Voyevodins' Library _ "International Business: Competing in the Global Marketplace" / Charles W.L. Hill ... Chapter 5 ... currency speculation, currency swap, currency translation, current account, current account deficit, current account surplus, current cost accounting, current rate method, customs union, D'Amato Act, deferral principle, democracy, deregulation, diminishing returns to specialization, dirty-float system, draft, drawee, dumping, eclectic paradigm, e-commerce, economic exposure, economic risk, economic union, economies of scale, ecu, efficient market, ending rate, ethical systems, ethnocentric behavior, ethnocentric staffing, eurobonds, eurocurrency, eurodollar, European Free Trade Association (EFTA), European Monetary System (EMS), European Union (EU), exchange rate, exchange rate mechanism (ERM), exclusive channels, expatriate failure, expatriate manager, experience curve, experience curve pricing, export management company, Export-Import Bank (Eximbank), exporting, externalities, externally convertible currency, factor endowments Voevodin's Library: currency speculation, currency swap, currency translation, current account, current account deficit, current account surplus, current cost accounting, current rate method, customs union, D'Amato Act, deferral principle, democracy, deregulation, diminishing returns to specialization, dirty-float system, draft, drawee, dumping, eclectic paradigm, e-commerce, economic exposure, economic risk, economic union, economies of scale, ecu, efficient market, ending rate, ethical systems, ethnocentric behavior, ethnocentric staffing, eurobonds, eurocurrency, eurodollar, European Free Trade Association (EFTA), European Monetary System (EMS), European Union (EU), exchange rate, exchange rate mechanism (ERM), exclusive channels, expatriate failure, expatriate manager, experience curve, experience curve pricing, export management company, Export-Import Bank (Eximbank), exporting, externalities, externally convertible currency, factor endowments



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Chapter 5 Outline

Development of the World Trading System

We have read in this chapter and the previous one about strong economic arguments for supporting unrestricted free trade. While many governments have recognized the value of these arguments, they have been unwilling to unilaterally lower their trade barriers for fear that other nations might not follow suit. Consider the problem that two neighboring countries, say France and Italy, face when considering whether to lower barriers to trade between them. The government of Italy might be in favor of lowering trade barriers, but it might be unwilling to do so for fear that France will not do the same. Italian officials might fear that the French will take advantage of Italy's low barriers to enter the Italian market, while continuing to shut Italian products out of France through high trade barriers. The French government might feel that it faces the same dilemma. The essence of the problem is a lack of trust between the governments of France and Italy. Both governments recognize that their respective nations will benefit from lower trade barriers between them, but neither government is willing to lower barriers for fear that the other might not follow.20

Such a deadlock can be resolved if both countries negotiate rules that will govern cross-border trade and lower trade barriers. But who is to monitor the governments to make sure they are playing by the trade rules? And who is to impose sanctions on a government that cheats? Both governments could set up an independent body whose function is to act as a referee. This referee could monitor trade between the countries, make sure that no side cheats, and impose sanctions on a country if it does cheat.

While it might sound unlikely that any government would compromise its national sovereignty by submitting to such an arrangement, since World War II an international trading framework has evolved that has exactly these features. For its first 50 years, this framework was known as the General Agreement on Tariffs and Trade (the GATT). Since 1995, it has been known as the World Trade Organization (WTO). Here we look at the evolution and workings of the GATT and the WTO. We begin, however, with a brief discussion of the pre-GATT history of world trade, since this helps set the scene.

From Smith to the Great Depression

As we saw in Chapter 4, the intellectual case for free trade goes back to the late 18th century and the work of Adam Smith and David Ricardo. Free trade as a government policy was first officially embraced by Great Britain in 1846, when the British Parliament repealed the Corn Laws. The Corn Laws placed a high tariff on corn imports. The objectives of the Corn Law tariff were to raise government revenues and to protect British corn producers. There had been annual motions in Parliament in favor of free trade since the 1820s when David Ricardo was a member of Parliament. However, agricultural protection was withdrawn only after a protracted debate when the effects of a harvest failure in Britain were compounded by the imminent threat of famine in Ireland. Faced with considerable hardship and suffering, among the populace, Parliament narrowly reversed its long-held position.

