Foreign Trade Dersi 6. Ünite Özet

Early Initiatives on the Establishment of the Multilateral Trading System

Economic cooperation has been playing a substantial role in tailoring the diplomatic relations among countries since the ancient times. In this respect, China’s foreign policy constituted on the grounds of military power to protect the Silk Road in the third century BC is a substantial example. International trade has played a very dominant role during both the war and peace times and constituted the hub of economic cooperation among countries.

General Agreement on Tariffs and Trade (GATT) in 1947, which is accepted as the first solid base of today’s multilateral trading system. Apart from those early steps, II. World War constitutes a landmark on the realization of GATT, which is the predecessor of the World Trade Organization (WTO).

Post-war international legal and political environment have been designed upon the rules and legislation of the United Nations and International Court of Justice. On the other hand, economic environment was proposed to be constructed upon the World Bank, International Monetary Fund (IMF) and International Trade Organization (ITO).

Bretton Woods Conference held in July 1944 so as to discuss postwar international economic order. Bretton Woods Conference ended with the conclusion of establishing the World Bank, the IMF and the ITO, which correspond to a three-pillared structure for the post-war international economic order. These new-proposed institutions were referred to Bretton Woods Institutions.

World Bank was founded in 1944. World Bank is a group composed of five associated institutions: The International Bank for Reconstruction and Development, The International Development Association, The International Finance Cooperation, The Multilateral Investment Guarantee Agency and The International Center for Settlement of Investment Disputes. The aim of World Bank has altered from reconstruction to development.

The second pillar of the Bretton Woods Institutions proposed at the Bretton Woods Conference was the IMF. Forty-four participating countries of the Bretton Woods Conference sought to establish an international monetary system that would prevent to repeat the competitive devaluations that prepared an adequate economic climate for the Great Depression at 1930s. In this respect, the IMF was founded to ensure and sustain the stability of the international monetary system. The IMF’s new mission and functions can be classified under three groups; surveillance, financial assistance and capacity development.

The last pillar of the Bretton Woods Institutions proposed at the Bretton Woods Conference was ITO. The proposed ITO was intended to act as an international trade ministry aiming to promote free trade by reducing existing trade restrictions in time. The idealists thought that these three international institutions would act as a government for the global economy.

Regarding Turkey’s status within the Bretton Woods structure, Turkey has been a member of the World Bank since 11 March 1947. Since then, the World Bank has supported various development projects of Turkey. The current relationship between Turkey and the World Bank Group is outlined within the Country Partnership Framework for the 2018-2021 financial period. This socalled Country Partnership Framework is the framework that defines the main engagement areas of the World Bank Group in Turkey.

On the other hand, Turkey became a member of the IMF on 11 March 1947, on the same date that the membership of the World Bank started. The first Standby Arrangement with the IMF dates back to 1 January 1961.

Standby Arrangement means countries usually need financial and technical support at the times of economic crises to overcome balance of payments problems. In these circumstances, the IMF provides support upon a Standby Arrangement subject to the policies of the IMF. Standby Arrangements are mostly used for the middle income or advanced countries since lower income countries can be supported by the concessional instruments that are designed upon their special needs.

Regarding the multilateral trading system pillars of the Bretton Woods structure, Turkey became a GATT signatory state on 17 October 1951. Since then, Turkey has been actively involved within the multilateral trading system.

Basics and Functioning of the Multilateral Trading System

Upon the failure of the ITO initiative, the GATT 1947 constituted the main nominator of establishing a strong and responsive multilateral trading system. It took concrete steps on making the multilateral trade freer via numerous negotiation rounds.

The years when negotiations on non-tariff restrictions became the main topic along with the tariffs were mid1970s. These years were the scene of the slowing down of the world economy. The fundamental reasons of this economic slowdown were the oil crises and collapse of the Bretton Woods monetary system.

The oil crises of mid-1970s was an outcome of the oil supply shortage driven by the oil exporting countries (OPEC). It led to an increased inflation, high unemployment and stock market crashes within almost all countries. Essentially, the oil crises prevailed during 1967 and 1979 but the most effective one began in 1973 with the embargo of the Arab oil producers.

In the Bretton Woods monetary system, countries settled their international balances in US dollars and the US dollar was convertible to gold at a fixed exchange rate, ISL351U-FOREIGN TRADE Chapter 6: Multilateral Trading System and Economic Integrations 2 referring to 35 US dollars to 1 ounce gold. Thus, the convertibility of the national currencies and gold was achieved. It was the responsibility of the US to keep the price of gold fixed.

Countries witnessing the negative effects of the oil crises and the collapse of the Bretton Woods monetary system began to restrict their international trade.

Another remarkable point on the GATT negotiations is the increase within the number of participating countries.

Multilateral trading system conducted by the WTO might be persumed as a quite confusing system dealing with pages long legal texts, numerous trade deals, tough negotiations with one hundred sixty-four member countries which are not similar in economic terms.

Essentially, the multilateral trading system is run by five basic principles. These are free trade without discrimination principle, free trade principle, predictability principle, promoting fair competition principle and encouraging economic development and reform principle.

