|Overview of Trade|
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|Why Do Countries Trade?|
International trade occurs when countries buy products and services from each other. Countries trade for the very same reasons as individuals that engage in market activities: to garner the benefits of specialisation, to benefit from the effects of competition, and to expand their range of choice. Just as it does not make sense for every individual to try to grow all of his or her nutritional requirements in his or her own back yard, it is not desirable for each country to produce the entire range of goods demanded by consumers at home. Just as individuals do better by concentrating their skills and specialising in some activity -- working as a baker, a teacher, a lawyer, a truck driver—and using the salaries gained from this activity to buy food, clothing, shelter and other goods and services, countries gain by specialising in the production of that range of goods and services that they are best at producing or providing. By specialising in the production of particular goods and services, firms within a country can produce efficiently, and trade their surplus for goods and services from other countries. Countries engage in international trade because there are gains to be realised. These gains take the form of greater product variety, lower prices, higher quality, increased spread of technology and increased consumption by the country as a whole. Increased trade openness has been linked to increased GDP growth. Several studies have supported the assertion that more open economies grow more and that an increase in openness accompanies an increase in GDP/per capita.
Everyone is affected by international trade—as consumers, as workers, and through the impact international trade has on the country as a whole. International trade increases the quality and abundance of consumer goods, lowers prices and creates new jobs. Any trade liberalisation will result in winners and losers. Increased international trade will benefit producers of exportable goods and the workers employed in those industries, as well as consumers who are able to purchase goods and services at lower prices. Opening to trade will negatively affect domestic producers and workers engaged in the production of goods that are displaced by imports, particularly those that had previously benefited from trade protection. The challenge of policymakers is to assist those who lose from trade liberalisation to adjust to the new realities, while assisting businesses and workers to take advantage of the opportunities of international trade.
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|Trade, Growth and Poverty|
How important is trade for poverty reduction? Can trade liberalisation promote growth? Is this growth pro-poor?
These questions have been widely analysed in policy and academic circles for many decades. Twenty years ago, proponents of change and reform argued that trade liberalisation would promote growth and thereby poverty reduction, if accompanied by a number of other domestic reforms. As developing countries advanced in the implementation of trade liberalising policies, academics revisited the debate. Most agreed that although there had been substantial trade liberalisation in the last 20 years, growth had not been as strong as expected in some cases. A large variety of explanations were proposed.
In a 2003 essay titled Trade, Growth and Poverty: A Selective Survey , Anne Krueger and Andrew Berg conducted a selective literature review that surveyed recent contributions to the debate and concluded that:
"Evidence from a variety of sources... supports the view that trade openness contributes greatly to growth. Moreover, trade openness does not have systematic effects on the poor beyond its effect on overall growth. Trade policy is only one of many determinants of growth and poverty reduction."In The LDC Report 2004: Linking International Trade with Poverty Reduction , UNCTAD argues that indeed trade can play a powerful role in reducing poverty in LDCs and other developing countries. But the report also stressed that the national and international policies that can facilitate this must be rooted in a "development-driven approach" to trade rather than a "trade-driven approach" to development. A similar approach is followed in the UNDP sponsored publication by Making Global Trade Work for People .
Other researchers have tried to assess the potential impact on poverty of further trade liberalisation at the multilateral and regional level. William Cline presented his findings in Trade, Growth, and Poverty Reduction . In Trade and Poverty in Latin America published in 2008 , Paolo Giordano and his colleagues at the Inter-American Development Bank approached the same topic from a hemispheric perspective. Their main conclusion is that “preexisting policies and socioeconomic conditions play a key role in determining how trade integration affects poverty. Because transmission channels are complex and highly contextualized, policy makers are urged to adopt complementary policies tailored to their countries’ circumstances in order to ensure an equitable distribution of the qains from trade.” Guillermo Perry and Marcelo Olarreaga (2007), in their paper entitled" Trade Liberalization, Inequality and Poverty Reduction in Latin America " also address the issue of complementary policies. In their 2002 publication on Trade Liberalization and Poverty: A Handbook , Neil MCulloch, L. Allan Winters and Xavier Cirera had also emphasized that although "trade liberalization ultimately helps poverty alleviating by stimulating growth, (…) it needs complementary policies in areas such as transport, education, and financial services to ensure that the poor benefit".
The relationship between trade, growth and poverty reduction has also been analysed within the context of the Caribbean. In a study published jointly by the World Bank and the Organization of American States in April 2009 and entitled Caribbean: Accelerating Trade Integration the authors discuss policy options for sustained growth, job creation and poverty reduction. Moreover, in two studies published by the World Bank in 2005 and entitled A Time to Choose: Caribbean Development in the 21st Century and Organization of Eastern Caribbean States: Towards a New Agenda for Growth the nexus between trade and poverty is also discussed. Janet Stotsky, Esther Suss, and Stephen Tokarick also approach the topic at regional level in Trade Liberalisation in the Caribbean. Jamaica's experience with trade liberalisation is covered by Michael Witter in Trade Liberalisation: The Jamaican Experience, and the UNCTAD/UNDP's study Jamaica: Globalisation, Liberalisation and Sustainable Human Development . In a report to the UN Security Council in January 2009, the economist Paul Collier highlights the importance of international trade on reducing poverty in Haiti .
