The Effect of GATT/WTO on the Formation of Preferential Trading Agreements - Term Paper Example

REVIEW: MULTILATERAL DETERMINANTS OF REGIONALISM, THE EFFECT OF GATT/WTO ON THE FORMATION OF PREFERRENTIAL TRADING AGREEMENTS INTRODUCTION The World has made efforts to unite the economies of the world into a common entity, with a view to ensuring that there is a common set of objectives and policies thereby ensuring free and fair trade practices by all members. Most importantly, the motive behind the formation of these organizations is to ensure that no distinction is made towards any member regardless of their attributes. However, it has been seen that most of the objective and ideals on which these organizations have been established have not been achieved and have instead gone towards a deviant path that is working against the common baseline of these organizations. The organizations being referred to here are the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), which was formed subsequently. Though the prime motive behind the formation of these groups was to prevent any form of discrimination among member nations, it is being witnessed that this is not being followed in practice. In fact, existing imbalances on a regional basis have driven nations to form Preferential Trading Arrangements (PTAs) that has been the trend since the past half century. During the same period, it has also been witnessed that there has been a major growth in the degree of multilateral openness within the above organizations. The question being asked by the authors of the paper Mansfield and Reinhardt is as to why nations have relied on preferential liberalization when the prime objective of the above organizations has been to advocate non-discrimination. Additionally, the authors have also performed requisite theoretical and mathematical analysis to determine the various factors that have led to such deviations, which forms a substantial part of the paper currently under review. The major aim of the current review is to analyze the findings, claims and arguments of this paper and to determine the extent to which these claims are justified. On the backdrop of such analysis, the paper attempts to provide a suitable set of recommendations on the basis of which further analysis may be initiated. 2. SUMMARY The authors, by way of the paper, have identified that the international trading system has witnessed a rapid increase in the formation of numerous Preferential Trading Agreements (PTAs). Moreover, the authors have also expressed agreement over the fact that there has been an increased multilateral openness by way of the formation of the GATT and the WTO. However, the authors have expressed that little research has been done for determining how and due to which reasons the multilateral regime has helped in the conception and formation of PTAs by the members of these organizations themselves. The paper claims that the prime reason behind nations preferring for the formation of PTAs is to enhance their bargaining power. The formation of these agreements is perceived as providing the member nations with an opportunity to help them gain strength against any future policies of the GATT/WTO that may not go well with the economic interests of the member states. Moreover, the presence of PTAs provides the member nation with extra muscle that would help it in being more vocal and provide an opportunity to the member for greater market power and share. The authors argue that the past few years has seen a major increase in the number of members of these organizations, thereby making it more and more difficult to allow the organizations to allow at multilateral agreements and hope for any sort of collective actions. In this backdrop, the authors state positively that the formation of PTAs also helps members with similar vested economic interests in solving common problems and achieving common objectives. In this backdrop, the authors argue that the prime reason for the rise and formation of these preferential agreements is the existence of the GATT/WTO themselves. In addition to the above points, the authors also argue that one of the main reasons that drives member states to form Preferential Trade Agreements is the fact that the determinants behind the formation of an open global trading system (that form the basis for the periodic multilateral trade negotiations (MTNs) under GATT/WTO) prompt nations to enter into PTAs with other nations so as to provide themselves with an alternative arrangement in case the talks do not proceed ahead and also provides the member with additional bargaining power that could help it in gaining more leverage out of the talks. The authors have also claimed that countries resort to the formation of PTAs by choosing members depending on existing trade disputes with any member states, in which case, a PTA is also used a primary tool to gain more leverage over conflicting members. The major claims and arguments by the authors that identify the reasons behind the formation of these PTAs are as listed below: Due to the numerous and time-consuming trade negotiations between states, which force a member to prefer the formation of PTAs so as to enable its use in the case of success or failure of these negotiations. To provide with the additional leverage that is felt necessary by member states as reaching at common decisions is proving increasingly difficult by the GATT/WTO as a result of an increase in the membership. To provide themselves with an alternative, member states resort to PTAs in the case where trade negotiations fall out. The efforts of the GATT/WTO on liberalization of foreign trade have had other unforeseen consequences such as the ones listed above. The extent to which the claims are justified shall be described below: 3. CRITIQUE As is well known, the reasons behind the formation of the GATT/WTO were to ensure the fulfillment of two major issues that had been facing the world economy until then. The first objective was to provide nations a common platform that would help member states communicate and form trade relationships with one another. Secondly, these organizations were also supposed to act as coordinators in solving trade disputed among members. In this scenario, a PTA is regarded by the authors as going against the nondiscriminatory nature of the GATT/WTO. However, the analysis, though using theoretical and statistical analysis, has largely concentrated on analyzing from within the perspective of the member states, when it should have been from the viewpoint of the organizations under question. The reason behind this argument is that the factors that have been identified for the formation of PTAs suggest that the formation is as a result of a member's individual objectives and preferences and suggests that in spite of the efforts of organizations of the GATT/WTO, their success depends on how every member nations perceives it with a sense of commitment and seriousness. Most importantly, the formation of these PTAs demonstrates the level of belief that these members have in the working ad policies of the world bodies. Secondly, the paper has claimed that the addition of more members to the multilateral trade regimes reduces the chance of leveraging for every member within the MTN. it reduces the amount of benefits that each member nation stands to gain out of the