International Negotiations and Trade Policy
Our discussion of the politics of trade policy has not been very encouraging. We have argued
that it is difficult to devise trade policies that raise national welfare and that trade policy is
often dominated by interest group politics. “Horror stories” of trade policies that produce
costs that greatly exceed any conceivable benefits abound; it is thus easy to be highly cynical
about the practical side of trade theory.
Yet, in fact, from the mid-1930s until about 1980, the United States and other advanced
countries gradually removed tariffs and some other barriers to trade, and by so doing aided
a rapid increase in international integration. Figure 10-5 shows the average U.S. tariff rate
on dutiable imports from 1891 to 2008; after rising sharply in the early 1930s, the rate has
TABLE 10-2 Welfare Costs of U.S. Protection ($ billion)
2002 Estimate 2013 Projected
Total 14.1 4.6
Textiles and apparel 11.8 2.3
Source: U.S. International Trade Commission.
0
Tariff rate
(percent)
60
10
20
30
40
50
1891
1896
1901
1906
1911
1916
1921
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2008
Figure 10-5
The U.S. Tariff Rate
After rising sharply at the beginning of the 1930s, the average tariff rate of the United States has steadily declined.
CHAPTER 10 The Political Economy of Trade Policy 235
steadily declined.6 Most economists believe this progressive trade liberalization was
highly beneficial. Given what we have said about the politics of trade policy, however, how
was this removal of tariffs politically possible?
At least part of the answer is that the great postwar liberalization of trade was achieved
through international negotiation. That is, governments agreed to engage in mutual tariff
reduction. These agreements linked reduced protection for each country’s import-competing
industries to reduced protection by other countries against that country’s export industries.
Such a linkage, as we will now argue, helps to offset some of the political difficulties that
would otherwise prevent countries from adopting good trade policies.
The Advantages of Negotiation
There are at least two reasons why it is easier to lower tariffs as part of a mutual agreement
than to do so as a unilateral policy. First, a mutual agreement helps mobilize support for
freer trade. Second, negotiated agreements on trade can help governments avoid getting
caught in destructive trade wars.
The effect of international negotiations on support for freer trade is straightforward. We
have noted that import-competing producers are usually better informed and organized
than consumers. International negotiations can bring in domestic exporters as a counterweight.
The United States and Japan, for example, could reach an agreement in which the
United States refrains from imposing import quotas to protect some of its manufacturers
from Japanese competition in return for removal of Japanese barriers against U.S. exports
of agricultural or high-technology products to Japan. U.S. consumers might not be effective
politically in opposing such import quotas on foreign goods, even though these quotas
may be costly to them, but exporters who want access to foreign markets may, through
their lobbying for mutual elimination of import quotas, protect consumer interests.
International negotiation can also help to avoid a trade war. The concept of a trade war
can best be illustrated with a stylized example.
Imagine that there are only two countries in the world, the United States and Japan, and
that these countries have only two policy choices, free trade or protection. Suppose that
these are unusually clear-headed governments that can assign definite numerical values to
their satisfaction with any particular policy outcome (Table 10-3).
6Measures of changes in the average rate of protection can be problematic because the composition of imports
changes—partly because of tariff rates themselves. Imagine, for example, a country that imposes a tariff on some
goods that is so high that it shuts off all imports of these goods. Then the average tariff rate on goods actually
imported will be zero! To try to correct for this, the measure we use in Figure 10-5 shows the rate only on “dutiable”
imports; that is, it excludes imports that for some reason were exempt from tariffs. At their peak, U.S. tariff rates
were so high that goods subject to tariffs accounted for only one-third of imports; by 1975 that share had risen to
two-thirds. As a result, the average tariff rate on all goods fell much less than the rate on dutiable goods. The
numbers shown in Figure 10-5, however, give a more accurate picture of the major liberalization of trade actually
experienced by the United States.
TABLE 10-3 The Problem of Trade Warfare
Free trade
10 –10
20 –5
U.S. Free trade
Protection
Protection
Japan
10 20
–10 –5
236 PART TWO International Trade Policy
The particular values of the payoffs given in the table represent two assumptions. First,
we assume that each country’s government would choose protection if it could take the
other country’s policy as given. That is, whichever policy Japan chooses, the U.S. government
is better off with protection. This assumption is by no means necessarily true; many
economists would argue that free trade is the best policy for the nation, regardless of what
other governments do. Governments, however, must act not only in the public interest but
also in their own political interest. For the reasons discussed in the previous section, governments
often find it politically difficult to avoid giving protection to some industries.
The second assumption built into Table 10-3 is that even though each government acting
individually would be better off with protection, they would both be better off if both
chose free trade. That is, the U.S. government has more to gain from an opening of
Japanese markets than it has to lose from opening its own markets, and the same is true for
Japan. We can justify this assumption simply by appealing to the gains from trade.
To those who have studied game theory, this situation is known as a Prisoner’s
dilemma. Each government, making the best decision for itself, will choose to protect.
These choices lead to the outcome in the lower right box of the table. Yet both governments
are better off if neither protects: The upper left box of the table yields a payoff that
is higher for both countries. By acting unilaterally in what appear to be their best interests,
the governments fail to achieve the best outcome possible. If the countries act unilaterally
to protect, there is a trade war that leaves both worse off. Trade wars are not as serious as
shooting wars, but avoiding them is similar to the problem of avoiding armed conflict or
arms races.
Obviously, Japan and the United States need to establish an agreement (such as a
treaty) to refrain from protection. Each government will be better off if it limits its own
freedom of action, provided the other country limits its freedom of action as well. A treaty
can make everyone better off.
This is a highly simplified example. In the real world there are both many countries and
many gradations of trade policy between free trade and complete protection against imports.
Nonetheless, the example suggests both that there is a need to coordinate trade policies
through international agreements and that such agreements can actually make a difference.
Indeed, the current system of international trade is built around a series of international
agreements.
International Trade Agreements: A Brief History
Internationally coordinated tariff reduction as a trade policy dates back to the 1930s. In
1930, the United States passed a remarkably irresponsible tariff law, the Smoot-Hawley
Act. Under this act, tariff rates rose steeply and U.S. trade fell sharply; some economists
argue that the Smoot-Hawley Act helped deepen the Great Depression. Within a few years
after the act’s passage, the U.S. administration concluded that tariffs needed to be reduced,
but this posed serious problems of political coalition building. Any tariff reduction would
be opposed by those members of Congress whose districts contained firms producing
competing goods, while the benefits would be so widely diffused that few in Congress
could be mobilized on the other side. To reduce tariff rates, tariff reduction needed to be
linked to some concrete benefits for exporters. The initial solution to this political problem
was bilateral tariff negotiations. The United States would approach some country that was
a major exporter of some good—say, a sugar exporter—and offer to lower tariffs on sugar
if that country would lower its tariffs on some U.S. exports. The attractiveness of the deal
to U.S. exporters would help counter the political weight of the sugar interest. In the foreign
country, the attractiveness of the deal to foreign sugar exporters would balance the
political influence of import-competing interests. Such bilateral negotiations helped
CHAPTER 10 The Political Economy of Trade Policy 237
reduce the average duty on U.S. imports from 59 percent in 1932 to 25 percent shortly
after World War II.