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|What Is Trade Policy?|
Trade policy encompasses all the tools that governments may use to encourage or restrict imports and exports. These can take the form of tariffs (taxes collected on imported goods), quotas (limitations on the quantity of goods allowed to be imported), and voluntary export restraints (restrictions set by the exporting government on the quantity to be sold to a foreign country). Domestic regulations, such as mandatory health and safety standards, can also serve as trade policy tools, if they are utilised to prevent or encourage goods or services to be brought into the domestic economy. Subsidies, payments by the government to encourage the production of certain products, can be considered trade policy tools, particularly if directed at encouraging exports.
Trade policy also includes the approach taken in trade negotiations. In participating in the multilateral trading system and/or negotiating bilateral trade agreements, countries assume obligations that will become part of and shape their national trade policies.
Throughout the twentieth century, the trade policy debate has been characterised by the opposition between proponents of protectionist and liberal approaches. While the former argued that a country would be better off if the government erected high cost barriers to foreign products seeking to compete in the domestic market in order to increase or maintain domestic production; the latter camp countered that government intervention would lead to higher prices for consumers, rent-seeking by domestic producers, and high inefficiencies due to low competition - particularly in smaller economies.
Most economists agree that, given the constraints of the political process, working towards free trade remains the best “rule of thumb” approach to trade policy. Much research has supported the assertion that more open economies experience a higher rate of growth. It is recognised that open trade policy is not sufficient to foster or sustain growth, ensure a welfare-enhancing distribution of the benefits of growth, however, it must work in tandem with other economic policies in order to accomplish these goals.
Throughout the latter years of the twentieth century and into the twenty-first century, most countries in the Americas have followed trade liberalising policies. For example, tariffs in Latin America have fallen from an average of 40 percent in the mid-1980s to about 12 percent in the mid-1990s. Unilateral tariff reductions have been complemented by participation in regional integration initiatives, including the establishment of free trade agreements and customs unions and the revamping of existing agreements, such as, for example, the revision of the CARICOM Treaty of Chaguaramas.
For more information see WTO Trade Policy Reviews and Government Reports to the WTO:Antigua and BarbudaFor more information CARICOM Members’ Trade Profiles:
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|Instruments of Trade Policy|
Classic instruments of trade policy include tariffs and quantitative restrictions. Trade negotiations, both at the multilateral level and through regional and bilateral trade agreements, have traditionally focused on eliminating tariffs and non-tariff barriers to trade. This section will explain some of these basic instruments of trade policy and their impact.
Classic trade policy instruments include:
Tariffs: A tariff is a tax on imported goods. Three main types of tariffs are:
ad valorem tariff: this is the simplest and most frequently used tariff type, under which the rate is expressed as a percentage of the value of the goods. For example, a tariff of 6% of the value of milk is an ad valorem tariff of 6 per cent of milk imports.The effect of a tariff is to raise the price of imported goods, thus making them generally less competitive within the market of the importing country.
Tariffs also have the effect of raising the price of domestically produced goods. This is due to the fact that when a tariff is imposed, the foreign-produced good is more expensive, so consumers will buy the domestically-produced good (assuming that the goods are the same, or homogeneous). The extra demand for the domestically-produced good will allow domestic producers to raise their output and prices to the market-clearing price (the price at which consumers are willing to buy and producers are willing to sell).
Tariffs can be used to accomplish various trade policy goals. The main goals are
The imposition or removal of a tariff has an impact on consumers, producers, the government and the country as a whole. For a simplified analysis of the impact of a tariff, we will look only at the importing country and assume that it is a small country (that is, that it cannot affect the price of a good by buying or selling that good on the world market). The supply and demand curves for the importing country are shown in the diagram below. The diagram illustrates the impact of imposing a tariff.
In a free trade situation, the country is consuming QD0 units at a price of P0, the world free-trade price (represented by the blue price line, PFT. At this price, domestic producers sell QS0 worth of the good, and QD0 -QS0 is purchased from the other country, or imported. The large blue bracket underneath the graph represents the amount of imports in free trade. When a tariff of t is imposed, the price goes up by the amount of the tariff. At the new price, P1-- the free-trade price plus the amount of the tariff, represented in red, consumers will reduce their consumption of the good to QD1. Domestic producers see a higher profit level, and increase their production to QS1. Imports fall to the level represented by the red bracket, which is the difference between QD1 and QS1.
The impacts of the tariff: As seen in the graph, the tariff will change the consumption patterns on consumers and the production patterns of firms. The overall effects of this tariff are:
Consumers: Consumers of the product in the importing country suffer a reduction in well-being as a result of the tariff, which increases the price of the good they previously purchased at price line P0. The increase in the domestic price of both imported goods and the domestic substitutes reduces the amount of consumer surplus in the market. Consumer surplus basically means the difference between what the consumer is willing to pay for a commodity and the amount he/she actually is required to pay. In this case, looking at the graph, consumers lose the entire area (a+b+c+d).Tariffs, particularly in the developed countries, have been significantly reduced through unilateral tariff cuts, eight rounds of tariff elimination at the multilateral level through the GATT and then the WTO, and regional and bilateral trade agreements. While many tariffs are now quite low, some products considered sensitive continue to have very high tariffs. These are known as "tariff peaks".
