these are far below their bound rates. The least-developed countries would not have to make any cuts.

In the agricultural sector, the developed countries would cut tariffs by half or more, although products deemed sensitive would be cut less. The developing countries would make smaller cuts, and the least-developed countries would not have to make any cuts. Total trade-distorting subsidies would be capped, albeit at a level for the United States that is above its current level of subsidization. And in the services area, only a very small degree of improved access would be achieved, because countries would basically just agree to additional bindings on existing practices.

The most progress in the Doha Round has been in the customs area.  At the 2013 WTO Ministerial Conference members did agree on a trade facilitation agreement which aims “to simplify customs procedures by reducing costs and improving their speed and efficiency.”[24]  This agreement covers a range of issues such as use of electronic payment and guarantees for rapid release of goods; developing and least developed countries will receive aid in implementing some provisions.  When fully implemented, it is envisioned that the costs of trade will be reduced by 10 to 15 percent.

The Doha Development Round has already lasted longer than any previous round. Although the negotiations have not officially been declared over, it seems very doubtful that a large package of concessions to reduce trade barriers across the board for industrial and agricultural products will be achieved. However, at the Ministerial Conference in Nairobi in December 2015, members did agree to continue work on remaining issues.  The U.S. and some other countries had pressed to begin work on other issues in the WTO that were not included in the mandate of the Doha Round, but other countries objected; going forward, all WTO members would have to agree if any new issues are to be taken up multilaterally.[25]

There are many reasons for the failure of the Doha Round, including the 2008 financial collapse and the deep, global recession it caused; the enormous complexity of trying to reach an agreement on these broad issues among the more than 150 WTO member countries that originally launched the round; the unwillingness by some advanced developing countries—particularly India, Brazil, and China—to make serious concessions in access for nonagricultural products or services; and the unwillingness of the United States, the EU, and Japan to make significant concessions in their agricultural programs.

Another reason for the Doha Round’s failure is that from the beginning it did not address some of the most important trade issues, such as investment, currency manipulation and the treatment of state-owned enterprises. Its focus on development was probably misplaced, because other international organizations, such as the World Bank, are more central players in promoting economic development. As a result, major economic interests in the United States were not deeply supportive of a successful outcome, and no major country felt that the package agreed to by 2008 was sufficiently attractive to justify making major concessions of its own.

The WTO’s New Members

Even though the Doha Development Round has apparently failed, in another important respect the WTO has presided over significant trade liberalization since its launch on January 1, 1995. By the end of 2015, fifty additional countries had joined the WTO. As part of this process, the new members have had to make significant changes to their laws and practices to conform to WTO rules, and they have had to substantially liberalize their trade regimes.

New members need to be approved by all WTO members. When a country applies for membership, a working party is established, which reviews the country’s trade rules and regulations, and their compliance with WTO rules. Applicants enter into bilateral market access agreements with any member that presses for this, and the results of these bilateral negotiations are implemented on an MFN basis. The United States and other members demand that new applicants conform to WTO rules and, if they have high trade barriers, that they substantially liberalize their market in accordance with their level of development.

Ukraine is a good example of how a prospective member country experiences the typical process of joining the WTO. According to Andrii Goncharuk, Ukraine’s former minister of foreign economic relations and trade, his country submitted its formal application in November 1993 and was finally admitted in May 2008, fifteen years later.[26] The Working Party, which had seventeen formal meetings and many informal meetings, consisted of forty-two countries that had expressed interest. In this process, Ukraine passed more than twenty laws to change its practices to comply with WTO rules. The changes made included ending export subsidies on agricultural products, eliminating duties on information technology products, becoming a party to the telecommunications services agreement, bringing its standards practices into conformity with the Agreement on Technical Barriers to Trade, and passing legislation regarding the protection of intellectual property rights.

China, the world’s third-largest economy behind Japan and America, is far and away the most important new WTO member in terms of the size of its gross domestic product, as can be seen in table 2.2. China’s accession to the WTO began in 1986 and was completed fifteen years later in 2001; the bilateral negotiations on market access with the United States took six years and resulted in improved access for U.S. exporters in many industrial and agricultural goods and some services. It also contained a commitment by China to eliminate all export duties and restrictions on exports, other than some that were specifically noted in the agreement. Additionally, the agreement contained a bilateral safeguard provision, which is similar to the safeguard provision in Article XIX of the WTO/GATT, except that the injury test is “market disruption,” a lower standard than the “serious injury” test in WTO Article XIX.

The United States–China WTO accession agreement also contained an unprecedented provision “that China bring its foreign exchange regime into conformity with the obligations of Article VIII of the IMF by an agreed date, and limited its rights to use foreign exchange restrictions in the future.”[27] However, the International Monetary Fund objected strenuously to this on the grounds that exchange restrictions were the IMF’s jurisdiction, and the provision was dropped from the final accession protocol. (As we will see, dropping this commitment has had extremely unfortunate consequences for the United States and for countries that compete with China in world markets.  In subsequent years, China deliberately maintained an undervalued currency that acted as a subsidy on its exports and an additional cost on imports from other countries, although today China’s currency is more fairly valued.)