Bilateral negotiations, however, do not take full advantage of international coordination.
For one thing, benefits from a bilateral negotiation may “spill over” to parties that
have not made any concessions. For example, if the United States reduces tariffs on coffee
as a result of a deal with Brazil, Colombia will also gain from a higher world coffee price.
Furthermore, some advantageous deals may inherently involve more than two partners:
The United States sells more to Europe, Europe sells more to Saudi Arabia, Saudi Arabia
sells more to Japan, and Japan sells more to the United States. Thus the next step in international
trade liberalization was to proceed to multilateral negotiations involving a number
of countries.
Multilateral negotiations began soon after the end of World War II. Originally, diplomats
from the victorious Allies imagined that such negotiations would take place under
the auspices of a proposed body called the International Trade Organization, paralleling
the International Monetary Fund and the World Bank (described in the second half of this
book). In 1947, unwilling to wait until the ITO was in place, a group of 23 countries began
trade negotiations under a provisional set of rules that became known as the General
Agreement on Tariffs and Trade, or GATT. As it turned out, the ITO was never established
because it ran into severe political opposition, especially in the United States. So
the provisional agreement ended up governing world trade for the next 48 years.
Officially, the GATT was an agreement, not an organization—the countries participating
in the agreement were officially designated as “contracting parties,” not members. In
practice, the GATT did maintain a permanent “secretariat” in Geneva, which everyone
referred to as “the GATT.” In 1995, the World Trade Organization, or WTO, was established,
finally creating the formal organization envisaged 50 years earlier. However, the
GATT rules remain in force, and the basic logic of the system remains the same.
One way to think about the GATT-WTO approach to trade is to use a mechanical analogy:
It’s like a device designed to push a heavy object, the world economy, gradually up a
slope—the path to free trade. To get there requires both “levers” to push the object in the
right direction as well as “ratchets” to prevent backsliding.
The principal ratchet in the system is the process of binding. When a tariff rate is
“bound,” the country imposing the tariff agrees not to raise the rate in the future. At present,
almost all tariff rates in developed countries are bound, as are about three-quarters of
the rates in developing countries. There is, however, some wiggle room in bound tariffs:
A country can raise a tariff if it gets the agreement of other countries, which usually
means providing compensation by reducing other tariffs. In practice, binding has been
highly effective, with very little backsliding in tariffs over the past half-century.
In addition to binding tariffs, the GATT-WTO system generally tries to prevent nontariff
interventions in trade. Export subsidies are not allowed, with one big exception: Back
at the GATT’s inception, the United States insisted on a loophole for agricultural exports,
which has since been exploited on a large scale by the European Union.
As we pointed out earlier in this chapter, most of the actual cost of protection in the
United States comes from import quotas. The GATT-WTO system in effect “grandfathers”
existing import quotas, though there has been an ongoing and often successful effort to
remove such quotas or convert them to tariffs. New import quotas are generally forbidden
except as temporary measures to deal with “market disruption,” an undefined phrase usually
interpreted to mean surges of imports that threaten to put a domestic sector suddenly
out of business.
The lever used to make forward progress is the somewhat stylized process known as a
trade round, in which a large group of countries get together to negotiate a set of tariff
reductions and other measures to liberalize trade. Eight trade rounds have been completed
238 PART TWO International Trade Policy
since 1947, the last of which—the Uruguay Round, completed in 1994—established the
WTO. In 2001, a meeting in the Persian Gulf city of Doha inaugurated a ninth round,
which by the summer of 2010 appeared to have failed to achieve an agreement. We’ll discuss
the reasons for the Doha Round’s apparent failure later in this chapter.
The first five trade rounds under the GATT took the form of “parallel” bilateral negotiations,
where each country negotiates pairwise with a number of countries at once. For
example, if Germany were to offer a tariff reduction that would benefit both France and
Italy, it could ask both of them for reciprocal concessions. The ability to make more extensive
deals, together with the worldwide economic recovery from the war, helped to permit
substantial tariff reductions.
The sixth multilateral trade agreement, known as the Kennedy Round, was completed
in 1967. This agreement involved an across-the-board 50 percent reduction in tariffs by
the major industrial countries, except for specified industries whose tariffs were left
unchanged. The negotiations concerned which industries to exempt rather than the size of
the cut for industries not given special treatment. Overall, the Kennedy Round reduced
average tariffs by about 35 percent.
The so-called Tokyo Round of trade negotiations (completed in 1979) reduced tariffs
by a formula more complex than that of the Kennedy Round. In addition, new codes were
established in an effort to control the proliferation of nontariff barriers, such as voluntary
export restraints and orderly marketing agreements. Finally, in 1994 an eighth round of
negotiations, the so-called Uruguay Round, was completed. The provisions of that round
were approved by the U.S. Congress after acrimonious debate; we describe the results of
these negotiations below.
The Uruguay Round
Major international trade negotiations invariably open with a ceremony in one exotic
locale and conclude with a ceremonial signing in another. The eighth round of global trade
negotiations carried out under the GATT began in 1986, with a meeting at the coastal
resort of Punta del Este, Uruguay (hence the name Uruguay Round). The participants then
repaired to Geneva, where they engaged in years of offers and counteroffers, threats and
counterthreats, and, above all, tens of thousands of hours of meetings so boring that even
the most experienced diplomat had difficulty staying awake. The round had been scheduled
for completion by 1990 but ran into serious political difficulties. In late 1993, the
negotiators finally produced a basic document consisting of 400 pages of agreements,
together with supplementary documents detailing the specific commitments of member
nations with regard to particular markets and products—about 22,000 pages in all. The
agreement was signed in Marrakesh, Morocco, in April 1994, and ratified by the major
nations—after bitter political controversy in some cases, including in the United States—
by the end of that year.
As the length of the document suggests, the end results of the Uruguay Round are not
that easy to summarize. The most important results, however, may be grouped under two
headings, trade liberalization and administrative reforms.
Trade Liberalization
The Uruguay Round, like previous GATT negotiations, cut tariff rates around the world.
The numbers can sound impressive: The average tariff imposed by advanced countries fell
almost 40 percent as a result of the round. However, tariff rates were already quite low. In
fact, the average tariff rate fell only from 6.3 to 3.9 percent, enough to produce only a
small increase in world trade.