Another phenomenon of note, one that particularly impacts developing countries, is that of tariff escalation. Tariff escalation occurs when a tariff on a product increases as that product moves through the value-added chain. Low tariffs are set on primary goods with higher tariffs on finished products. An example would be a five percent tariff on soybeans and a ten percent tariff on soy oil. This type of a tariff structure serves to protect domestic industry by allowing the import of basic raw materials tariff-free or at low rates, but with higher rates of protection on the results of value-adding processes.
Quotas: Another trade policy tool that can be used to manage the level of imports is an import quota. Import quotas are limits on the quantity of goods that can be imported into a country during a given time. In order to restrict imports, import quotas are typically set below the free trade level of imports. This is referred to as a binding quota; a non-binding quota is a quota that is set at or above the free trade level of imports, thus having little effect on trade. There are two main types of quotas: absolute quotas and tariff-rate quotas.
Absolute quotas limit the quantity of imports to a specified level during a specified period of time. Sometimes these quotas are set globally and thus affect all imports while sometimes they are set only against specified countries. Absolute quotas are generally administered on a first-come first-served basis.The impact of a quota:
The welfare effects of quotas are similar to that of tariffs: if a quota is set below free trade level, the amount of imports will be reduced. A reduction in imports will lower the supply of the good on the domestic market and raise the domestic price. Domestic price will rise to the level where import demand meets the value of the quota.
Consumers - Consumers of the product in the importing country will be worse-off as a result of the quota, as they were with the tariff. The increase in the domestic price of both imported goods and the domestic substitutes reduces consumer surplus in the market.
Producers - Producers in the importing country are better-off as a result of the quota. The increase in the price of their product increases producer surplus in the industry. The price increase also induces an increase in output of existing firms (and perhaps the addition of new firms), an increase in employment, and an increase in profit and/or payments to fixed costs.
The quota case differs from the tariff case, in that box C does not automatically go to the government. It goes to the holder of the quota. The distribution of the quota rents depends on how the quota is administered.
There are several possibilities:
Voluntary Export Restraints (VERs):
A voluntary export restraint is an agreement among two governments to set a limit on the quantity of goods that can be exported out of a country during a specified period of time. VERs establish a type of informal quota on exports that is enforced by the country that is voluntarily restraining their exports. VERs may arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints imposed by the importer.
VERs cause, as do tariffs and quotas, domestic prices to rise and cause a loss of domestic consumer surplus.
The WTO Agreement on Safeguards made new arrangements illegal and all those in existence on January 1, 1995 when the WTO was established, had to be phased out within five years.
Export Taxes: An export tax is a tax collected on exported goods As with tariffs, export taxes can be set on a specific or an ad valorem basis. A tax on exports will serve to reduce the flow of goods across the border, raising the price of exporting a good.
Export Subsidies are payments made by the government to encourage the export of specified products or services. As with taxes, subsidies can be levied on a specific or ad valorem basis. The most common product groups where export subsidies are applied are agricultural and dairy products. Export subsidies on agricultural products are often motivated by national security or self-sufficiency considerations. A common method for applying export subsidies is the imposition of price floors on specified commodities.
Other Trade Policy Tools: Structural reform programs undertaken over the past several decades have diminished the worldwide importance of classical trade policy tools such as tariffs and quotas and led commercial policy to focus much more on the direct and indirect impacts of domestic regulatory regimes on international trade and investment flows. Some of these new policy tools are as follows:
Government Procurement PoliciesAdditional reading on the instruments of trade:
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Trade agreements are binding legal instruments among countries that regulate specific aspects of their trading relations. Agreements may be between two partners (bilateral agreements), or among several countries (multilateral agreements). The term "multilateral trade agreement" generally refers to the legal architecture of the world trading system (the GATT and its successor, the WTO agreement), which encompass nearly all countries in the world. This framework also contains a few so-called "plurilateral" agreements, such as the Agreement on Government Procurement, in which not all members participate. Regional trade agreements are those whose members belong to a particular geographic region, such as the European Union, the Southern African Customs Union (SACU), the Andean Community, or the Caribbean Community (CARICOM).
Trade agreements are negotiated and then signed by the parties. To be legally binding, trade agreements, protocols and - sometimes - resolutions must be incorporated into domestic law through each country's domestic procedures. In most countries with presidential political regimes, the executive negotiates and signs agreements which are then approved by a vote in Congress.