In addition to China and Ukraine, other new WTO members that are significant markets are Saudi Arabia; Taiwan; the United Arab Emirates; Vietnam; and Russia, the world’s tenth-largest economy. Russia was finally approved for membership at the December 2001 WTO Ministerial Conference after eighteen years of negotiations with some sixty WTO member countries. In the process of these negotiations, Russia agreed to substantially liberalize its trade regime.

Twenty-two countries have “observer” status in the WTO, which means they must start accession negotiations within five years of becoming an observer.[28] Because joining the WTO is a lengthy and arduous process, countries must carefully consider the costs and benefits. Obviously, however, countries that do join believe that undertaking the WTO commitments will help them develop economically over the long term. In the case of Ukraine, for example, Andrii Goncharuk describes the benefits as:

1. “strengthening domestic policies and institutions for international trade…”;
2. “improving the ease and security of access to major export markets”;
3. “accessing a dispute settlement mechanism for trade issues”; and
4. “providing Ukraine with a ‘seat at the table’ as the WTO members establish the rules that govern much of global trade.”[29]

Though not stated by Goncharuk, however, perhaps the major motive for Ukraine to join the WTO was to be eligible to enter into negotiations with the EU to establish an FTA, because the EU will only enter into an FTA with WTO member countries. (The United States also requires its potential FTA partners to be WTO members, which was a motivation for Jordan, Oman, and Panama to join the WTO.)

Although the accession of these new members resulted in a significant liberalization of global trade barriers, WTO membership for the communist countries also required a significant change by the United States. When the GATT was first launched in 1947, the United States had applied

MFN treatment to non-GATT member countries; this was not required by GATT, but was a statutory requirement of the 1934 Reciprocal Trade Agreements Act. However, in 1951, as the Cold War began, the U.S. Congress amended the law to deny MFN treatment to most communist countries.

The 1974 Trade Act revised this treatment in a provision, known as the Jackson-Vanik Amendment, which is still in effect. Under this legislation, the president cannot grant MFN treatment to any nonmarket country that restricts emigration, a prohibition that was particularly aimed at the Soviet Union for imposing restrictions on Jews trying to emigrate from Russia. However, this law allowed MFN treatment to be granted on a temporary basis if the United States negotiated a trade agreement with the country (which had to be extended every three years) and the president determined that the country did not restrict emigration or by a presidential waiver. This waiver, however, had to be renewed annually and was subject to congressional override. Beginning in the late 1970s, the president also used this waiver authority to grant MFN treatment to the People’s Republic of China.

Granting MFN treatment on a year-to-year basis is inconsistent with the obligation to provide MFN treatment unconditionally under GATT Article 1.[30] As the USSR dissolved and its former constituent states joined the WTO, the United States had to change how it treated these countries. To make it more palatable politically to grant a communist nation MFN treatment in the United States, MFN treatment was renamed “permanent normal trade relations” in 1998 legislation.

Today the only two countries that do not receive MFN treatment from the United States are Cuba and North Korea. Imports from these two nations face the original Smoot-Hawley high tariffs in the United States, such as a 70 percent duty on toys and an 80 percent duty on sundry plastic articles.

Exchange Rates: The Big Gap in Trade Rules

Although the GATT/WTO has made enormous progress in reducing barriers and distortions to trade in nonagricultural goods, there are still a number of gaps, such as the lack of rules governing competition policy and the loopholes in the TRIMs agreement. However, far and away the biggest gap is in the treatment of exchange rates.

It has long been recognized that countries could use exchange rate policy as a trade distortion: an undervalued currency acts as a subsidy for the country’s exports and a barrier to imports. The founders of the postwar institutions envisioned that the GATT would address trade issues and that exchange rate issues would be addressed by the International Monetary Fund.

GATT/WTO Article XV states that “Contracting Parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.” If there are problems, the

WTO is to seek cooperation with the IMF “to pursue a coordinated policy with regard to exchange questions within the jurisdiction of the Fund.” The WTO is then required to “accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with” the IMF rules.

The IMF does have rules on exchange rate manipulation, but unfortunately the IMF has proven to be very weak in its ability to address foreign exchange issues. In fact, the IMF has never concluded that a member was out of compliance with its obligations in this regard. Even if the

IMF did conclude that a country was manipulating its exchange rate to take unfair advantage of the trade system, it has no leverage to deal with this issue and it lacks a dispute settlement mechanism.[31]

Because the founders of the postwar institutions envisioned that the IMF would address this issue, WTO rules are inadequate to deal with the problem of deliberate currency manipulation. There have never been any WTO dispute settlement cases regarding Article XV’s prohibition of exchange rate manipulation. And the subsidies / countervailing duty code is not useful, because it defines prohibited subsidies as being industry specific, not across the board, as is the impact of currency manipulation.