CHAPTER 10 The Political Economy of Trade Policy 239
More important than this overall tariff reduction were the moves to liberalize trade in
two important sectors, agriculture and clothing.
World trade in agricultural products has been highly distorted. Japan is notorious for
import restrictions that lead to internal prices of rice, beef, and other foods that are several
times as high as world market prices; Europe’s massive export subsidies under the
Common Agricultural Policy were described in Chapter 9. At the beginning of the
Uruguay Round, the United States had an ambitious goal: free trade in agricultural products
by the year 2000. The actual achievement was far more modest but still significant.
The agreement required agricultural exporters to reduce the value of subsidies by 36 percent,
and the volume of subsidized exports by 21 percent, over a six-year period. Countries
like Japan that protect their farmers with import quotas were required to replace quotas
with tariffs, which may not be increased in the future.
World trade in textiles and clothing was also highly distorted by the Multi-Fiber
Arrangement, also described in Chapter 9. The Uruguay Round phased out the MFA over
a ten-year period, eliminating all quantitative restrictions on trade in textiles and clothing.
(Some high tariffs remain in place.) This was a fairly dramatic liberalization—remember
that most estimates suggest that protection of clothing imposes a larger cost on U.S. consumers
than all other protectionist measures combined. It is worth noting, however, that
the formula used in phasing out the MFA was heavily “backloaded”: Much of the liberalization
was postponed until 2003 and 2004, with the final end of the quotas not taking
place until January 1, 2005. Many trade experts worried that when push came to shove,
there would be strong political pressure to reintroduce limits on apparel exports.
Sure enough, the end of the MFA brought a surge in clothing exports from China. For
example, in January 2005 China shipped 27 million pairs of cotton trousers to the United
States, up from 1.9 million a year earlier. And there was a fierce political reaction from
clothing producers in the United States and Europe. While new restrictions were imposed
on Chinese clothing exports, these restrictions were phased out over time; world trade in
clothing has, in fact, been largely liberalized. A final important trade action under the
Uruguay Round was a new set of rules concerning government procurement, purchases
made not by private firms or consumers but by government agencies. Such procurement
has long provided protected markets for many kinds of goods, from construction equipment
to vehicles. (Recall the box on Hungarian buses in Chapter 9.) The Uruguay Round
set new rules that should open up a wide range of government contracts for imported
products.
Administrative Reforms: From the GATT to the WTO
Much of the publicity that surrounded the Uruguay Round, and much of the controversy
swirling around the world trading system since then, has focused on the round’s creation
of a new institution, the World Trade Organization. In 1995 this organization replaced the
ad hoc secretariat that had administered the GATT. As we’ll see in Chapter 12, the WTO
has become the organization that opponents of globalization love to hate; it has been
accused by both the left and the right of acting as a sort of world government, undermining
national sovereignty.
How different is the WTO from the GATT? From a legal point of view, the GATT was a
provisional agreement, whereas the WTO is a full-fledged international organization; however,
the actual bureaucracy remains small (a staff of 500). An updated version of the original
GATT text has been incorporated into the WTO rules. The GATT, however, applied
only to trade in goods; world trade in services—that is, intangible things like insurance,
consulting, and banking—was not subject to any agreed-upon set of rules. As a result,
many countries applied regulations that openly or de facto discriminated against foreign
240 PART TWO International Trade Policy
suppliers. The GATT’s neglect of trade in services became an increasingly glaring omission,
because modern economies have increasingly focused on the production of services
rather than physical goods. So the WTO agreement includes rules on trade in services (the
General Agreement on Trade in Services, or GATS). In practice, these rules have not yet
had much impact on trade in services; their main purpose is to serve as the basis for negotiating
future trade rounds.
In addition to a broad shift from producing goods to producing services, advanced
countries have also experienced a shift from depending on physical capital to depending
on “intellectual property,” which is protected by patents and copyrights. (Thirty years ago,
General Motors was the quintessential modern corporation; now it’s Apple or Google.)
Thus defining the international application of international property rights has also
become a major preoccupation. The WTO tries to take on this issue with its Agreement on
Trade-Related Aspects of Intellectual Property (TRIPS). The application of TRIPS in the
pharmaceutical industry has become a subject of heated debate.
The most important new aspect of the WTO, however, is generally acknowledged to be
its “dispute settlement” procedure. A basic problem arises when one country accuses
another of violating the rules of the trading system. Suppose, for example, that Canada
accuses the United States of unfairly limiting timber imports—and the United States
denies the charge. What happens next?
Before the WTO, there were international tribunals in which Canada could press its
case, but such proceedings tended to drag on for years, even decades. And even when a
ruling had been issued, there was no way to enforce it. This did not mean that the GATT’s
rules had no force: Neither the United States nor other countries wanted to acquire a reputation
as scofflaws, so they made considerable efforts to keep their actions “GATT-legal.”
But gray-area cases tended to go unresolved.
The WTO contains a much more formal and effective procedure. Panels of experts are
selected to hear cases, usually reaching a final conclusion in less than a year; even with
appeals, the procedure is not supposed to take more than 15 months.
Suppose that the WTO concludes that a nation has, in fact, been violating the rules—
and the country nonetheless refuses to change its policy. Then what? The WTO itself
has no enforcement powers. What it can do is grant the country that filed the complaint
the right to retaliate. To use our Canada–U.S. example, the government of Canada might
be given the right to impose restrictions on U.S. exports without being considered
in violation of WTO rules. In the case of the banana dispute described in the box on
page 248, a WTO ruling found the European Union in violation; when Europe remained
recalcitrant, the United States temporarily imposed tariffs on such items as designer
handbags.
The hope and expectation is that few disputes will get this far. In many cases the threat
to bring a dispute before the WTO should lead to a settlement; in the great majority of
other cases, countries accept the WTO ruling and change their policies.
The following box describes an example of the WTO dispute settlement procedure at
work: the U.S.–Venezuela dispute over imported gasoline. As the box explains, this case
has also become a prime example for those who accuse the WTO of undermining national
sovereignty.
Benefits and Costs
The economic impact of the Uruguay Round is difficult to estimate. If nothing else, think
about the logistics: To do an estimate, one must translate an immense document from one
impenetrable jargon (legalese) into another (economese), assign numbers to the translation,
then feed the whole thing into a computer model of the world economy.
