Academic journal article Federal Reserve Bank of St. Louis Review

Potential Gains from Reducing Trade Barriers in Manufacturing, Services and Agriculture

Academic journal article Federal Reserve Bank of St. Louis Review

Potential Gains from Reducing Trade Barriers in Manufacturing, Services and Agriculture

Article excerpt

In November/December of 1999, leaders from around the world converged on Seattle with the goal of launching a new round of trade negotiations under the auspices of the World Trade Organization (WTO). This has been dubbed "WTO2000" in recognition of the new millennium. In light of the tremendous growth in world trade over the last fifty years--much of it fueled by multilateral trade liberalization under the General Agreement on Tariffs and Trade (GATT), the WTO's predecessor, many had high aspirations for this "Millennium Round." However, the Seattle meetings failed in the face of vigorous demonstrations by labor and environmental groups. In addition, there has been a marked lack of enthusiasm for this new round in the United States. The purpose of this paper is to provide a quantitative assessment of the potential gains available from trade liberalization under this new WTO round, thereby assessing whether greater enthusiasm is warranted.

The Millennium Round aims to follow on the footsteps of the Uruguay Round (UR), which was concluded in 1994 after prolonged negotiations. The implementation period for the UR in the case of developing countries, as well as sensitive sectors, is not due to be completed until 2004. So, why the rush into a new round? The UR agreement left in its wake a built-in agenda for revisiting the more difficult areas of previous negotiations. In particular, agriculture and services were two areas where a framework for liberalization was developed during the UR, but concrete progress toward free and open trade was limited. Not surprisingly, these are two sectors for which researchers have also had a difficult time quantifying the potential for gains from more liberal trade.

The UR created the General Agreement on Trade in Services (CATS), which established rules and disciplines on policies related to market access in services. However, as Hoekman (1995) noted, the commitments made under this agreement "are best described as bound standstill agreements," with real liberalization being deferred to future rounds of negotiations. The benefits of services trade, in particular, have proven elusive for quantitative economists. Hoekman (1995) made a valiant attempt to quantify services protection across sectors by relating coverage ratios to tariff equivalents, however, comprehensive measures such as those provided in manufactures and agriculture have yet to be obtained. This has frustrated attempts to quantify the impact of potential liberalization of trade in this sector. The present paper draws on a new set of estimates of protection in the business, finance, and construction sectors to begin to remedy this gap (Francois, 1999a).

Historically agriculture has been largely undisciplined by the GATT (Josling Tangermann and Warley, 1996). One of the great achievements of the UR was bringing agricultural policies under greater multilateral discipline. The UR Agreement on Agriculture led to the conversion of non-tariff agricultural import barriers into bound tariffs, and those bound tariffs, together with subsidies to farm production and exports, have been scheduled for phased reductions. This represents a major reversal of the trend since the 1950s of substantial growth in agricultural protection and insulation in the industrial economies (Johnson, 1973; Tyers and Anderson, 1992). Thus, the UR marks a watershed in the historical evolution of multilateral negotiations over agriculture. While the actual cuts in protection under the UR are likely to be quite small, Martin and Winters (1995) argue that the stage is now set for steady reductions in tariffs under WT02000 and subsequent rounds of negotiations.

It is interesting that manufactures trade--previously the bread and butter of the GATT negotiations--is absent from the built-in agenda. Historically, progress in manufactures liberalization has derived its main impetus from the high-income, "industrialized" economies, with developing economies focusing more attention on trade in primary products. …

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