The WTO Multilateral Agreements

Contents:

  1. Introduction
  2. General Agreement on Tariffs and Trade (GATT) (on another page)
  3. General Agreement on Trade in Services (GATS) (on another page)

Introduction

The very nature of agreeements such as these means that they restrict what a country can do. But like domestic laws the intention is that while some degree of liberty is sacrificed other benefits accrue that outweigh these losses. Consider one of the most common criminal laws: the law against murder. By having this law any given individual loses his freedom to go out and murder someone. However on the other hand that person now no longer has to worry that he may be the victim of another’s freedom by being murdered. This is obviously an extreme example so consider the law (in certain countries) that you have to have a licence to drive a car. This means that one can’t just go out and start driving straight away, one has to have lessons, take a test etc. This not only costs money but is time consuming. So why do we do it? Because this way when you are on the roads you can expect a certain standard of driving from others and people who drive improperly (for example while drunk) will be prohibited. Again in this case for each of us (or at least a majority) must decide that this trade off has a net benefit.
The same question arises with respect to the WTO and the trade agreements that it enforces and our negotiated under its auspices. Some degree of national sovereignty is sacrificed but in the hope or realising benefits that offset this loss. What are the benefits?

  1. Economic Gains From Trade. The agreements are designed to promote trade by eliminating tariffs and non-tariff barriers to trade. This can bring large economic benefits through a variety of routes (e.g. trade itself is beneficial, promotes competition which itself leads to faster economic growth etc). See The WTO’s Free Trade Philosophy for extended discussion.
  2. The Prisoner’s dilemma argument (or the game theory argument). (This depends on the existence of benefits in 1). The prisoner’s dilemma to those familiar with it encapsulates the situation where cooperation leads to the socially optimal outcome but where there is a temptation for any individual player to cheat. It goes as follows: A and B are arrested for a crime that they did, in fact, commit. They are each seperately offered the following deal by the authorities. Confess to it and give evidence against your accomplice and you get 1 year whilst your accomplice gets 15. If neither confess then they both get 3 years. If both confess they get 10 each. Social optimal (from their point of view) is where total sentence time is minimized, i.e. neither confess (outcome = 6 years total). However for each of them their is the temptation to confess and get only one year. Of course the likelihood is they may both do it and thereby end up with the least socially optimal outcome, namely total 20 years. It it to enforce the socially optimal outcome that many rules and customs in society exist (consider e.g. littering, moral prohibitions against lying etc). The version of the PD argument with respect to the world trading system relates to tariffs. Having no tariffs may be the global optimum (see 1) but for each country their may be a temptation to ‘cheat’ with tariffs in a given area. Of course the danger is that then every country puts up tariffs barriers then everyone is worse off. Thus the WTO and trade agreements in general provide a way of enforcing the cooperation that leads to the global optimum.
  3. Promotion of Transparency. By putting free trade (see 1) out in the open the WTO makes it more difficult for special interests to promote tariffs for their own benefit (e.g. agricultural producers, steel makers etc etc). Transparency is also increased by the firm institutional footing of the WTO and more clearly defined processes it supports (e.g. dispute settlement). By reducing informational costs this is beneficial to the trading system. This also contains an equity consideration in that the poorer, less powerful countries are more likely to benefit from this transparency than richer, more powerful ones (not that there isn’t much more to be done).

As can be seen from this list most of the benefits flow directly or indirectly from the point 1: Economic Gains From Trade. Unfortunately it is difficult to quantify these gains let alone the losses from reduction in national sovereignty (e.g. defining what loss of soverignty is involved in GATS, let alone its ‘value’ is very hard). For a discussion of Economic Gains see WTO’s Free Trade Philosophy.

Last Updated: 2003-03-24
Created: 2002-Oct-21
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