CHAPTER 10 The Political Economy of Trade Policy 241
The most widely cited estimates are those of the GATT itself and of the Organization
for Economic Cooperation and Development, another international organization (this one
consisting only of rich countries, and based in Paris). Both estimates suggest a gain to the
world economy as a whole of more than $200 billion annually, raising world income by
about 1 percent. As always, there are dissenting estimates on both sides. Some economists
claim that the estimated gains are exaggerated, particularly because the estimates assume
that exports and imports responded strongly to the new liberalizing moves. A probably
larger minority of critics argues that these estimates are considerably too low, for the
“dynamic” reasons discussed earlier in this chapter.
In any case, it is clear that the usual logic of trade liberalization applies: The costs of
the Uruguay Round were felt by concentrated, often well-organized groups, while the benefit
accrued to broad, diffuse populations. The progress on agriculture hurt the small but
influential populations of farmers in Europe, Japan, and other countries where agricultural
The very first application of the WTO’s new dispute
settlement procedure has also been one of the
most controversial. To WTO supporters, it illustrates
the new system’s effectiveness. To opponents,
it shows that the organization stands in the
way of important social goals such as protecting the
environment.
The case arose out of new U.S. air pollution standards.
These standards set rules for the chemical
composition of gasoline sold in the United States.
A uniform standard would clearly have been legal
under WTO rules. However, the new standards
included some loopholes: Refineries in the United
States, or those selling 75 percent or more of their
output in the United States, were given “baselines”
that depended on their 1990 pollutant levels. This
provision generally set a less strict standard than
was set for imported gasoline, and thus in effect
introduced a preference for gasoline from domestic
refineries.
Venezuela, which ships considerable quantities of
gasoline to the United States, brought a complaint
against the new pollution rules early in 1995.
Venezuela argued that the rules violated the principle
of “national treatment,” which says that imported
goods should be subject to the same regulations as
domestic goods (so that regulations are not used as
an indirect form of protectionism). A year later the
panel appointed by the WTO ruled in Venezuela’s
favor; the United States appealed, but the appeal was
rejected. The United States and Venezuela then
negotiated a revised set of rules.
At one level, this outcome was a demonstration of
the WTO doing exactly what it was supposed to do.
The United States had introduced measures that pretty
clearly violated the letter of its trade agreements;
when a smaller, less influential country appealed
against those measures, it got fairly quick results.
On the other hand, environmentalists were
understandably upset: The WTO ruling, in effect,
blocked a measure that would have made the air
cleaner. Furthermore, there was little question that
the clean-air rules were promulgated in good faith—
that is, they were really intended to reduce air pollution,
not to exclude exports.
Defenders of the WTO point out that the United
States clearly could have written a rule that did not
discriminate against imports; the fact that it had not
done so was a political concession to the refining
industry, which did in effect constitute a sort of protectionism.
The most you can say is that the WTO’s
rules made it more difficult for U.S. environmentalists
to strike a political deal with the industry.
In the mythology of the anti-globalization movement,
which we discuss in Chapter 12, the WTO’s
intervention against clean-air standards has taken on
iconic status: The case is seen as a prime example of
how the organization deprives nations of their sovereignty,
preventing them from following socially and
environmentally responsible policies. The reality of
the case, however, is nowhere near that clear-cut: If
the United States had imposed a “clean” clean-air
rule that had not discriminated among sources, the
WTO would have had no complaints.
Settling a Dispute—and Creating One
242 PART TWO International Trade Policy
prices are far above world levels. These losses were much more than offset by gains to
consumers and taxpayers in those countries, but because these benefits were very widely
spread, they were little noticed. Similarly, the liberalization of trade in textiles and clothing
produced some concentrated pain for workers and companies in those industries, offset
by considerably larger but far less visible consumer gains.
Given these strong distributional impacts of the Uruguay Round, it is actually remarkable
that an agreement was reached at all. Indeed, after the failure to achieve anything
close to agreement by the 1990 target, many commentators began to pronounce the whole
trade negotiation process to be dead. That in the end, agreement was achieved, if on a
more modest scale than originally hoped, may be attributed to an interlocking set of political
calculations. In the United States, the gains to agricultural exporters and the prospective
gains to service exporters if the GATT opened the door to substantial liberalization
helped offset the complaints of the clothing industry. Many developing countries supported
the round because of the new opportunities it would offer to their own textile and
clothing exports. Also, some of the “concessions” negotiated under the agreement were an
excuse to make policy changes that would eventually have happened anyway. For example,
the sheer expense of Europe’s Common Agricultural Policy in a time of budget
deficits made it ripe for cutting in any case.
An important factor in the final success of the round, however, was fear of what would
happen if it failed. By 1993, protectionist currents were evidently running strong in the
United States and elsewhere. Trade negotiators in countries that might otherwise have
refused to go along with the agreement—such as France, Japan, or South Korea, in all of
which powerful farm lobbies angrily opposed trade liberalization—therefore feared that
failure to agree would be dangerous. That is, they feared that a failed round would not
merely mean lack of progress but substantial backsliding on the progress made toward free
trade over the previous four decades.
Case Study
Testing the WTO’s Mettle
In March 2002 the U.S. government imposed 30 percent tariffs on a range of imported
steel products. The official reason for this action was that the U.S. industry faced a surge
in imports, and needed time to restructure. But the real reason, almost everyone agreed,
was politics: West Virginia, Ohio, and Pennsylvania, where the steel industry is concentrated,
were widely expected to be crucial “swing states” in the 2004 election.
Europe, Japan, China, and South Korea filed suit against the U.S. steel tariff with the
WTO, asserting that the U.S. action was illegal. In July 2003, a WTO panel agreed, ruling
that the U.S. action was unjustified. Many observers regarded the U.S. response to
this ruling as a crucial test of the WTO’s credibility: Would the government of the
world’s most powerful nation really allow an international organization to tell it to
remove a politically important tariff? There was even talk of a looming trade war.
In fact, the United States complied with the ruling, lifting the steel tariffs in
December 2003. The official explanation for the decision was that the tariffs had served
their purpose. Most observers believed, however, that the key motivation was a threat
by the European Union, which by now had received WTO clearance to take retaliatory
action, and was getting ready to impose tariffs on more than $2 billion in U.S. exports.
(The Europeans, who understand politics as well as we do, targeted their tariffs on
goods produced in—you guessed it—political swing states.)
CHAPTER 10 The Political Economy of Trade Policy 243
So the WTO passed a big test. Still, it’s one thing for the United States to defer to a
complaint from the European Union, which is an economic superpower with an economy
roughly the same size as that of the United States. The next question is what will
happen when the WTO rules in favor of smaller economies against major economic
powers like the United States or the EU.
In March 2005, in a landmark decision, the WTO agreed with Brazil’s claim that
U.S. subsidies to cotton producers were illegal. The United States said that it would
comply and eliminate the subsidies, but by 2009 had made only partial moves toward
compliance; at that point, the WTO authorized Brazil to retaliate with substantial sanctions
on U.S. exports.