Another issue for the WTO is that its rules only address specific actions by governments and a country’s exchange rate is often affected by market forces, such as changes in economic competitiveness or global capital flooding into a “safe haven” in times of global crisis. However, an undervalued exchange rate can also be driven by government policy, such as deliberate and consistent central bank intervention in the foreign exchange market.

FTAs and the WTO

The founders of the postwar institutions envisioned a world where trade would be largely based on economic fundamentals and where nations would trade with one another on a basically equal level. The GATT, it was hoped, would set the structure that would enable that vision to become reality.

As noted, the first article of the GATT set out the requirement for MFN treatment under which discrimination was only permitted in two circumstances. One of those instances was the formation of customs unions and free trade areas (Article XXIV of the GATT). In a customs union, the participating countries eliminate all barriers to trade between themselves and adopt a common external tariff. In a free trade area (i.e., an FTA), all internal barriers to trade are eliminated, but each member country maintains its own external tariff that applies to nonmembers of the agreement.

This exception to the GATT was intended to allow Europe—and in particular France and Germany, the two historic enemies—to join together in a customs union where they would become economically linked and, it was expected, would live together in peace. Some recent analysis suggests that some American policymakers also wanted to allow the option for a future FTA between the United States and Canada.

For both political and economic reasons, however, policymakers envisioned such blocs as the exception to MFN status. Politically, it was believed that trading blocs could lead to friction and even possibly war, and economically that they could cause injury to nonmembers. According to economic theory, the members of a preferential trade bloc could benefit from the creation of new trade opportunities, while nonmembers might be hurt by loss of sales to a less-efficient member that only gains the sale because of the tariff preference.

Accordingly, GATT Article XXIV, which is now part of the WTO, was intended to minimize these risks. This article required that customs unions and free trade area agreements be notified to all members of the GATT and that all GATT members would have the right to consult with the members of the agreement. To maximize the potential economic gains of a trade bloc and minimize the potential injury to nonmembers, Article XXIV required that trade barriers be removed on “substantially all” trade between the partners. And if the members of the bloc were forming a customs union with a common external tariff, nonmembers could be entitled to compensation where tariffs were increased as the common external tariff was formed.

Unfortunately, these rules have been almost totally ineffective, and today preferential trade is almost the rule, not the exception. The WTO reports that 354 agreements had been notified and were in force as of January 2013. FTAs account for more than 90 percent of these notified agreements, and customs unions make up fewer than 10 percent.[32] In addition to these agreements that have been notified to the WTO/GATT, there are others that have not been notified or are in a very early stage of negotiation.

The European Union, the most important of these agreements, consists of twenty-eight nations that have formed a customs and economic union and now constitute the world’s largest trading bloc. Another agreement is the European Free Trade Area, which today consists of Iceland, Liechtenstein, Norway, and Switzerland.[33]

Most of the United States’ trade competitors are aggressively negotiating FTAs. For example, the EU has negotiated or is negotiating agreements with Albania, Algeria, Canada, Chile, Egypt, India, Israel, Jordan, South Korea, Lebanon, Mexico, Morocco, Tunisia, Turkey, and Ukraine.[34]

Developing countries also have formed many free trade arrangements among themselves, for example MERCOSUR (Official members are Argentina, Brazil, Paraguay, Uruguay, and Venezuela), and the East Africa Community (Kenya, Tanzania, Rwanda, and Uganda).

Whenever a country applies different tariff rates depending on the country of export, it needs to have a methodology for defining the origin of the product, known as “rules of origin.” Rules of origin are very important in free trade area arrangements where members accord duty free treatment to one another. All members of the FTA must apply the same rules of origin, because once a product has cleared customs in one member, it can be transshipped free of duty to any other FTA member country.

Rules of origin can be very liberal and allow products to be shipped between members with a great deal of parts and material produced in a nonmember; or they can be very restrictive, at the extreme even requiring that 100 percent of the product be produced within the area, thereby excluding any foreign value added. They can also be used to nullify the market opening ostensibly granted by the duty elimination by requiring more local content than the partner country can economically produce.

The 1947 GATT did not have any specific rules for how countries should determine the origin of products, which was viewed as a technical exercise left to each country’s discretion. At that time, the production process for goods was far more straightforward than it is today. Generally something was grown or mined in a country and either processed there or shipped raw for processing in another country, where it was “transformed” into a new product.

Today, the situation is radically different. Many goods are shipped repeatedly across borders, and part of the production occurs in many countries. For example, a semiconductor may contain silicon from one country, be processed in another, and then cross several borders while it is fabricated and developed, and then finally packaged in a different country. Automobiles today are assembled from parts produced in multiple countries. Multinational corporations have “value chains” for production that involve parts and components from many nations. Identifying origin is arbitrary.