During the next 80 years or so, Great Britain, as one of the world's dominant trading powers, pushed the case for trade liberalization; but the British government was a voice in the wilderness. Its policy of unilateral free trade was not reciprocated by its major trading partners. The only reason Britain kept this policy for so long was that, as the world's largest exporting nation, it had far more to lose from a trade war than did any other country.

By the 1930s, however, the British attempt to stimulate free trade was buried under the economic rubble of the Great Depression, which had roots in the world economy's failure to mount a sustained economic recovery after the end of World War I in 1918. Things got worse in 1929 with the US stock market collapse and the subsequent run on the US banking system. Economic problems were compounded in 1930 when Congress passed the Smoot-Hawley tariff. Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products, the Smoot-Hawley tariff erected an enormous wall of tariff barriers. Almost every industry was rewarded with its "made-to-order" tariff. A particularly odd aspect of the Smoot-Hawley tariff-raising binge was that the United States was running a balance-of-payment surplus at the time and it was the world's largest creditor nation. The Smoot-Hawley tariff had a damaging effect on employment abroad. Other countries reacted to the US action by raising their own tariff barriers. US exports tumbled in response, and the world slid further into the Great Depression.21

1947-1979: GATT, Trade Liberalization, and Economic Growth

The economic damage caused by the beggar-thy-neighbor trade policies that the Smoot-Hawley Act ushered in influenced the economic institutions and ideology of the post-World War II world. The United States emerged from the war not only victorious but also economically dominant. After the debacle of the Great Depression, opinion in the US Congress had swung strongly in favor of free trade. As a consequence, under US leadership, GATT was established in 1947.

The GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like. From its foundation in 1947 until it was superseded by the WTO, the GATT's membership grew from 19 to more than 120 nations. The GATT did not attempt to liberalize trade restrictions in one fell swoop; that would have been impossible. Rather, tariff reduction was spread over eight rounds. The most recent, the Uruguay Round, was launched in 1986 and completed in December 1993. In these rounds, mutual tariff reductions were negotiated among all members, who then committed themselves not to raise import tariffs above negotiated rates. GATT regulations were enforced by a mutual monitoring mechanism. If a country felt that one of its trading partners was violating a GATT regulation, it could ask the Geneva-based bureaucracy that administered the GATT to investigate. If GATT investigators found the complaints to be valid, member countries could be asked to pressure the offending party to change its policies. In general, such pressure was always sufficient to get an offending country to change its policies. If it were not, the offending country could have been expelled from the GATT.

In its early years, the GATT was by most measures very successful. In the United States, for example, the average tariff declined by nearly 92 percent between the Geneva Round of 1947 and the Tokyo Round of 1973 - 79 (see Figure 5.1). Consistent with the theoretical arguments first advanced by Ricardo and reviewed in Chapter 4, the move toward free trade under the GATT appeared to stimulate economic growth. From 1953 to 1963, world trade grew at an annual rate of 6.1 percent, and world income grew at an annual rate of 4.3 percent. Performance from 1963 to 1973 was even better; world trade grew at 8.9 percent annually, and world income grew at 5.1 percent.22

1980-1993: Disturbing Trends

During the 1980s and early 1990s, the world trading system erected by the GATT began to come under strain as pressures for greater protectionism increased around the world. Three main reasons caused the rise in such pressures during the 1980s.

05.01

Figure 5.1

Average Reductions in US Tariffs Rates, 1947 - 1985

Note: Indexes are calculated from percentage reductions in average weighted tariff rates given in Finger, 1979 (Table 1, p. 425), World Bank, World Development Report (New York: Oxford University Press, 1987), (Table 8.1, p. 136), and World Bank. World Development Report (New York: Oxford University Press, 1994). Weighted average US tariff rate after Tokyo Round was 4.6 percent (World Bank, 1987).

First, the economic success of Japan strained the world trading system. Japan was in ruins when the GATT was created. By the early 1980s, however, it had become the world's second largest economy and its largest exporter. Japan's success in the automobile and semiconductor industries by themselves might have been enough to strain the world trading system. Things were made worse, however, by the widespread perception in the West that despite low tariff rates and subsidies, Japanese markets were closed to imports and foreign investment by administrative trade barriers.