Our discussion of the politics of trade policy has not been very encouraging. We have argued
that it is difficult to devise trade policies that raise national welfare and that trade policy is
often dominated by interest group politics. “Horror stories” of trade policies that produce
costs that greatly exceed any conceivable benefits abound; it is thus easy to be highly cynical
about the practical side of trade theory.
Yet, in fact, from the mid-1930s until about 1980, the United States and other advanced
countries gradually removed tariffs and some other barriers to trade, and by so doing aided
a rapid increase in international integration. Figure 10-5 shows the average U.S. tariff rate
on dutiable imports from 1891 to 2008; after rising sharply in the early 1930s, the rate has
TABLE 10-2 Welfare Costs of U.S. Protection ($ billion)
2002 Estimate 2013 Projected
Total 14.1 4.6
Textiles and apparel 11.8 2.3
Source: U.S. International Trade Commission.
0
Tariff rate
(percent)
60
10
20
30
40
50
1891
1896
1901
1906
1911
1916
1921
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2008
Figure 10-5
The U.S. Tariff Rate
After rising sharply at the beginning of the 1930s, the average tariff rate of the United States has steadily declined.
CHAPTER 10 The Political Economy of Trade Policy 235
steadily declined.6 Most economists believe this progressive trade liberalization was
highly beneficial. Given what we have said about the politics of trade policy, however, how
was this removal of tariffs politically possible?
At least part of the answer is that the great postwar liberalization of trade was achieved
through international negotiation. That is, governments agreed to engage in mutual tariff
reduction. These agreements linked reduced protection for each country’s import-competing
industries to reduced protection by other countries against that country’s export industries.
Such a linkage, as we will now argue, helps to offset some of the political difficulties that
would otherwise prevent countries from adopting good trade policies.
The Advantages of Negotiation
There are at least two reasons why it is easier to lower tariffs as part of a mutual agreement
than to do so as a unilateral policy. First, a mutual agreement helps mobilize support for
freer trade. Second, negotiated agreements on trade can help governments avoid getting
caught in destructive trade wars.
The effect of international negotiations on support for freer trade is straightforward. We
have noted that import-competing producers are usually better informed and organized
than consumers. International negotiations can bring in domestic exporters as a counterweight.
The United States and Japan, for example, could reach an agreement in which the
United States refrains from imposing import quotas to protect some of its manufacturers
from Japanese competition in return for removal of Japanese barriers against U.S. exports
of agricultural or high-technology products to Japan. U.S. consumers might not be effective
politically in opposing such import quotas on foreign goods, even though these quotas
may be costly to them, but exporters who want access to foreign markets may, through
their lobbying for mutual elimination of import quotas, protect consumer interests.
International negotiation can also help to avoid a trade war. The concept of a trade war
can best be illustrated with a stylized example.
Imagine that there are only two countries in the world, the United States and Japan, and
that these countries have only two policy choices, free trade or protection. Suppose that
these are unusually clear-headed governments that can assign definite numerical values to
their satisfaction with any particular policy outcome (Table 10-3).
6Measures of changes in the average rate of protection can be problematic because the composition of imports
changes—partly because of tariff rates themselves. Imagine, for example, a country that imposes a tariff on some
goods that is so high that it shuts off all imports of these goods. Then the average tariff rate on goods actually
imported will be zero! To try to correct for this, the measure we use in Figure 10-5 shows the rate only on “dutiable”
imports; that is, it excludes imports that for some reason were exempt from tariffs. At their peak, U.S. tariff rates
were so high that goods subject to tariffs accounted for only one-third of imports; by 1975 that share had risen to
two-thirds. As a result, the average tariff rate on all goods fell much less than the rate on dutiable goods. The
numbers shown in Figure 10-5, however, give a more accurate picture of the major liberalization of trade actually
experienced by the United States.
TABLE 10-3 The Problem of Trade Warfare
Free trade
10 –10
20 –5
U.S. Free trade
Protection
Protection
Japan
10 20
–10 –5
236 PART TWO International Trade Policy
The particular values of the payoffs given in the table represent two assumptions. First,
we assume that each country’s government would choose protection if it could take the
other country’s policy as given. That is, whichever policy Japan chooses, the U.S. government
is better off with protection. This assumption is by no means necessarily true; many
economists would argue that free trade is the best policy for the nation, regardless of what
other governments do. Governments, however, must act not only in the public interest but
also in their own political interest. For the reasons discussed in the previous section, governments
often find it politically difficult to avoid giving protection to some industries.
The second assumption built into Table 10-3 is that even though each government acting
individually would be better off with protection, they would both be better off if both
chose free trade. That is, the U.S. government has more to gain from an opening of
Japanese markets than it has to lose from opening its own markets, and the same is true for
Japan. We can justify this assumption simply by appealing to the gains from trade.
To those who have studied game theory, this situation is known as a Prisoner’s
dilemma. Each government, making the best decision for itself, will choose to protect.
These choices lead to the outcome in the lower right box of the table. Yet both governments
are better off if neither protects: The upper left box of the table yields a payoff that
is higher for both countries. By acting unilaterally in what appear to be their best interests,
the governments fail to achieve the best outcome possible. If the countries act unilaterally
to protect, there is a trade war that leaves both worse off. Trade wars are not as serious as
shooting wars, but avoiding them is similar to the problem of avoiding armed conflict or
arms races.
Obviously, Japan and the United States need to establish an agreement (such as a
treaty) to refrain from protection. Each government will be better off if it limits its own
freedom of action, provided the other country limits its freedom of action as well. A treaty
can make everyone better off.
This is a highly simplified example. In the real world there are both many countries and
many gradations of trade policy between free trade and complete protection against imports.
Nonetheless, the example suggests both that there is a need to coordinate trade policies
through international agreements and that such agreements can actually make a difference.
Indeed, the current system of international trade is built around a series of international
agreements.
International Trade Agreements: A Brief History
Internationally coordinated tariff reduction as a trade policy dates back to the 1930s. In
1930, the United States passed a remarkably irresponsible tariff law, the Smoot-Hawley
Act. Under this act, tariff rates rose steeply and U.S. trade fell sharply; some economists
argue that the Smoot-Hawley Act helped deepen the Great Depression. Within a few years
after the act’s passage, the U.S. administration concluded that tariffs needed to be reduced,
but this posed serious problems of political coalition building. Any tariff reduction would
be opposed by those members of Congress whose districts contained firms producing
competing goods, while the benefits would be so widely diffused that few in Congress
could be mobilized on the other side. To reduce tariff rates, tariff reduction needed to be
linked to some concrete benefits for exporters. The initial solution to this political problem
was bilateral tariff negotiations. The United States would approach some country that was
a major exporter of some good—say, a sugar exporter—and offer to lower tariffs on sugar
if that country would lower its tariffs on some U.S. exports. The attractiveness of the deal
to U.S. exporters would help counter the political weight of the sugar interest. In the foreign
country, the attractiveness of the deal to foreign sugar exporters would balance the
political influence of import-competing interests. Such bilateral negotiations helped
CHAPTER 10 The Political Economy of Trade Policy 237
reduce the average duty on U.S. imports from 59 percent in 1932 to 25 percent shortly
after World War II.