As the GATT/WTO has eliminated various forms of protectionism during the past sixty five years, countries have sometimes looked for imaginative new ways to protect their domestic industries, and thus they sometimes have used rules of origin.[35] The United States, EU member states, the member states of the European Free Trade Area, Japan, and other countries all have different systems for determining rules of origin. Even where protectionism is not deliberate, the sheer diversity and complexity of these rules may reduce potential trade gains. For example, a product produced in Chile may qualify for duty-free trade under the U.S. rule of origin but not under the EU rule, even though the product is ostensibly duty free in both markets.

America’s FTAs

America’s FTAs all build on the WTO rules and often reiterate them in the agreement, although they also go beyond WTO rules in a number of areas. The U.S. agreements have evolved from a short and straightforward 1985 agreement with Israel to more complex and far-reaching recent agreements.

Today, the U.S. has free trade agreements in effect with 20 countries, as listed in Table 1.1, and in February 2016 signed a major new agreement with 11 other Asian-Pacific nations, the Trans-Pacific Partnership (TPP) agreement.  However, at this time it is not clear if this agreement can win Congressional approval.  Additionally, the U.S. is negotiating an agreement with the European Union – the Trans-Atlantic Trade and Investment Partnership (TTIP). If the TPP is not approved by Congress, however, the future of the TTIP negotiations will be in doubt.

We will first look at the agreements currently in effect with 20 nations, and then briefly consider the pending agreements, the TPP and TTIP.

NAFTA provides the basic model for the United States’ subsequent FTAs, although this model has evolved considerably. Basically, U.S. negotiators use standard concepts in the negotiations, although these may be modified in minor respects to fit the needs of a U.S. trade partner or U.S political requirements. However, U.S. negotiators insist that all major areas of the model be covered.

U.S. negotiators sometimes refer to this model as the “gold standard.” As the Government Accountability Office reports: “Taking products, sectors, or issues off the table, particularly ones such as intellectual property rights that are considered to provide a U.S. competitive advantage, generally precludes or creates an impasse in negotiations.”[36]

One of the most important elements of America’s FTAs is the elimination of tariff and nontariff barriers to trade. In general, under the U.S. agreements, both the United States and its trade partner eliminate duties over a ten-year schedule to allow domestic producers time to adjust to the new competition, although there are many exceptions to this.

Agricultural liberalization generally lags that of nonagricultural goods. The United States–Israel agreement exempted the agricultural sector initially, although the two partner countries subsequently negotiated an agreement on trade in agricultural products, but this only opened trade on about a hundred items.

In subsequent agreements, the United States has insisted that trade barriers on agricultural products be significantly reduced or eliminated. However, the United States has refused to limit its domestic agricultural subsidies, and as a result some countries have been unwilling to conclude an FTA with the United States. For example, this was a major sticking point with Brazil in the United States’ negotiations for a free trade area of the Americas.

The rules of origin in America’s FTAs, like those of other developed countries, are lengthy, complex, and sometimes designed to sharply limit incorporation of nonmember parts and materials. For example, the rules of origin in the United States–Singapore agreement are 260 pages long.

One chapter of U.S. FTAs pertains to government procurement. This section commits the parties to the agreement to publicize their procedures and opportunities to bid on projects, and for covered entities it generally has a lower threshold for allowing bids from companies in the United States’ partner countries. For example, under the WTO government procurement agreement, signatories must allow bids from other signatories valued at more than $169,000 for covered entities for both goods and services to compete. In the agreements with Mexico, Singapore, and Chile, however, the threshold is $56,190, thereby providing more opportunities for competition. Additionally, some of the agreements open up additional state and federal agencies under the procurement coverage.

The Treatment of Investment, Services, and Intellectual Property Protection

In addition to the provisions regarding the traditional trade issues of market access for goods, NAFTA and all subsequent U.S. FTAs go beyond WTO rules for investment, services, and the protection of intellectual property rights. The chapter on investment in these agreements requires the parties to give treatment to investors from its partner that is no less favorable than it gives to its own domestic investors (national treatment) or to investors from any other nonparty (MFN treatment). This covers such areas as the right to establish or expand a subsidiary or to acquire a company. These rules also specify that investors from the partner country can appoint managers without regard to nationality.

The rules also spell out the right of investors from the partner country to transfer capital into its investment and to repatriate profits, dividends, proceeds from the sale of any part of the covered investment, and so forth. The United States’ agreements define investment very broadly to include both foreign direct investments and short-term portfolio investment flows.

The investment chapter also builds on the WTO agreement on TRIMS —for example, by including some practices not spelled out in that agreement, such as a prohibition on requirements to transfer technology. The expropriation, either direct or indirect, of a covered investment is prohibited unless for a public purpose and provided that it is done in a nondiscriminatory manner and with full compensation.