Second, the world trading system was further strained by the persistent trade deficit in the world's largest economy, the United States. Although the deficit peaked in 1987 at over $170 billion, by the end of 1992 the annual rate was still running about $80 billion. From a political perspective, the matter was worsened by the fact that in 1992 the United States also ran a $45 billion deficit in its trade with Japan--a country perceived as not playing by the rules. The consequences of the US deficit included painful adjustments in industries such as automobiles, machine tools, semiconductors, steel, and textiles, where domestic producers steadily lost market share to foreign competitors. The resulting unemployment gave rise to renewed demands in the US Congress for protection against imports.

A third reason for the trend toward greater protectionism was that many countries found ways to get around GATT regulations. Bilateral voluntary export restraints circumvented GATT agreements because neither the importing country nor the exporting country complained to the GATT bureaucracy in Geneva--and without a complaint, the GATT bureaucracy could do nothing. Exporting countries agreed to VERs to avoid more damaging punitive tariffs. One of the best-known examples is the VER between Japan and the United States, under which Japanese producers promised to limit their auto imports into the United States to defuse growing trade tensions. According to a World Bank study, 13 percent of the imports of industrialized countries in 1981 were subjected to nontariff trade barriers such as VERs. By 1986, this figure had increased to 16 percent. The most rapid rise was in the United States, where the value of imports affected by nontariff barriers (primarily VERs) increased by 23 percent between 1981 and 1986.23

The Uruguay Round and the World Trade Organization

Against the background of rising pressures for protectionism, in 1986 the members of the GATT embarked upon their eighth round of negotiations to reduce tariffs, the Uruguay Round (so named because they occurred in Uruguay). This was the most difficult round of negotiations yet, primarily because it was also the most ambitious. Until then, GATT rules had applied only to trade in manufactured goods and commodities. In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services. They also sought to write rules governing the protection of intellectual property, to reduce agricultural subsidies, and to strengthen the GATT's monitoring and enforcement mechanisms.

The Uruguay Round dragged on for seven years. For a time, it looked as if an agreement might not be possible, raising fears that the world might slip into a trade war. The main impediment to an agreement was a long-standing dispute between the United States and the European Union on agricultural subsidies. An agreement had to be reached before December 16, 1993, which was when the "fast-track negotiating authority" granted to President Clinton by Congress was to expire. Without this authority, any agreement would have to have been approved by Congress rather than just the president, a much more difficult proposition. An 11th hour compromise on agricultural subsidies--which reduced the level of subsidies significantly, but not by as much as the United States had wanted--saved the day, and an agreement was reached on December 15, 1993. The agreement was formally signed by member states at a meeting in Marrakech, Morocco, on April 15, 1994. It took effect July 1, 1995.

The most important components of the Uruguay Round agreement are detailed in Table 5.1. The Uruguay Round contained the following provisions: Tariffs on industrial goods were to be reduced by more than one-third; agricultural subsidies were to be substantially reduced; fair trade and market access rules were to be extended to cover a wide range of services; GATT rules were also to be extended to protect patents, copyrights, and trademarks (intellectual property); barriers on trade in textiles were to be significantly reduced over 10 years; and a World Trade Organization was to be created to implement the GATT agreement.

Services and Intellectual Property

In the long run, the extension of GATT rules to cover services and intellectual property may be particularly significant. In 1997, world trade in services amounted to $1,295 billion (compared to world trade in goods of $5,295).24 Extending GATT rules to this important trading arena could significantly increase both the total share of world trade accounted for by services and the overall volume of world trade. Having GATT rules cover intellectual property will make it much easier for high-technology companies to do business in developing nations where intellectual property rules have historically been poorly enforced (see Chapter 2 for details). High-technology companies will now have a mechanism to force countries to prohibit the piracy of intellectual property.