Bilateral negotiations, however, do not take full advantage of international coordination.
For one thing, benefits from a bilateral negotiation may “spill over” to parties that
have not made any concessions. For example, if the United States reduces tariffs on coffee
as a result of a deal with Brazil, Colombia will also gain from a higher world coffee price.
Furthermore, some advantageous deals may inherently involve more than two partners:
The United States sells more to Europe, Europe sells more to Saudi Arabia, Saudi Arabia
sells more to Japan, and Japan sells more to the United States. Thus the next step in international
trade liberalization was to proceed to multilateral negotiations involving a number
of countries.
Multilateral negotiations began soon after the end of World War II. Originally, diplomats
from the victorious Allies imagined that such negotiations would take place under
the auspices of a proposed body called the International Trade Organization, paralleling
the International Monetary Fund and the World Bank (described in the second half of this
book). In 1947, unwilling to wait until the ITO was in place, a group of 23 countries began
trade negotiations under a provisional set of rules that became known as the General
Agreement on Tariffs and Trade, or GATT. As it turned out, the ITO was never established
because it ran into severe political opposition, especially in the United States. So
the provisional agreement ended up governing world trade for the next 48 years.
Officially, the GATT was an agreement, not an organization—the countries participating
in the agreement were officially designated as “contracting parties,” not members. In
practice, the GATT did maintain a permanent “secretariat” in Geneva, which everyone
referred to as “the GATT.” In 1995, the World Trade Organization, or WTO, was established,
finally creating the formal organization envisaged 50 years earlier. However, the
GATT rules remain in force, and the basic logic of the system remains the same.
One way to think about the GATT-WTO approach to trade is to use a mechanical analogy:
It’s like a device designed to push a heavy object, the world economy, gradually up a
slope—the path to free trade. To get there requires both “levers” to push the object in the
right direction as well as “ratchets” to prevent backsliding.
The principal ratchet in the system is the process of binding. When a tariff rate is
“bound,” the country imposing the tariff agrees not to raise the rate in the future. At present,
almost all tariff rates in developed countries are bound, as are about three-quarters of
the rates in developing countries. There is, however, some wiggle room in bound tariffs:
A country can raise a tariff if it gets the agreement of other countries, which usually
means providing compensation by reducing other tariffs. In practice, binding has been
highly effective, with very little backsliding in tariffs over the past half-century.
In addition to binding tariffs, the GATT-WTO system generally tries to prevent nontariff
interventions in trade. Export subsidies are not allowed, with one big exception: Back
at the GATT’s inception, the United States insisted on a loophole for agricultural exports,
which has since been exploited on a large scale by the European Union.
As we pointed out earlier in this chapter, most of the actual cost of protection in the
United States comes from import quotas. The GATT-WTO system in effect “grandfathers”
existing import quotas, though there has been an ongoing and often successful effort to
remove such quotas or convert them to tariffs. New import quotas are generally forbidden
except as temporary measures to deal with “market disruption,” an undefined phrase usually
interpreted to mean surges of imports that threaten to put a domestic sector suddenly
out of business.
The lever used to make forward progress is the somewhat stylized process known as a
trade round, in which a large group of countries get together to negotiate a set of tariff
reductions and other measures to liberalize trade. Eight trade rounds have been completed
238 PART TWO International Trade Policy
since 1947, the last of which—the Uruguay Round, completed in 1994—established the
WTO. In 2001, a meeting in the Persian Gulf city of Doha inaugurated a ninth round,
which by the summer of 2010 appeared to have failed to achieve an agreement. We’ll discuss
the reasons for the Doha Round’s apparent failure later in this chapter.
The first five trade rounds under the GATT took the form of “parallel” bilateral negotiations,
where each country negotiates pairwise with a number of countries at once. For
example, if Germany were to offer a tariff reduction that would benefit both France and
Italy, it could ask both of them for reciprocal concessions. The ability to make more extensive
deals, together with the worldwide economic recovery from the war, helped to permit
substantial tariff reductions.
The sixth multilateral trade agreement, known as the Kennedy Round, was completed
in 1967. This agreement involved an across-the-board 50 percent reduction in tariffs by
the major industrial countries, except for specified industries whose tariffs were left
unchanged. The negotiations concerned which industries to exempt rather than the size of
the cut for industries not given special treatment. Overall, the Kennedy Round reduced
average tariffs by about 35 percent.
The so-called Tokyo Round of trade negotiations (completed in 1979) reduced tariffs
by a formula more complex than that of the Kennedy Round. In addition, new codes were
established in an effort to control the proliferation of nontariff barriers, such as voluntary
export restraints and orderly marketing agreements. Finally, in 1994 an eighth round of
negotiations, the so-called Uruguay Round, was completed. The provisions of that round
were approved by the U.S. Congress after acrimonious debate; we describe the results of
these negotiations below.
The Uruguay Round
Major international trade negotiations invariably open with a ceremony in one exotic
locale and conclude with a ceremonial signing in another. The eighth round of global trade
negotiations carried out under the GATT began in 1986, with a meeting at the coastal
resort of Punta del Este, Uruguay (hence the name Uruguay Round). The participants then
repaired to Geneva, where they engaged in years of offers and counteroffers, threats and
counterthreats, and, above all, tens of thousands of hours of meetings so boring that even
the most experienced diplomat had difficulty staying awake. The round had been scheduled
for completion by 1990 but ran into serious political difficulties. In late 1993, the
negotiators finally produced a basic document consisting of 400 pages of agreements,
together with supplementary documents detailing the specific commitments of member
nations with regard to particular markets and products—about 22,000 pages in all. The
agreement was signed in Marrakesh, Morocco, in April 1994, and ratified by the major
nations—after bitter political controversy in some cases, including in the United States—
by the end of that year.
As the length of the document suggests, the end results of the Uruguay Round are not
that easy to summarize. The most important results, however, may be grouped under two
headings, trade liberalization and administrative reforms.
Trade Liberalization
The Uruguay Round, like previous GATT negotiations, cut tariff rates around the world.
The numbers can sound impressive: The average tariff imposed by advanced countries fell
almost 40 percent as a result of the round. However, tariff rates were already quite low. In
fact, the average tariff rate fell only from 6.3 to 3.9 percent, enough to produce only a
small increase in world trade.