The investment rules also contain a controversial “Investor-State Dispute Settlement” mechanism, under which a foreign investor from an FTA partner country can submit a claim against the partner government to an arbitration panel. Within specified time limits, the arbitration panel then issues a binding ruling on the dispute, which could include a requirement that the government provide monetary damages or restitution of property in the event the claimant prevails. Under this provision, investors have brought suits against governments (for the United States, this includes state governments) for environmental regulations, which, the investor argues, are a “taking” of the investment’s value. (This argument is considered more fully in chapter 7, on trade and the environment.)

The investment rules in U.S. FTAs incorporate provisions of the bilateral investment treaties that the United States and its partner country already had in place before the FTA. By and large, the FTA investment provisions only extend commitments already in place in these bilateral investment treaties to a marginal degree.

The approach taken to services liberalization in the United States’ FTAs subsequent to NAFTA is different from the structure in the WTO agreement in two important respects.[37] First, in the GATS countries list the services that are to be covered (the “positive list” approach), whereas in U.S. FTAs after NAFTA all services are covered unless specifically listed as an exemption (the “negative list” approach). In theory, the negative list approach would seem to result in greater liberalization than the GATS approach, but in practice most observers believe the results are fairly similar.

Secondly, the GATS covers the supply of services through four distinct modes of supply, whereas NAFTA’s approach is to have a chapter on cross-border services (GATS Modes 1 and 2) and a separate chapter on investment (Mode 3). The significance of this is that the rules on investment in U.S. trade agreements apply equally to all subject areas, including both goods and services. Additionally, NAFTA and the Chile and Singapore agreements have a separate chapter on temporary entry for businesspersons (Mode 4); however, the other agreements do not have any provisions for the temporary entry of businesspersons. Additionally, a number of U.S. FTAs provide for greater market access in specific services sectors than is covered under WTO commitments.

The United States’ trade negotiators refer to the intellectual property protection provisions in its FTAs as “TRIPS Plus” because they go somewhat further than the provisions in the WTO. As noted above, the WTO rules represent a balance between countries whose companies have substantial intellectual property that they want to protect for as long as possible and countries that do not have significant intellectual property and want access to the protected goods at lower prices. U.S. companies, of course, have substantial intellectual property, and thus not surprisingly U.S. negotiators have pressed for extensive protection.

In the WTO negotiations, there was more or less a balance of countries that were net holders of intellectual property and net consumers of intellectual property. However, in its FTA negotiations, the United States wields enormous power, and it has used this power to press for protection in excess of that accorded by the WTO.

The following are examples of areas where TRIPS Plus provisions go farther than the WTO’s TRIPS agreement in protecting intellectual property:

• Under the TRIPS agreement, patents are protected for twenty years, and then the intellectual property is publicly available and can be freely used. However, U.S. FTAs provide for additional years of protection for pharmaceuticals if there are unreasonable delays in the filing of a patent or in marketing approval. Such delays are common in developing countries, where the capacity to analyze a patent application is generally weak.
• TRIPS Plus requires FTA partners to provide at least a seventy-year term of copyright protection, compared with fifty years in TRIPS.
• In the United States, pharmaceutical companies must submit their test data regarding the safety of a drug to the Food and Drug Administration in order to gain approval to market the drug. The TRIPS agreement requires members to protect these undisclosed data, but it does not require governments to grant exclusive rights to these data. Accordingly, some countries may require that these test data be made available to applicants seeking to market a generic drug, thereby speeding the approval process of the generic. However, under U.S. FTAs, applicants to market a generic pharmaceutical of a patented product are not allowed to use these test data for five years, which means that to produce a generic drug in one of the United States’ partner countries, an applicant must either replicate these data or wait for five years.
• Under U.S. FTAs, America’s partner governments are required to inform a patent holder if a generic company has applied for marketing approval of its drug. The TRIPS agreement has no such requirement.

Not surprisingly, these TRIPS Plus provisions were highly contentious in many of the United States’ bilateral negotiations, and may have played a significant role in the failure of U.S. efforts to negotiate agreements with the Southern African Customs Union and Thailand.

The Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership

With the failure of the WTO Doha Development Round, the United States has turned its attention to two major regional negotiations that could have far-reaching impacts on the world trade system if they are successful.  The first is the negotiations for a Trans-Pacific Partnership (TPP) agreement that would eliminate trade barriers between twelve Asian-Pacific countries. The second is the negotiations with the European Union for a Trans-Atlantic Trade and Investment Partnership (TTIP) agreement which would establish a free trade area between the world’s two largest trading blocs.  (The commercial implications of these agreements are addressed in Chapter 4, “Trade Agreements and U.S. Commercial Interests” and the foreign policy implications in Chapter 5, “Foreign Policy: The Other Driver”.)