The World Trade Organization

The clarification and strengthening of GATT rules and the creation of the World Trade Organization also hold out the promise of more effective policing and enforcement of GATT rules in the future. This should have a beneficial effect on overall
  Up to 1993 The 1993 Agreement Main Impact
  Industrial Tariffs  

Backbone of previous GATT rounds. Tariffs on industrial goods average 5% in industrialized countries, down from 40% in the late 1940s. Rich contries will cut tariffs on industrial goods by more than one-third. Tariffs will be scrapped on over 40% of manufactured goods. Easier access to world markets for exports of industrial goods. Lower prices for consumers.
  Agriculture  

High farm subsidies and protected markets in United States and EC lead to overproduction and dumping. Subsidies and other barriers to trade in agricultural products will be cut over six years. Subsidies cut by 20%. All import barriers will be converted to tariffs and cut by 36%. Better market opportunities for efficient food producers. Lower prices for consumers. Restraint of farm subsidies war.
  Services  

GATT rules do not extend to services. Many countries protect service industries from international competition. GATT rules on fair trade principles extended to cover many services. Failure to reach agreement on financial services and telecommunications. Special talks will continue. Increase in trade services. Further liberalization of trade in services now seems likely.
  Intellectual Property  

Standards of protection for patents, copyrights, and trademarks vary widely. Ineffective enforcement of national laws a growing source of trade friction. Extensive agreements on patents, copyrights, and trademarks. International standards of protection, and agreements for effective enforcement, established. Increased protection and reduction of intellectual property piracy will benefit producers of intellectual property (e.g., computer software firms, performing artists). Will increase technology transfer.
  Textiles  

Rich countries have restricted imports of textiles and clothing through bilateral quotas under Multi-Fiber Arrangement MFA quotas progressively dismantled over 10 years and tariffs reduced. Normal GATT rules will apply at end of 10 years. Increased trade in textiles should benefit developing countries. Reduced prices for consumers worldwide.
  GATT Rules  

GATT remains the same as when drafted in 1947, even though many more countries have entered the world trading community and trade patterns have shifted. Many GATT rules revised and updated. They include codes on customs valuation and import licensing, customs unions and free trade areas, and rules dealing with waivers from GATT regulations. Greater transparency, security, and predictability in trading policies.
  World Trade Organization  

GATT original envisioned as part of an International Trade Organization. ITO never ratified and GATT applied provisionally. GATT becomes a permanent world trade body covering goods, services, and intellectual property with a common disputes procedure. WTO to implement results of Uruguay Round. More effective advocacy and policing of the international trading system.

Source: "The GATT Deal," Financial Times, December 16, 1993, pp. 4 - 7.

Table 5.1

Main Features of the Uruguay Round Agreement

economic growth and development by promoting trade. The WTO will act as an umbrella organization that which will encompass the GATT along with two new sister bodies, one on services and the other on intellectual property. The WTO will take over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. While the WTO will operate as GATT now does--on the basis of consensus--in the area of dispute settlement, member countries will no longer be able to block adoption of arbitration reports. Arbitration panel reports on trade disputes between member countries will be automatically adopted by the WTO unless there is a consensus to reject them. Countries that have been found by the arbitration panel to violate GATT rules may appeal to a permanent appellate body, but its verdict will be binding. If offenders then fail to comply with the recommendations of the arbitration panel, trading partners will have the right to compensation or, in the last resort, to impose (commensurate) trade sanctions. Every stage of the procedure will be subject to strict time limits. Thus, the WTO will have something that the GATT never had--teeth.25

Implications of the Uruguay Round

The world is better off with a GATT deal than without it. Without the deal, the world might have slipped into increasingly dangerous trade wars, which might have triggered a recession. With a GATT deal concluded, the current world trading system looks secure, and there is a good possibility that the world economy will now grow faster than would otherwise have been the case. Estimates as to the overall impact of the GATT agreement, however, are not that dramatic. Three studies undertaken in mid-1993 (before the agreement was finalized) estimated the deal will add between $213 billion and $274 billion in 1992 US dollars to aggregate world income by 2002--or about 0.75 percent to 1 percent of gross global income by that time.26 Others argue that these figures underestimate the potential gain because they do not factor in gains from the liberalization of trade in services, stronger trade rules, and greater business confidence. Taking such factors into account, it is claimed that global economic output could be as much as 8 percent higher by 2002 than it would have been without the agreement.27 Whatever figure is closer to the truth, it is best to keep in mind what a successful GATT agreement helps avoid: the risk of a trade war that might reduce global economic growth and raise prices for consumers around the globe.