CHAPTER 10 The Political Economy of Trade Policy 239
More important than this overall tariff reduction were the moves to liberalize trade in
two important sectors, agriculture and clothing.
World trade in agricultural products has been highly distorted. Japan is notorious for
import restrictions that lead to internal prices of rice, beef, and other foods that are several
times as high as world market prices; Europe’s massive export subsidies under the
Common Agricultural Policy were described in Chapter 9. At the beginning of the
Uruguay Round, the United States had an ambitious goal: free trade in agricultural products
by the year 2000. The actual achievement was far more modest but still significant.
The agreement required agricultural exporters to reduce the value of subsidies by 36 percent,
and the volume of subsidized exports by 21 percent, over a six-year period. Countries
like Japan that protect their farmers with import quotas were required to replace quotas
with tariffs, which may not be increased in the future.
World trade in textiles and clothing was also highly distorted by the Multi-Fiber
Arrangement, also described in Chapter 9. The Uruguay Round phased out the MFA over
a ten-year period, eliminating all quantitative restrictions on trade in textiles and clothing.
(Some high tariffs remain in place.) This was a fairly dramatic liberalization—remember
that most estimates suggest that protection of clothing imposes a larger cost on U.S. consumers
than all other protectionist measures combined. It is worth noting, however, that
the formula used in phasing out the MFA was heavily “backloaded”: Much of the liberalization
was postponed until 2003 and 2004, with the final end of the quotas not taking
place until January 1, 2005. Many trade experts worried that when push came to shove,
there would be strong political pressure to reintroduce limits on apparel exports.
Sure enough, the end of the MFA brought a surge in clothing exports from China. For
example, in January 2005 China shipped 27 million pairs of cotton trousers to the United
States, up from 1.9 million a year earlier. And there was a fierce political reaction from
clothing producers in the United States and Europe. While new restrictions were imposed
on Chinese clothing exports, these restrictions were phased out over time; world trade in
clothing has, in fact, been largely liberalized. A final important trade action under the
Uruguay Round was a new set of rules concerning government procurement, purchases
made not by private firms or consumers but by government agencies. Such procurement
has long provided protected markets for many kinds of goods, from construction equipment
to vehicles. (Recall the box on Hungarian buses in Chapter 9.) The Uruguay Round
set new rules that should open up a wide range of government contracts for imported
products.
Administrative Reforms: From the GATT to the WTO
Much of the publicity that surrounded the Uruguay Round, and much of the controversy
swirling around the world trading system since then, has focused on the round’s creation
of a new institution, the World Trade Organization. In 1995 this organization replaced the
ad hoc secretariat that had administered the GATT. As we’ll see in Chapter 12, the WTO
has become the organization that opponents of globalization love to hate; it has been
accused by both the left and the right of acting as a sort of world government, undermining
national sovereignty.
How different is the WTO from the GATT? From a legal point of view, the GATT was a
provisional agreement, whereas the WTO is a full-fledged international organization; however,
the actual bureaucracy remains small (a staff of 500). An updated version of the original
GATT text has been incorporated into the WTO rules. The GATT, however, applied
only to trade in goods; world trade in services—that is, intangible things like insurance,
consulting, and banking—was not subject to any agreed-upon set of rules. As a result,
many countries applied regulations that openly or de facto discriminated against foreign
240 PART TWO International Trade Policy
suppliers. The GATT’s neglect of trade in services became an increasingly glaring omission,
because modern economies have increasingly focused on the production of services
rather than physical goods. So the WTO agreement includes rules on trade in services (the
General Agreement on Trade in Services, or GATS). In practice, these rules have not yet
had much impact on trade in services; their main purpose is to serve as the basis for negotiating
future trade rounds.
In addition to a broad shift from producing goods to producing services, advanced
countries have also experienced a shift from depending on physical capital to depending
on “intellectual property,” which is protected by patents and copyrights. (Thirty years ago,
General Motors was the quintessential modern corporation; now it’s Apple or Google.)
Thus defining the international application of international property rights has also
become a major preoccupation. The WTO tries to take on this issue with its Agreement on
Trade-Related Aspects of Intellectual Property (TRIPS). The application of TRIPS in the
pharmaceutical industry has become a subject of heated debate.
The most important new aspect of the WTO, however, is generally acknowledged to be
its “dispute settlement” procedure. A basic problem arises when one country accuses
another of violating the rules of the trading system. Suppose, for example, that Canada
accuses the United States of unfairly limiting timber imports—and the United States
denies the charge. What happens next?
Before the WTO, there were international tribunals in which Canada could press its
case, but such proceedings tended to drag on for years, even decades. And even when a
ruling had been issued, there was no way to enforce it. This did not mean that the GATT’s
rules had no force: Neither the United States nor other countries wanted to acquire a reputation
as scofflaws, so they made considerable efforts to keep their actions “GATT-legal.”
But gray-area cases tended to go unresolved.
The WTO contains a much more formal and effective procedure. Panels of experts are
selected to hear cases, usually reaching a final conclusion in less than a year; even with
appeals, the procedure is not supposed to take more than 15 months.
Suppose that the WTO concludes that a nation has, in fact, been violating the rules—
and the country nonetheless refuses to change its policy. Then what? The WTO itself
has no enforcement powers. What it can do is grant the country that filed the complaint
the right to retaliate. To use our Canada–U.S. example, the government of Canada might
be given the right to impose restrictions on U.S. exports without being considered
in violation of WTO rules. In the case of the banana dispute described in the box on
page 248, a WTO ruling found the European Union in violation; when Europe remained
recalcitrant, the United States temporarily imposed tariffs on such items as designer
handbags.
The hope and expectation is that few disputes will get this far. In many cases the threat
to bring a dispute before the WTO should lead to a settlement; in the great majority of
other cases, countries accept the WTO ruling and change their policies.
The following box describes an example of the WTO dispute settlement procedure at
work: the U.S.–Venezuela dispute over imported gasoline. As the box explains, this case
has also become a prime example for those who accuse the WTO of undermining national
sovereignty.
Benefits and Costs
The economic impact of the Uruguay Round is difficult to estimate. If nothing else, think
about the logistics: To do an estimate, one must translate an immense document from one
impenetrable jargon (legalese) into another (economese), assign numbers to the translation,
then feed the whole thing into a computer model of the world economy.
CHAPTER 10 The Political Economy of Trade Policy 241
The most widely cited estimates are those of the GATT itself and of the Organization
for Economic Cooperation and Development, another international organization (this one
consisting only of rich countries, and based in Paris). Both estimates suggest a gain to the
world economy as a whole of more than $200 billion annually, raising world income by
about 1 percent. As always, there are dissenting estimates on both sides. Some economists
claim that the estimated gains are exaggerated, particularly because the estimates assume
that exports and imports responded strongly to the new liberalizing moves. A probably
larger minority of critics argues that these estimates are considerably too low, for the
“dynamic” reasons discussed earlier in this chapter.