Negotiations for the Trans-Pacific Partnership agreement were completed in late 2015 and the agreement was signed by the twelve nations - Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam – in February 2016. Each of the countries now has to ratify the agreement, and for the U.S. this means that it has to win Congressional approval, and this is very much in doubt.  On the Presidential campaign trail, almost all of the candidates have either opposed the agreement or raised serious questions.  The earliest that Congress is likely to take this issue up is after the 2016 elections, perhaps in a lame duck session or at the start of the new Congress in 2017.

The U.S. already has free trade agreements with six of the TPP countries: Australia, Canada, Chile, Mexico, Peru and Singapore. However, these agreements were all negotiated some time ago (Canada and Mexico in 1994), and the TPP will update the rules to today’s commercial realities and expand the market access provisions in each agreement.  Japan, the third largest economy in the world, is far and away the largest of the five countries with which the U.S. does not currently have an agreement.

The twelve countries that negotiated the TPP are highly diverse, both commercially and in terms of their economic structures. For example, Australia and the United States are wealthy nations, whereas Malaysia and Vietnam are lower-middle-income countries; Vietnam has a relatively protected market while the others are more open.

The Trans-Pacific Partnership agreement includes all the areas covered in most of the United States’ other bilateral trade agreements, such as trade in goods and services, intellectual property protection, government procurement, customs valuation, technical barriers to trade, sanitary and phytosanitary measures, trade remedies, and dispute settlement. In addition, the agreement addresses several new areas. One of these is cross-border data flows, which has become an important issue in the Internet age, where data are sent around the world with the click of a computer’s mouse and stored in data servers that may be located anywhere.

A second area is “regulatory coherence.” Different regulations between countries governing such areas as product safety or technical standards often represent a bigger barrier to trade than formal trade restrictions, even where the differing regulations achieve the same objectives.  The agreement requires transparency in the regulatory process with an opportunity for TPP partners to comment on proposed regulations.

A third important new area is rules on how state-owned enterprises (SOEs) may operate in global competition so as not to have an unfair trade advantage over market oriented firms. This is the first agreement to address this issue in a substantive way.

A TPP agreement has been seen from the beginning as a potential template to attract other countries that belong to the Asia-Pacific Economic Cooperation (APEC) forum, a group of twenty-one Pacific Rim economies such as China, Hong Kong, Indonesia, and Russia.[38]

Negotiations between the United States and the EU are not as far along as the TPP negotiations, but they are addressing basically the same issues. However, the approaches taken in the TPP and the EU negotiations on some of these issues may be different. For example, in the approach to reducing the trade impact of differing regulations, the negotiations with the EU may consider the possibility of actual convergence, whereas the TPP negotiations basically address procedural changes.

Conclusion

Since the Reciprocal Trade Agreements Act of 1934, U.S. policy toward trade agreements has been based on the concept of reciprocity—that is, the United States would make concessions roughly equal to the concessions made by its trade partners. (As noted, however, there have been two exceptions to this. First, for a short period immediately after World War II, the United States deliberately opened its market to a greater extent than demanded of its trade partners in order to facilitate economic recovery in Europe and Japan. Second, the U.S. approach and the multilateral trade rules of the GATT/WTO allow developing countries to provide less market opening than developed countries.)

In the eight rounds of multilateral trade negotiations since the GATT was launched in 1947, the intent of trade negotiators has been to reduce trade barriers to promote economic growth. Though most trade barriers on nonagricultural goods have been removed, progress on trade liberalization in the agricultural area and services areas has been limited. Additionally, a huge hole in the trade rules remains with regard to the potential for the manipulation of exchange rates and loopholes in other rules still provide room for a neomercantilist country to gain an unfair trade advantage.

One of the fundamental principles of the original GATT is the concept of MFN trade treatment, which requires all members of the GATT/WTO to provide all other members with the same treatment with regard to access to their market, although more favorable treatment can be given to developing countries. A second exception to MFN is that countries are allowed to negotiate FTAs with one or more countries, provided these agreements remove substantially all barriers to trade among the partners. Though originally this exception was envisioned as being very limited, the reality today is that almost all members of the WTO have negotiated these agreements and today there are 354 of them. These agreements discriminate against nonmembers and distort trade; the MFN principle is now almost the exception rather than the rule.

Efforts to conclude a new round of multilateral negotiations in the Doha Development Round have stalemated. In an attempt to spur the multilateral negotiations and to make progress on trade liberalization, the United States has increasingly turned to negotiating bilateral and regional agreements, and it now has agreements with twenty other nations. These agreements eliminate almost all barriers to trade between the United States and its partners, except in the agricultural area, where some high U.S. tariff s remain and the United States continues to give large subsidies to producers of specified products. Additionally, the rules in many of these agreements go farther than the multilateral rules, particularly with regard to services, investment, and intellectual property.

The major U.S. negotiations today are the TPP negotiations with eleven other Asia-Pacific countries, and the Trans-Atlantic Trade and Investment Partnership negotiations with the European Union to further open trade between the EU and the United States.