WTO: Early Experience

When the WTO was established, its creators hoped the WTO's enforcement mechanisms would make it a more effective policeman of global trade rules than the GATT had been. The expectation was that the WTO emerge as an effective advocate and facilitator of future trade deals, particularly in areas such as services. The experience so far has been encouraging.

WTO as a Global Policeman

The first three years in the life of the WTO suggest its policing and enforcement mechanisms are having a positive effect. As of July 31, 1997, 104 trade disputes had been brought to the WTO for arbitration.28 This compares with a total of 196 cases handled by the GATT over almost half a century. Countries' use of the WTO represents an important vote of confidence in the organization's dispute resolution.

The backing of the leading trading powers has been crucial to the early success of the WTO. Initially, some feared that the United States might undermine the system by continuing to rely on unilateral measures when it suited or by refusing to accept WTO verdicts. These fears were enhanced in 1995 when the United States refused to bring a dispute with Japan over trade in autos and auto parts to the WTO (that dispute was settled bilaterally). Since then, however, the United States has emerged as the biggest user of the WTO, bringing 34 complaints on everything from food inspection in South Korea to taxation of foreign film revenues in Turkey. The top four trading entities--the United States, the European Union, Japan, and Canada--dominated the dispute settlement process.

Of the cases filed by the United States, five led to outright US victories and another seven yielded favorable results. The rest of the cases are still under review, but WTO analysts figure that the United States will win 80 to 85 percent of its cases, about the same percentage as under the GATT.29 In 1997, the European Union lost two major cases brought by the United States, a complaint on EU restrictions limiting the import of hormone-treated US beef (see the opening case) and a protest against the EU's discriminatory banana import policy. The United States lost a major case to Japan when the WTO rejected every element of a US claim that Japan should reorganize its commercial economy so that Kodak could better compete there against its global rival, Fuji. Kodak claimed that its access to Japanese markets was unfairly restricted because of the close relationships between Japanese manufacturing companies, banks, and retail outlets. There is little question that these exist, but they are neither unique to Japan nor, the WTO observed, were they created to keep Kodak out of the Japanese markets: they were there long before Kodak came along. Besides, Fuji holds no larger share of the Japanese market than Kodak does of the US market.

Encouraged perhaps by the tougher system, developing countries are also starting to use the settlement procedures more than they did under the GATT. Developing countries had launched over 30 complaints by July 1997, many targeted at developed nations. When Costa Rica complained that US regulations discriminated against its textile exports, the WTO ruled in favor of the Central American nation.

So far the United States has proved willing to accept WTO rulings that go against it. The United States agreed to implement a WTO judgment that called for the country to remove discriminatory antipollution regulations that were applied to gasoline imports. In a dispute with India over textile imports, the United States rescinded quotas before a WTO panel could start work. And in June 1996, the United States preempted the establishment of a WTO panel by revoking punitive tariffs placed on EU food and drink exports that were imposed in 1988 in retaliation for the EU's ban on hormone-treated beef.

Despite its early success, questions still remain as to how effective the WTO's dispute resolution procedures will be. The first real test of the procedures will arise when the WTO has to arbitrate a politically sensitive case, particularly one that involves the United States or the European Union, where a significant and vocal minority of politicians argues that the WTO infringes on national sovereignty. The WTO rulings on Kodak and hormone-treated beef produced complaints from vocal minorities in the United States and EU, respectively.

WTO Telecommunications Agreement

As explained above, the Uruguay Round of GATT negotiations extended global trading rules to cover services. The WTO was given the role of brokering future agreements to open global trade in services. The WTO was also encouraged to extend its reach to encompass regulations governing foreign direct investment--something the GATT had never done. Two of the first industries targeted for reform were the global telecommunications and financial services industries. The WTO came close to reaching an agreement to liberalize global telecommunications services in early 1996, but ultimately failed to close a deal when the United States declined to sanction the draft agreement, arguing that it did not do enough to open national telecommunications markets to foreign investment.