negotiations. However, this claim seems a bit absurd from the0 members' standpoint in that the reason for a nation to come to the negotiating table is not to gain everything that is perceived as lucrative. Instead, the intended motive and logic behind any negotiation is to clear any existing hurdles and shortcomings so as to provide for common objectives that are perceived as agreeable by mutual parties. As such, the claim that the addition of more members reduces the leverage of a member does not go down well. Instead, if the member prefers to gain more out of negotiations and is not concerned with the objectives of the other members, then it should never resort to 'negotiations' in the first place and should instead concentrate its efforts solely on the formation of PTAs. The formation of groups within a major world body is certainly acceptable and in fact, such groups should exist based on a number of driving factors. As such, the paper's argument that nations might prefer forming smaller sub-groups with members of similar economic interests is quite significant. Therefore, the argument and its subsequent claim that nations use it to gain more advantage than what the world bodies can offer are agreed upon. Moreover, it is accepted that PTAs help provide member states facilitate the creation of additional options in the case of failure of trade negotiations. However, one major point that has not been concentrated upon by authors while discussing this aspect has been the fact that nations have also been using PTAs to threaten members during negotiations by projecting them as alternatives that would enable them to gain the intended objectives whatsoever. For example, a member nation could form a regional PTA that could help the nation resort to making demands instead of negotiating with other members. In such an instance, the intended objective of the world bodies for free and fair negotiations is absolutely lost. However, in spite of these deficiencies, the authors have been largely convincing in their argument on the fact that the GATT/WTO have achieved little all along and that many of the trade and economic disputes remain to this day, so much so that many of the nations, especially from the third world have lost confidence in them. as such, potential members have not favored joining them and have instead resorts to forming PTAs or individual trade agreements with other nations. One of the prominent examples in this regard has been that the WTO has failed in its attempt to convince the European Union in reducing its subsidies to its Agricultural Sector, thereby helping label the WTO as the club for the richer nations. Moreover, despite the knowledge of existence of these PTAs, the world bodies have turned a blind eye to them and have by far remained unconcerned about these individual agreements and their impact on future working. The paper has also claimed that almost any nation has always resorted to the formation of bilateral as well as multilateral trade agreements. Moreover, the paper has also claimed that the formation of PTAs and their co-existence with multilateral trade agreements is the preferred choice of most nations. The reasons for these preferences, as the paper describes, have got to do with the internal political situation as well as the size of the country under question. This is true to the fact that such trade agreements are usually extended to nations that enjoy stable and mostly democratic form of governments and the size of the nation's economy determines the extent to which it would require the formation of regional PTAs. One of the major deficiencies that is witnessed in the paper is the fact that though the paper has talked a lot on the formation of PTAs and bilateral agreements among nations especially among nations within a particular region, it is also evident that not much has been discussed on the factors that influence the formation of these partnerships. The fact that is being highlighted here is that the reasons for formation have got to do much more than the economic interests. In reality, a number of factors other than economic considerations, such as the political and security scenario among the parties under question play a critical role in the forging of such alliances and agreements. However, not much has been discussed in the paper and instead it has chosen to analyze using a majority of economic considerations. 4. RECOMMENDATIONS It is no doubt that the performance of the GATT/WTO has not satisfied many nations and the extended time spent in negotiations among members has left many to turn towards other options such as PTAs. As such, it is recommended that in addition to concentrating on elucidating the determinants that drive member nations to form PTAs, it is also necessary to examine the policies and performance of these member nations in greater detail so as to be able to analyze the question from both the perspectives of the members as well as the governing bodies under question. It is also necessary to study some of the major PTAs that have been formed so far so as to be able to determine the reasons and conditions behind the formation of these alliances. With adequate research, it would be possible to determine whether these individual PTAs were formed as a result of discontent or due to a sense of a greater need for cooperation. It is also interesting to determine in this regard as to why some of the PTAs themselves have not been able to fulfill their intended objectives to their fullest capabilities, while other have been able to do so without much hassles. As research on the current topic has been quite less, it is also advocated that some research be directed on analyzing the various factors that determine the level of influence being played by members in the GATT/WTO. Good examples in this regard could be the role played by the richer nations in shaping the policies of these institutions and how well has it gone with the countries of regions such as Africa. It is also deemed necessary to investigate the impact of allowing new members to join these organizations and the level to which the dynamics of the working of these organizations has changes over the course of such inclusions also needs to be properly investigated. It can therefore be seen that the paper under review is one of the first of its kinds and has made a good beginning to answer many of the factors that have come to influence the formation of PTAs. However, it has also come to note that a number of points that could well have worked towards answering the desired questions in a more detailed fashion have not been considered or were never thought upon during research. As such, the onus lies on future research to take it from where this paper has left and answer the questions that have been raised as part of the critique and recommendations sections. BIBLIOGRAPHY 1) Rodriguez Mendoza, Patrick Low, Barbara Kotschwar (1999), Trade Rules in the Making: Challenges in Regional and Multilateral Negotiations. New York: Brookings. 2) Jeffrey J. Schott (2000), WTO 2000: setting the course for world trade. Peterson Institute. 3) J. S. L. McCombie, Philip Arestis, Michelle Baddeley (2003), Globalization, Regionalism and Economic Activity. London: Edwar Elgar. 4) Takatoshi Ito, Anne O. Krueger (1997), Regionalism versus Multilateral Trade Arrangements. University of Chicago. Read More