In addition to differing in terms of the membership, trade agreements also differ in scope. Partial preferential agreements aim to liberalise trade in a limited number of goods, often reducing tariffs in specific sectors or eliminating tariffs on an agreed-upon list of goods. Unlike free trade agreements, the aim is not to eliminate tariffs on the entire universe of goods. Free Trade Agreements aim for the elimination of tariffs (although they may have specifically-negotiated exceptions) and other barriers to trade and investment. Custom Unions aim for a deeper level of integration, adding the establishment of a common external tariff (CET) to the free trade area and harmonising members' trade policy. In other words not only are internal tariffs removed, but countries also adopt the same tariff rates for products originating in non-member countries. Customs Unions, such as CARICOM and MERCOSUR negotiate external trade agreements jointly. Common markets take integration a further step, adding the liberalisation of the movement of people and capital across borders. Both custom unions and common market agreements involve a greater degree of legislative complexity than do free trade agreements, including in many cases a Secretariat, promulgation and implementation of common legislation (protocols and resolutions of technical bodies) and a larger degree of policy harmonisation among parties.
Free Trade Agreements - FTAs*
Countries in the Americas have varied in their approach to trade integration. During the second half of the twentieth century, the United States traditionally took a multilateralist stance, eschewing bilateral and regional trade agreements in favour of liberalising through the GATT/WTO. The few exceptions to this were the 1965 Auto Pact with Canada; the 1985 US-Israel FTA and, in 1989, the Canada-US FTA (CUSFTA) and the subsequent 1994 North American Free Trade Agreement (NAFTA). This stance has changed, and in the first few years of the twenty first century, the United States has signed free trade agreements with various trading partners including, within the Americas, Chile, the Central American countries and the Dominican Republic, Peru, Colombia, and Panama (the last two have yet to be approved by the US Congress). Latin American and Caribbean countries were early participants in regional integration arrangements, with several customs unions (the Andean Pact, CARICOM, the Central American Common Market) in existence since the 1960s and early 1970s, as well as a regional Latin American initiative towards a Latin American Free Trade Area (LAFTA). These early trade agreements tended to follow the principles of import substitution industrialisation (ISI), eliminating trade barriers among the members, but erecting high barriers to trade with the rest of the world.
In the 1980s, policies towards trade began to change as countries unilaterally liberalised their trade regimes. They also began to engage in more -- and more complex-- trade liberalising agreements with their trading partners. The LAFTA evolved into the Latin American Integration Association, or ALADI, an umbrella framework for conducting trade agreements among members. These ALADI economic complementation agreements (Acuerdos de Complementación Económica), which differ dramatically from the traditional protectionist trade agreements of the 1960s and 1970s, are often comprehensive free trade agreements. A new customs union, the MERCOSUR, was formed in 1995, and already existing customs unions reformed their approach: in 1997 the Andean Pact evolved into the Andean Community and the CARICOM underwent a rejuvenation with the revised treaty of Chaguaramas.
Starting in the early 1990s, Latin American countries signed a record number of trade agreements, most of the free trade agreements that complemented their unilateral trade opening measures by creating legal obligations to eliminate tariffs vis-à-vis their trading partners. Up to the late 1980s, free trade agreements aimed mostly at the elimination of tariffs and other at-the-border measures. One example of an early FTAs is the US-Israel FTA which contains a short main body, the tariff schedules of each country, and a side declaration on trade in services. With the completion of the Uruguay Round and the launching of a much more comprehensive multilateral trade agreement, and as countries in the Americas began to adopt trade liberalisation as part of their economic development strategy, the scope of trade agreements became more far-reaching. The Canada-US FTA (CUSFTA) and the North American Free Trade Agreement (NAFTA) revolutionised the scope of free trade agreements, including, in addition to the market access component, provisions that cover trade in services, regulate trade remedies, and cover traditional "domestic policy areas" such as investment, intellectual property rights, government procurement, labour, and the environment. Recent free trade agreements, such as the US-Dominican Republic-Central America Free Trade Agreement (CAFTA), for example, sometimes even include language on corruption, transparency and gender issues.
In a further step towards hemispheric trade liberalisation, thirty-four countries in the Americas undertook, at the Summit of the Americas in 1994, steps to negotiate the Free Trade Area of the Americas (FTAA). The FTAA would aim to eliminate barriers to trade and investment within the Americas.
SICE's database of trade agreements. List and text of all trade agreements involving countries in the Western Hemisphere.
(This section draws extensively on UNCTAD's Website section: "About GSP")
Unilateral Preferential Schemes provide selected products originating in developing countries reduced or zero tariff rates over the Most Favoured Nation rates. Oftentimes, the least developed countries (LDCs) receive even wider coverage of products and deeper tariff cuts. The origin requirement ensures that only the goods produced in a beneficiary country benefit from the preferences, and not ones that have undergone minimal industrial processing. Preferential schemes enjoy extensive product coverage which includes most agricultural and industrial exports but a few and often notable exceptions remain. Preferential schemes are renewed periodically. It is often the case that at each revision, the preferential margins, product coverage and related features have been improved by the preference-giving countries. However, the existence of a renewal requirement introduces an element of uncertainty that might affect investment decisions.