Revised April 28, 2016

[1] In 1983, Theodore Levitt published an article in the Harvard Business Review titled “The Globalization of Markets,” which some credit with popularizing the concept of globalization in economics.

[2] GATT 1947, and all the basic legal texts of the WTO, are available at http://www.wto.org/english/docs_e/legal_e/legal_e.htm.

[3] In addition to the aircraft agreement, the Tokyo Round also included plurilateral agreements on bovine meat and dairy products, although these are no longer in effect.

[4] Originally nontariff measures were known as “nontariff barriers.” The name change was in recognition that these measures often have a legitimate function.

[5] An example of how a country could use a testing procedure to block imports would be if it required all machines sold in the country to use a unique screw size, or it might require that all products have to be inspected by a government inspector, but then not provide any funding for the inspectors to travel overseas. As a result of either measure, foreign products would be effectively blocked from entering the market.

[6] Interestingly, the U.S. chemical industry supported giving up the American Selling Price system, even though it meant giving up a method of import protection upon which had they had relied for many years. The reason they supported this was that their products were blocked in other major markets by other valuation systems that also had to be changed to comply with the new code. In the Tokyo Round, as they supported these changes, the American chemical industry fundamentally changed its focus from national to global, and companies developed strategies to compete in the world market.

[7] Source: https://www.wto.org/english/tratop_e/gproc_e/memobs_e.htm.

[8] SDRs were created by the International Monetary Fund in 1969 and were designed to be an international reserve currency, along with the dollar. Originally the value of an SDR was based on gold, but today its value is derived from a basket of currencies, including the Japanese yen, the euro, the U.S. dollar, and the British pound. The value of an SDR varies as the value of these currencies change, but as of April 4, 2016, SDR 1 was equal to $1.4069 (Source: https://www.imf.org/external/np/fin/data/rms_sdrv.aspx). Threshold levels for each of the signatories of the government procurement code are available on the WTO Website at http://www.wto.org/english/tratop_e/gproc_e/thresh_e.htm.

[9] The Common Agricultural Policy (CAP) went into effect in 1962, replacing highly protectionist policies maintained by some of the original six European Community members (Germany, France, Italy, Belgium, Luxembourg, and the Netherlands).  The objectives of the CAP were to provide reasonable income to farmers and thereby maintain a rural heritage and to provide food security. To achieve these objectives, imports were restricted and farmers received direct subsidies. To maintain a desired internal price, the EU bought excess product and then often dumped these products on world markets. In recent years, however, the EU has made major changes to the CAP system, which greatly reduces its trade distortions.

[10] The European Union is far and away the largest user of direct export subsidies, and accounts for some 85 to 90 percent of all direct export subsidies. In contrast, the United States only accounts for 0.05 percent. Indirect export subsidies, such as export promotion and export credit guarantees, were also considered potentially distortive, but negotiators were unable to agree on how to address these practices.

[11] As noted in chapter 1, in the 1940s negotiators of the post–World War II commercial architecture originally developed rules governing trade, investment, and competition policy to be incorporated in an International Trade Organization (ITO).  However, when President Harry Truman realized that the Senate would not approve the ITO, he implemented only the General Agreement on Tariffs and Trade (GATT) by executive order, leaving a major gap in rules on investment. The GATT rules that could impact investment were Article III concerning national treatment and Article XI on quantitative restrictions.

[12] The only reference to services was Article II.2(c), which specifies that contracting parties may impose fees on imported goods that are commensurate with the cost of the service provided. By implication, of course, this means that service fees on imported goods, such as charges to unload cargo, that are not commensurate with cost could be subject to dispute settlement.

[13] A list of the 12 sectors and 155 specific areas can be found at http://www.wto.org/english/tratop_e/serv_e/serv_e.htm.

[14] In 2005 it was clear that the least developed countries would not be able to implement the TRIPS agreement in the ten years specified in the Uruguay Round package. Accordingly, the WTO Council approved an extension to January 1, 2016, for least-developed countries to implement the TRIPS Agreement. In November 2015 the Council again extended the deadline so that least developed countries will not have to protect pharmaceutical patents and test data until January 1, 2033.

[15] Commerce imposed a system called “Fair Market Value” (FMV), which was determined by traditional dumping methodology based on an industry with increasing costs. However, the costs of semiconductors fall dramatically when production is increased, and the FMV system infuriated consumers of semiconductors—particularly computer makers such as Hewlett-Packard, NCR, and Compaq—and in fact threatened their competitiveness because their Japanese competitors could obtain semiconductors at low prices. At the time I worked for the largest U.S. technology trade association, the American Electronics Association, and both the large semiconductor and computer companies were important members. We formed a task force of the CEOs of the major companies and worked with Commerce to gradually reform the FMV system to reflect commercial realities.