The Generalized System of Preferences (GSP) was instituted under the auspices of the United Nations Conference on Trade and Development (UNCTAD) in 1971. The GSP has been contributing to create a facilitating and encouraging trading environment for the least developed and developing countries for years. Today, there are thirteen countries that grant preferential access to their markets via implementing the GSP. These countries are Australia, Belarus, Canada, European Union, Iceland, Japan, Kazakhistan, New Zealand, Norway, Russia, Switzerland, Turkey and the US.

Fair competition can be distorted by dumping and subsidies. Dumping happens when a commodity is sold at a price less than its normal value at the foreign market. In other words, there is dumping when a commodity is exported with a price that is lower than its production cost. Subsidies are usually classified under two groups: Export subsidies and domestic subsidies. Export subsidies are subsidies that are given to an exporting firm by the government. Domestic subsidies do not require a contingency on exportation.

Promoting Fair Competition Principle helps in avoiding unfair anti-dumping duties and countervailing duties. Anti-dumping duty is a country exposed to dumping can charge an antidumping duty from the exporter country in order to compensate its loss. Countervailing duty is a country that is exposed to an export subsidy can charge a countervailing duty from the exporter country in order to compensate its loss.

The Fundamentals and Structure of the WTO

The WTO was established on 1 January 2005 upon the decisions taken at the Uruguay Round. The WTO is an international organization that deals with the multilateral trading system and its rules. The WTO operates as the successor of the GATT without terminating its existence.

The fundamentals of the WTO can briefly be examined under four subtitles; setting multilateral trading rules, trade negotiations, WTO aggrements and building trade capacity.

Red tape is a term that refers to the excessive bureaucratic requirements and implementations of the countries.

Zero hunger goal is the second goal of the United Nations Sustainable Development Goals: In order to end hunger, food security has to be achieved, nutrition has to be improved and sustainable agriculture has to be promoted in order to end hunger.

The structure of the WTO is based on five pillars. The first pillar, trade in commodities, has been the founding framework of the multilateral trading system. As explained before, the GATT signed in 1947 has been the fundamental basis of the multilateral trading system in commodities.

Trade in services, which is the second pillar of the structure of the WTO, was not a subject of the GATT 1947. It is regulated by the GATS (General Agreement on Services Trade) within the structure of the WTO.

Third pillar of the structure of the WTO is the TRIPS (Trade Related Aspects of Intellectual Property Rights). It is the most comprehensive agreement on intellectual property rights. Intellectual property rights are the rights that are given to people for the creations or innovations of their minds. TRIPS covers: (1) copyright and related rights such as performers’ rights, producers of recordings and broadcasting set ups, (2) trademarks, (3) geographical indications, (4) industrial designs, (5) patents, (6) layout designs of integrated circuits, (7) undisclosed information.

Fourth pillar of the structure of the WTO is the Trade Related Dispute Settlement. It usually refers to one of the most important innovations of the Uruguay Round.

The fifth and the last pillar of the structure of the WTO is the Trade Monitoring. Trade Monitoring is achieved by the Trade Policy Review Mechanism. The aim of the Trade Policy Review Mechanism is to assist efficient adherence of all the WTO member countries to the rules and procedures of the WTO as a whole.

Economic Integrations Within the Multilateral Trading System

The world economy has been witnessing a remarkable increase within the establishment of economic integrations. This rapid increase of the economic integrations within the current multilateral system has been leading to enthusiastic discussions.

When countries come together and form economic collaborations, they may decide to go beyond a simple economic cooperation and pool their economic resources to get the benefits of an integrated economy.

We can illustrate the stages or types of economic integration like a pyramid. At the bottom of the economic integrations pyramid, there is the preferential trade agreement, referring to the first stage of economic integration. Preferential trade agreement is the loosest type of economic integration in which the areas that require common decisions and implementation of the participant countries are minimum.

The next stage within the economic integration is the free trade area. In a free trade area, member countries abolish all trade restrictions on each other’s commodities but continue to implement their own trade policies to the countries that are outside the free trade area.

The third stage/type of economic integration is customs union. Member countries of a customs union abolish all trade restrictions among themselves and implement a common external trade policy toward the third countries. Moreover, the customs union member countries act together as a single entity during the negotiation and conclusion of trade agreements with other countries (third countries).

The fourth stage/type of economic integration is common market. All trade restrictions are abolished among member countries. In addition to the free movement of goods, free movement of services, labor and capital are also achieved.

The last stage/type of economic integration process is the economic and monetary union. Certainly, it is the most comprehensive type of economic integration. Economic and monetary union encompasses all the features of the common market and goes further to unify of all the economic institutions.

Theory of economic integration analyzes the economic effects of economic integrations. Theory of economic integration is developed upon the welfare effects of customs union.

Static effects of customs union are called trade creation and trade diversion. Trade creation occurs when traded commodity is shifted from the highest cost domestic producer to the lowest cost customs union member country.

Trade diversion occurs when traded commodity is shifted from the lowest cost country that is out of the customs union (third country) to the relatively higher cost customs union member country.

Dynamic effects are long run effects. They arise due to increased competition within the customs union, higher level of technology, economies of scale, induce to foreign direct investments and better allocation of economic resources.

Certainly, the most adequate example of economic integrations within the multilateral trading system is the European Union (EU).