The idea of granting developing countries preferential tariff rates in the markets of industrialised countries was originally presented by then-Secretary General Raúl Prebisch at the first UNCTAD conference in 1964. His argument was that trade on a Most Favoured Nation (MFN) basis ignored unequal economic realities among trading nations. Differences in terms of stages of development, , factor endowments, size of markets, efficiency and diversification of production structures between developing and developed ones called for policies to address those imbalances. Thus a number of unilateral preferential schemes were granted with the objective of increasing export earnings, promoting industrialisation; and accelerating rates of economic growth of the recipient economies.
The beneficiaries of non-reciprocal preferential schemes have to meet certain requirements in order to be designated as such and to maintain beneficiary status. Eligibility criteria differ among the different schemes.
Adopted at the second UNCTAD Conference in New Delhi in 1968, the Generalised System of Preferences (GSP) is an umbrella that comprises the bulk of preferential schemes granted by industrialised nations. In 2009 there were 11 national GSP schemes notified to the UNCTAD secretariat (these GSP schemes are granted by Australia, Belarus, Canada, the European Community, Japan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America). Though the GSP is a generalised, non-reciprocal system of preferences, it nonetheless allows special measures in favour of the least advanced among the developing countries. Thus, countries may grant MFN tariff rates to GATT Contracting Parties, GSP tariffs to a given group of developing countries, and a special GSP (SGSP) tariff to less developed countries. The tariff equation in mathematical terms would thus be: MFNt > GSPt > SGSPt
The U.S. Generalized System of Preferences (GSP), a program designed to promote economic growth in the developing world, provides preferential duty-free entry for about 4,900 products from 132 designated beneficiary countries and territories. The GSP program was instituted on Jan. 1, 1976, and authorized under the Trade Act of 1974 for a 10-year period. The GSP Program is currently authorized through December 31, 2009.
Canada grants unilateral preferential tariff treatment under the General Preferential Tariff (GPT), the Least-Developed Country Tariff (LDCT), and the Commonwealth Caribbean Country Tariff (CARIBCAN). The GPT provides tariff preferences for most developing countries. Dairy products, poultry, eggs, refined sugar, and most textiles, clothing, and footwear are not eligible for preferential tariff treatment. Around 67% of tariff lines benefit from duty-free treatment under the GPT. The simple average tariff under the GPT was 5.2% in 2006, roughly the same as in 2002. The GPT has been extended until June 2014. The LDCT provides duty-free access for imports from the least developed countries (including Haiti), as defined by the United Nations, except Myanmar. Following the expansion of the LDCT in January 2003, close to 99% of tariff lines are eligible for duty-free treatment. The remaining 1% is subject to average tariffs of around 224% and covers out-of-quota tariffs on dairy, poultry, and egg products, which have been excluded from preferential treatment under the LDCT. The simple average tariff under the LDCT was 2.5% in 2006, down from 4.1% in 2002. The LDCT has been extended until June 2014.
Developing countries have also benefited from a number of other non-reciprocal trade preference by developed countries on a unilateral or regional basis. Such preferential trading schemes include the Caribbean Basin Initiative (CBI), CARIBCAN, and the Andean Trade Promotion and Drug Eradication Act (ATPDEA) in the Western Hemisphere. These schemes, like the GSP, have as their primary objective the promotion of economic development in the beneficiary countries by means of improved trade performance. However other objectives are expressly pursued. For example, the ATPDEA aims to assist the Andean countries develop alternative sources of income and livelihood to drug production and trafficking.
The CBI was launched in 1983 through the Caribbean Basin Economic Recovery Act (CBERA), and substantially expanded in 2000 through the U.S.-Caribbean Basin Trade Partnership Act (CBTPA), the CBI currently provides 18 beneficiary countries with duty-free access to the U.S. market for most goods. CBTPA entered into force on October 1, 2000 and continues in effect until September 30, 2010 or the date, if sooner, on which the FTAA or another free trade agreement as described in legislation enters into force between the United States and a CBTPA beneficiary country. There are currently 18 countries/territories that benefit from the CBI program and, therefore, may potentially benefit from CBTPA. These countries are: Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Netherlands Antilles, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. On March 24, 2009, the WTO Council for Trade in Goods extended the CBERA waiver through December 31, 2014, and broadened it to waive U.S. obligations under paragraph 1 of Article I and paragraphs 1 and 2 of Article XIII of GATT 1994 to the extent necessary to permit the United States to provide preferential tariff treatment to eligible products originating in beneficiary countries designated pursuant to the provisions of the CBERA, as amended by the United States-Caribbean Basin Trade Partnership Act, the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006, and the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2008 ("HOPE II") ("CBERA as amended"). See WTO document.