[16] The number of pages of the GATT and of the WTO, of course, depends on whether the document is printed in word or PDF, in English or some other language and the size of the font used. When I printed these documents in Microsoft Word, this was the number of pages of each, and these numbers are given here simply to indicate the magnitude of the change when the GATT became the WTO.

[17] The WTO/GATT also recognizes some other circumstances when protection against imports is justified, particularly the right of members to protect the health and safety of the populace or for reasons of national security.

[18] If the price charged in the home market cannot be used, governments may use the price for the like product exported to other markets, or they may have to determine if there is dumping based on the cost of production. The WTO Web site describes antidumping provisions: http://www.wto.org/english/tratop_e/adp_e/adp_e.htm.

[19] A good explanation of the Agreement on Subsidies and Countervailing Measures is available at http://www.wto.org/english/tratop_e/scm_e/subs_e.htm.

[20] A good explanation of the Agreement on Safeguards is available at http://www.wto.org/english/tratop_e/safeg_e/safeint.htm.

[21] It is often possible to design an action to impact some countries and not others even while ostensibly making the action consistent with MFN. In the early 1980s, when the United States imposed high duties on imported motorcycles to deal with a surge of imports from Japan, it specified that the duties would only apply to motorcycles with large engines, not the smaller engines used on the European motorcycles, thereby exempting those bikes from high tariffs.

[22] The Ministerial statement is available at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.doc.

[23] Available at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm.

[24] The agreement is available at https://www.wto.org/english/thewto_e/minist_e/mc9_e/desci36_e.htm.

[25] A report on the Ministerial is available at https://www.wto.org/english/news_e/news15_e/mc10_19dec15_e.htm.

[26] Ambassador Andrii Goncharuk, “The Path of Ukraine into the WTO,” in Opportunities and Obligations: New Perspectives on Global and US Trade Policy, edited by Terence P. Stewart (Amsterdam: Kluwer Law International, 2009).

[27] Independent Evaluation Office of the International Monetary Fund, IMF Involvement in International Trade Policy Issues (Washington, D.C.: International Monetary Fund, 2009), 59.

[28] The status and numbers of WTO members and observers are as of November 30, 2015. A listing of WTO members and observers is available at http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm. The one exception to the rule that observers have to start accession negotiations within five years is the Holy See, for which this rule has been waived, and there is no expectation that the Holy See will become a member.

[29] Ambassador Andrii Goncharuk, “The Path of Ukraine into the WTO,” in Opportunities and Obligations, ed. Stewart, 256.

[30] An exception to the requirement to provide unconditional MFN is in Article XIII of the WTO/GATT, which allows a member to deny MFN status to a newly acceding country if it notifies the WTO/GATT accordingly. In such a case, the new member is not required to extend MFN treatment to that member. In fact, for the memberships of Mongolia, Kyrgyz Republic, and Georgia, the U.S. temporarily invoked Article XIII until permanent normal trade relations could be approved by Congress.

[31] The IMF does have enormous leverage over countries that run into severe balance-of-payments problems caused by deficits through its lending programs, but this leverage does not work vis-à-vis surplus countries.

[32] The WTO Web site on “regional trade agreements” is available at http://www.wto.org/english/tratop_e/region_e/region_e.htm.

[33] The European Free Trade Area (EFTA) was originally established in 1960 by seven countries—Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom—that were not willing to join the European Community at that time and felt they needed their own trade bloc to protect their interests. Subsequently, however, as circumstances changed, the United Kingdom, Austria, Denmark, Portugal, and Sweden all joined the EU, while Liechtenstein and Iceland joined EFTA.

[34] Bilateral and regional free trade agreements that have been notified to the WTO are listed on the website noted in n.29.

[35] In 1972, I was new to trade policy and my first assignment was to analyze the EC-EFTA trade agreement to see if it complied with GATT rules and if the United States might be owed compensation. After carefully reviewing the agreement and finding nothing, I came to the huge annex defining the rules of origin for the agreement. Initially, I thought this was just “technical,” but then looked at it carefully to find it was highly protectionist—e.g., one rule stated that an electronic product would only qualify for duty free treatment if it contained less than 3 percent of semiconductors sourced from non-EC-EFTA countries. The United States launched a GATT Article XXII consultation, which led to some changes in the EC-EFTA rules.

[36] U.S. Government Accountability Office, An Analysis of Free Trade Agreements and Congressional and Private Sector Consultations under Trade Promotion Authority, Report GAO-08-59 (Washington, D.C.: U.S. Government Printing Office, 2007), 18.

[37] The 1985 U.S. trade agreement with Israel covered cross-border trade in services but not investment, and the provisions on services were not legally binding. The agreement with Jordan signed in 2000 did not have separate chapters on cross border supply and investment, but it did cover these areas in articles in the agreement. All subsequent U.S. FTAs have separate chapters on cross-border trade and investment.

[38] The twenty-one members of APEC are Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taipei, Thailand, the United States, and Vietnam.