In any case, it is clear that the usual logic of trade liberalization applies: The costs of
the Uruguay Round were felt by concentrated, often well-organized groups, while the benefit
accrued to broad, diffuse populations. The progress on agriculture hurt the small but
influential populations of farmers in Europe, Japan, and other countries where agricultural
The very first application of the WTO’s new dispute
settlement procedure has also been one of the
most controversial. To WTO supporters, it illustrates
the new system’s effectiveness. To opponents,
it shows that the organization stands in the
way of important social goals such as protecting the
environment.
The case arose out of new U.S. air pollution standards.
These standards set rules for the chemical
composition of gasoline sold in the United States.
A uniform standard would clearly have been legal
under WTO rules. However, the new standards
included some loopholes: Refineries in the United
States, or those selling 75 percent or more of their
output in the United States, were given “baselines”
that depended on their 1990 pollutant levels. This
provision generally set a less strict standard than
was set for imported gasoline, and thus in effect
introduced a preference for gasoline from domestic
refineries.
Venezuela, which ships considerable quantities of
gasoline to the United States, brought a complaint
against the new pollution rules early in 1995.
Venezuela argued that the rules violated the principle
of “national treatment,” which says that imported
goods should be subject to the same regulations as
domestic goods (so that regulations are not used as
an indirect form of protectionism). A year later the
panel appointed by the WTO ruled in Venezuela’s
favor; the United States appealed, but the appeal was
rejected. The United States and Venezuela then
negotiated a revised set of rules.
At one level, this outcome was a demonstration of
the WTO doing exactly what it was supposed to do.
The United States had introduced measures that pretty
clearly violated the letter of its trade agreements;
when a smaller, less influential country appealed
against those measures, it got fairly quick results.
On the other hand, environmentalists were
understandably upset: The WTO ruling, in effect,
blocked a measure that would have made the air
cleaner. Furthermore, there was little question that
the clean-air rules were promulgated in good faith—
that is, they were really intended to reduce air pollution,
not to exclude exports.
Defenders of the WTO point out that the United
States clearly could have written a rule that did not
discriminate against imports; the fact that it had not
done so was a political concession to the refining
industry, which did in effect constitute a sort of protectionism.
The most you can say is that the WTO’s
rules made it more difficult for U.S. environmentalists
to strike a political deal with the industry.
In the mythology of the anti-globalization movement,
which we discuss in Chapter 12, the WTO’s
intervention against clean-air standards has taken on
iconic status: The case is seen as a prime example of
how the organization deprives nations of their sovereignty,
preventing them from following socially and
environmentally responsible policies. The reality of
the case, however, is nowhere near that clear-cut: If
the United States had imposed a “clean” clean-air
rule that had not discriminated among sources, the
WTO would have had no complaints.
Settling a Dispute—and Creating One
242 PART TWO International Trade Policy
prices are far above world levels. These losses were much more than offset by gains to
consumers and taxpayers in those countries, but because these benefits were very widely
spread, they were little noticed. Similarly, the liberalization of trade in textiles and clothing
produced some concentrated pain for workers and companies in those industries, offset
by considerably larger but far less visible consumer gains.
Given these strong distributional impacts of the Uruguay Round, it is actually remarkable
that an agreement was reached at all. Indeed, after the failure to achieve anything
close to agreement by the 1990 target, many commentators began to pronounce the whole
trade negotiation process to be dead. That in the end, agreement was achieved, if on a
more modest scale than originally hoped, may be attributed to an interlocking set of political
calculations. In the United States, the gains to agricultural exporters and the prospective
gains to service exporters if the GATT opened the door to substantial liberalization
helped offset the complaints of the clothing industry. Many developing countries supported
the round because of the new opportunities it would offer to their own textile and
clothing exports. Also, some of the “concessions” negotiated under the agreement were an
excuse to make policy changes that would eventually have happened anyway. For example,
the sheer expense of Europe’s Common Agricultural Policy in a time of budget
deficits made it ripe for cutting in any case.
An important factor in the final success of the round, however, was fear of what would
happen if it failed. By 1993, protectionist currents were evidently running strong in the
United States and elsewhere. Trade negotiators in countries that might otherwise have
refused to go along with the agreement—such as France, Japan, or South Korea, in all of
which powerful farm lobbies angrily opposed trade liberalization—therefore feared that
failure to agree would be dangerous. That is, they feared that a failed round would not
merely mean lack of progress but substantial backsliding on the progress made toward free
trade over the previous four decades.
Case Study
Testing the WTO’s Mettle
In March 2002 the U.S. government imposed 30 percent tariffs on a range of imported
steel products. The official reason for this action was that the U.S. industry faced a surge
in imports, and needed time to restructure. But the real reason, almost everyone agreed,
was politics: West Virginia, Ohio, and Pennsylvania, where the steel industry is concentrated,
were widely expected to be crucial “swing states” in the 2004 election.
Europe, Japan, China, and South Korea filed suit against the U.S. steel tariff with the
WTO, asserting that the U.S. action was illegal. In July 2003, a WTO panel agreed, ruling
that the U.S. action was unjustified. Many observers regarded the U.S. response to
this ruling as a crucial test of the WTO’s credibility: Would the government of the
world’s most powerful nation really allow an international organization to tell it to
remove a politically important tariff? There was even talk of a looming trade war.
In fact, the United States complied with the ruling, lifting the steel tariffs in
December 2003. The official explanation for the decision was that the tariffs had served
their purpose. Most observers believed, however, that the key motivation was a threat
by the European Union, which by now had received WTO clearance to take retaliatory
action, and was getting ready to impose tariffs on more than $2 billion in U.S. exports.
(The Europeans, who understand politics as well as we do, targeted their tariffs on
goods produced in—you guessed it—political swing states.)
CHAPTER 10 The Political Economy of Trade Policy 243
So the WTO passed a big test. Still, it’s one thing for the United States to defer to a
complaint from the European Union, which is an economic superpower with an economy
roughly the same size as that of the United States. The next question is what will
happen when the WTO rules in favor of smaller economies against major economic
powers like the United States or the EU.
In March 2005, in a landmark decision, the WTO agreed with Brazil’s claim that
U.S. subsidies to cotton producers were illegal. The United States said that it would
comply and eliminate the subsidies, but by 2009 had made only partial moves toward
compliance; at that point, the WTO authorized Brazil to retaliate with substantial sanctions
on U.S. exports.
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