The 2006 Haitian Hemispheric Opportunity through Partnership Encouragement (HHOPE) Act, which was signed into law on December 20, 2006 and became effective March 20, 2007, was designed to support development and employment growth in Haiti, the poorest country in the Western Hemisphere. The HHOPE Act provides expanded trade benefits beyond what the country receives under the Caribbean Basin Trade Partnership Act (CBTPA), extending duty-free treatment to U.S. imports of knit and woven apparel assembled in Haiti from U.S., Haitian, or global inputs, subject to eligibility requirements, and in most cases, value-added content requirements. The Act provides for more flexible sourcing alternatives than the CBTPA and has the potential to improve the competitiveness of Haitian manufacturers by allowing the use of lower cost raw materials, a primary cost component in the production of apparel. On September 30, 2008, HOPE II entered into force for a period of 10 years. The HOPE Act as amended (Section 213a of the CBERA) provides for apparel imports from Haiti to enter the United States duty-free if the “applicable percentage” of the value of inputs and/or costs of processing is met from any combination of Haiti, United States, U.S. FTA or regional preference program partner countries. The HOPE Act as amended also provides duty-free treatment for certain apparel articles if imported directly from Haiti or the Dominican Republic, provided that Haiti and the Dominican Republic develop procedures to prevent transhipment. The HOPE Act as amended also removes duties for three years on a specified quantity of woven apparel imports from Haiti made from fabric produced anywhere in the world. Additionally, the Act allows duty-free treatment for any apparel article classifiable under heading 6212.10 of the HTS (certain brassieres), if the article is both cut and sewn or otherwise assembled in Haiti or the U.S., or both without regard to the source of the fabric or components from which the article is made. Finally, the HOPE Act as amended allows automotive wire harnesses imported from Haiti that contain at least 50 percent by value of materials produced in Haiti, the United States, or U.S.-FTA partner or regional preference program beneficiary countries to qualify for duty-free treatment. The HOPE Act as amended also establishes an International Labor Organization monitoring program, and requires the President to establish certain procedures to monitor Haiti’s and individual producers’ compliance with the eligibility criteria.
The main feature of CARIBCAN is the unilateral extension by Canada, beginning on June 15, 1986, of duty-free access to the Canadian market for most commodities originating in Commonwealth Caribbean countries. On November 28, 1986, a decision by the Contracting Parties to the General Agreement on Tariffs and Trade (GATT) waived until June 15, 1998, the provisions of paragraph 1 of Article 1 of the General Agreement, "only to the extent necessary to permit the Government of Canada to provide duty-free treatment to eligible imports of Commonwealth Caribbean countries benefiting from the provisions of CARIBCAN, without being required to extend the same duty-free treatment to like products of any other contracting party" (L/6102). On December 15, 2006 the WTO extended the CARIBCAN waiver until December 31, 2011 (WT/L/677). The conditions associated with the CARIBCAN waiver remain unchanged. For more information, please consult the WTO document (WT/L/741)
The Andean Trade Preference Act was enacted in 1991 to combat drug production and trafficking in the Andean countries: Bolivia, Colombia, Ecuador and Peru. The program offers trade benefits to help these countries develop and strengthen legitimate industries. ATPA was expanded under the Trade Act of 2002, and is now called the Andean Trade Promotion and Drug Eradication Act. It provides duty-free access to U.S. markets for approximately 5,600 products. The ATPA has been extended until December 31, 2009
The granting of preferential trade treatment has been accommodated in the context of the World Trading System. In 1971, the GATT Contracting Parties approved a temporary waiver to Article I of the Agreement authorising the GSP scheme. Later, in 1979, the Contracting Parties decided to adopt the document entitled " Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries Article I of the Agreement authorising the GSP scheme. Later, in 1979, the Contracting Parties decided to adopt the document entitled "Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries"- also known as the "Enabling Clause"- creating a permanent waiver to the most-favoured-nation obligation and allowing preference-giving countries to grant preferential tariff treatment to developing countries under their respective GSP schemes.
The impact of preferential schemes on trade and welfare have has been a topic of debate. Some experts point that preferential schemes have trade diversion effects and often lead developing countries to depend on them for ensuring competitiveness. Nonetheless, impact studies also show concrete benefits for the recipient economies. In fact, a recent UNCTAD study concludes that "despite the general decline in most-favoured-nation (MFN) tariffs as a result of GATT/WTO negotiations, there remain substantial MFN tariffs on many developing country exports, and preferences continue to have value in increasing export opportunities for developing countries."
The 1996 Singapore Ministerial Declaration started to refocus the attention of the trading community on the idea of unilateral preferences by launching the idea of special trade preferences for LDCs, including provisions for taking positive measures, for example duty-free access on an autonomous basis, aimed at improving the opportunities offered by the trading system for those countries. In response to the Singapore proposal, a number of initiatives were undertaken to provide more favourable market access conditions for LDCs:
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Bilateral Investment Treaties
and International Investment Agreements
Investment agreements have a long history. Some authors refer to the experience of the Hanseatic League in the 12th century when cities in northern Europe joined to protect commerce as one of the first investment agreements, whereas others point to the Friendship, Commerce and Navigation Treaties negotiated by the United States with other nations starting in the 18th century and during 19th century and the first part of the 20th century.
During the first part of the 20th century capital exporting countries were mostly concerned about investment protection. For example, beginning in 1945 and for the next 20 years, the United States started negotiating a series of modern Friendship, Commerce and Navigation Treaties with other countries, which included several property-protection provisions (fair and equitable treatment; prompt, adequate and effective compensation for expropriation, etc.).
The first modern bilateral investment treaty (BIT) was concluded in 1959 between the Federal Republic of Germany and Pakistan. Over the following decade, several European countries (Belgium, Denmark, France, Italy, Luxembourg, the Netherlands, Norway, Sweden, and Switzerland) also negotiated such treaties with developing countries. As UNCTAD writes in the publication International Investment Rule-Making: Stocktaking, Challenges and the Way Forward : “These BITs shared several features. First, they were, as the name implies, between two countries only. Second, these two countries typically included a developed and a developing country. Third, the BITs addressed exclusively the promotion and protection of investment, though typically they promoted investment only by protecting it. That is, only occasionally were there provisions directed at the promotion, but not the protection of investment. The underlying assumption was that the treaty would protect investment from the developed country in the territory of the developing country and, in that way, attract additional investment from the developed country to the developing country. Although only 72 BITs were signed between 1959 and 1969, this period was important in establishing the basic model that would characterize the great majority of BITs over the next 40 years. It included guarantees of national treatment and most-favoured nation (MFN) treatment of investment, fair and equitable treatment, treatment in accordance with customary international law, a guarantee of prompt, adequate and effective compensation for expropriation, a right of free transfer of payments related to investment, and provisions for investor-State and State-State dispute resolution.”
In the mid-1970s, several other countries, including Austria, Japan, the United Kingdom and the United States launched their BIT program. In the case of the United States, its bilateral investment treaty model included a new dimension: investment liberalization, in addition to investment protection and investor-State dispute settlement (and state to state dispute settlement).
Although the first BITs originated in Europe in the late 1950s, it took more than 30 years before countries of the Americas started negotiating bilateral investment treaties among themselves. The first BIT concluded within the region was between the United States and Panama in 1982. During the 1980s the United States was very active in entering into bilateral investment treaties with other countries of the region, signing a BIT with Haiti in 1983 and one with Grenada in 1986. An overwhelming majority of the countries in the Americas have now signed at least one BIT. In fact, only two countries (The Commonwealth of the Bahamas and St. Kitts and Nevis) have not yet done so. Of all these bilateral investment treaties, only those signed by the United States and Canada include an investment liberalization component.
There were more than 2,600 BITs concluded worldwide by the end of 2007. UNCTAD’s database of investment instruments provide a full listing of these agreements:
Regional Investment Instruments
In the early 1990s, in particular after the entry into force of the North American Free Trade Agreement (NAFTA) in 1994, several other regional trade and investment instruments were negotiated. By the end of 2007, more than 250 such agreements were in existence worldwide. In the Americas, bilateral or regional trade agreements, especially those which follow the NAFTA model, include three investment pillars: investment protection, investment liberalization and investor-State dispute settlement.
While countries were negotiating bilaterally, a few attempts were made to design multilateral rules on investment. One such example was the negotiation of the Havana Charter shortly after World War II. With the exception of Articles 11 and 12 in Chapter III of the Havana Charter, this effort was essentially timid because it addressed only restrictive business practices related to goods and services, more specifically the regulation of international cartels (Chapter V). Other initiatives were also unsuccessful. For example, a resolution on international investments for economic development was adopted in 1955 asking the GATT CONTRACTING PARTIES to adopt conditions conducive to international investment activities. In 1970, a suggestion to create a “GATT for Investment” remained without strong support.
Trade-related investment measures were first brought into the GATT discussions by the United States at a meeting of the Consultative Group of Eighteen in 1981. Quoting a study prepared by the IMF and the World Bank on the trade-distorting effects of performance requirements, the United States called for the compilation by the GATT Secretariat of an inventory of performance requirements. In 1982 the United States challenged Canada over performance requirements imposed by Canada’s Foreign Investment Review Agency (FIRA) on local subsidiaries of foreign-based firms. A GATT panel ruled later that the FIRA’s local-content requirements violated Article III(4), the national treatment provision. But the same panel, however, did not support the view that export performance requirements were inconsistent with GATT Article XVII:1c), which prohibited GATT contracting parties from preventing an enterprise from behaving in a nondiscriminatory manner. Following the GATT panel ruling renewed efforts were made to include trade-related investment measures in the 1986 Punta del Este Ministerial Declaration, which launched the Uruguay Round of Multilateral Trade Negotiations.
There is no comprehensive agreement on investment at the WTO, whose investment framework is rather limited in scope since it is primarily confined to performance requirements in the Agreement on Trade-Related Investment Measures (TRIMs), which covers goods only, and to the provisions of the General Agreement on Trade in Services (GATS) through commercial presence and movement of natural persons as the third and fourth modes of supply of a service. In fact, the WTO framework suffers from a clear imbalance. It includes disciplines on trade in goods and services, and on investment in services but investment in goods has yet to be fully covered. Moreover, the traditional elements of an investment agreement, such as investment protection, are not addressed by WTO rules.
Several agreements resulting from the Uruguay Round include investment provisions. These are: the WTO Agreement on Trade-Related Investment Measures (TRIMs), the General Agreement on Trade in Services (GATS), the Agreement on Subsidies and Countervailing Duties (SCM), the Agreement on Trade-Related Intellectual Property Rights (TRIPS), and the Plurilateral Agreement on Government Procurement (GPA).
In the late 1990s another attempt was made at designing multilateral investment rules. The Multilateral Agreement on Investment (MAI) was negotiated between members of the Organisation for Economic Co-operation and Development (OECD) between 1995 and 1998. Its purpose was to develop multilateral rules that would ensure that international investment was governed in a more systematic and uniform way between states. When the first draft was leaked to the public in 1997, it drew widespread criticism from some civil society groups and some developing countries. After an intense global campaign was waged against the MAI by the treaty's critics, the host nation France announced in October 1998 that it would not support the agreement, which led to the MAI demise.
The WTO also offered a new opportunity to discuss and negotiate investment rules. At the WTO Singapore Ministerial Conference, WTO members started analyzing the relationship between international trade and investment. In 2003, at the Cancun Ministerial Conference, no consensus reached on investment but in August 2004 WTO members decided to not pursue this issue any longer as part of the Doha Development Agenda launched in November 2001.
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Regionalism is defined by the WTO as “actions by governments to liberalise or facilitate trade on a regional basis, sometimes through free trade areas or customs unions.” This broad definition encompasses a number of trade liberalisation initiatives that differ in scope and objective. The following is a list of "ideal types" by increasing order of market integration:
Another element that complicates the analysis of regionalism is that with the rising number of regional integration agreements many countries are now members of several initiatives at the same time. Just to cite an example in the Americas, Colombia is a member of the Andean Community, but also has free trade agreements with Mexico, Chile, the Northern Triangle (Guatemala, El Salvador and Honduras), and Canada. Colombia also is a party to several partial preferential agreements, including an agreement on trade, economic and technical cooperation with CARICOM. Another country with a large network of trade agreements, in this case FTAs, is Mexico, which is a party to NAFTA and a member of ALADI. It has concluded FTAs with Bolivia, Chile, Colombia, Costa Rica, EFTA, EU, Israel, Nicaragua, Northern Triangle, Japan, Uruguay, and Venezuela, to name a few. Most of these agreement involve different sets of rules and regulations in terms of Antidumping, Competition Policy, Dispute Settlement, Intellectual Property Rights, Investment, Technical Barriers to Trade, and other trade disciplines. The increasing regulatory complexity of trade relations where one set of rules applies for each bilateral or regional initiative has worried many experts, one has made the analogy to a "spaghetti bowl". These experts often call for a simplification of the trading system by focusing on progress at multilateral level.
Thus, much of the debate on regionalism has centered on the interaction of regionalism and multilateralism- where multilateralism is understood as liberalisation among all WTO Members. Normally, setting up a customs union or free trade area would violate the WTO’s principle of equal treatment for all trading partners, since partners grant to each other preferential treatment which excludes other countries. But GATT’s Article XXIV allows regional trading arrangements to be set up as a special exception, provided certain strict criteria are met. In particular, the arrangements should help trade flow more freely among the countries in the group without barriers being raised on trade with the outside world, and this should be done within a reasonable amount of time. In other words, regional integration should complement the multilateral trading system and not threaten it. There is an extensive literature on whether regionalism and multilateralism are friends or foes. Many specialists, and the WTO itself, conclude that it is hard to come up with a definitive answer to this question and that it has to be analysed case by case.
Two tendencies are worth noting: Regional arrangements are on the rise and the character of regional integration is also changing. In the Western Hemisphere, different developmental paradigms have established their own approach to regionalism. Regionalism flourished in the days of the import substitution industrialisation (ISI) paradigm of the1950s and 1960s, when countries embraced regionalism as a natural response to escape the crippling effects of production for small-scale domestic markets. Under "old regionalism" partners aimed to apply high tariffs to third parties while eliminating internal barriers to trade. The objective was to develop markets for nascent industries. More recently, most Latin American and Caribbean countries have abandoned the prescriptions of ISI and have chosen instead to actively engage in the world economy. Experts began sketching a new vision of regionalism. The "new regionalism" paradigm no longer views the pooling of domestic markets as an end in itself. It rather sees it as an asset to increase the attraction of foreign investment as well as the bargaining power in regional and multilateral negotiations. Thus, new regionalism is based on fostering efficiency and competition by lowering the level of external tariffs to allow for an active engagement in the world economy, while aiming to reap the benefits of achieving "deep" integration (integration that goes beyond multilateral commitments) and fostering better relations among partners.
Multilateralists often point out that basic economics maintains that lowering tariff barriers on a discriminatory basis causes distortions in the home economy and that it imposes costs on third parties that do not participate in the regional agreement. They argue that though it is difficult to accurately evaluate the benefits of PTAs, economic theory suggests that the net benefits of regionalism are not very large. Finally, they maintain that regionalism diminishes the incentives to participate in multilateral trade negotiations and might lead to a divided world where trade conflicts among regions will increase.
Regionalists point out that the days in which regionalism meant ISI and high tariffs are gone, and that "new regionalism" tends to minimise trade diversion. Moreover, they stress that "deep" regional integration arrangements can bring benefits to the participating countries that extend beyond those that they might reap by sole participation the WTO. Also, they clarify that regionalism can be a platform for improving the insertion in the world economy.
TRC section on Regionalism
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