The WTO tried again to reach an agreement in February 1997. Many observers felt that the negotiations represented a major test of the WTO's credibility as a facilitator of future global trade and investment deals. In 1995, the global telecommunications services market was worth just over $600 billion--or 2.5 percent of global GDP--only 20 percent of which was open to competition. Given its importance in the global economy, the telecommunications services industry was a very important target for reform. The WTO's goal was to get countries to open their telecommunications markets to competition, allowing foreign operators to purchase ownership stakes in domestic telecommunications providers and establishing a set of common rules for fair competition in the telecommunications sector. Three benefits were cited.

First, advocates argued that inward investment and increased competition would stimulate the modernization of telephone networks around the world and lead to higher-quality service. Second, supporters maintained that the increased competition would benefit customers through lower prices. Estimates suggested that a deal would soon reduce the average cost of international telephone calls by 80 percent and save consumers $1,000 billion over three years.30 Third, the WTO argued that trade in other goods and services invariably depends on flows of information matching buyers to sellers. As telecommunications service improves in quality and declines in price, international trade increases in volume and becomes less costly for traders. Telecommunications reform, therefore, should promote cross-border trade in other goods and services. In sum, Renato Ruggiero, the director general of the WTO, argued:

Telecommunications liberalization could mean global income gains of some $1 trillion over the next decade or so. This represents about 4 percent of world GDP at today's prices.31

After some last-minute hedging by the United States, a deal was reached on February 15, 1997. Under the pact, 68 countries accounting for more than 90 percent of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications. Most of the world's biggest markets, including the United States, European Union, and Japan, were fully liberalized by January 1, 1998, when the pact took effect. All forms of basic telecommunications service are covered, including voice telephony, data and fax transmissions, and satellite and radio communications. Many telecommunications companies responded positively to the deal, pointing out that it would give them a much greater ability to offer their business customers "one-stop shopping"--a global, seamless service for all of their corporate needs and a single bill.32

WTO Financial Services Agreement

Fresh from its success in brokering a telecommunications agreement, in April 1997 the WTO embarked on negotiations to liberalize the global financial services industry. Under the negotiating schedule, an agreement had to be reached by December 31, 1997. The financial services industry includes banking, securities businesses, insurance, asset management services, and the like. As with telecommunications, the first attempt at reaching a global deal in 1995 failed when the United States refused to join a pact. The negotiations stalled because the United States felt developing countries were not prepared to make enough concessions.

The global financial services industry is enormous. The sector executes $1.2 trillion a day in foreign exchange transactions. International financing extended by banks around the world reporting to the Bank for International Settlements is estimated at $6.4 trillion, including $4.6 trillion net international lending. Total world banking assets are put at more than $20 trillion, insurance premiums at $2 trillion, stock market capitalization at over $10 trillion, and market value of listed bonds at about $10 trillion. In addition, practically every international trade deal in goods or services requires credit, capital, foreign exchange, and insurance.33

Participants in the negotiations wanted to see more competition in the sector both to allow firms greater opportunities abroad and to encourage greater efficiency. Developing countries need the capital and financial infrastructure for their development. But governments also have to ensure that the system is sound and stable because of the economic shocks that can be caused by exchange rates, interest rates, or other market conditions fluctuating excessively. They also have to avoid economic crisis caused by bank failures. Therefore, government intervention in the interest of prudential safeguards is an important condition underpinning financial market liberalization.

An agreement was finally reached December 14, 1997.34 The deal covers more than 95 percent of the world's financial services market. Under the agreement, which was to take effect in March 1999, 102 countries have pledged to open to varying degrees their banking, securities, and insurance sectors to foreign competition. Just as in the telecommunications deal, the accord covers not just cross-border trade, but also foreign direct investment. Seventy countries have agreed to dramatically lower or eradicate barriers to FDI in their financial services sector. The United States and the European Union will, with minor exceptions, be fully open to inward investment by foreign banks, insurance, and securities companies. As part of the deal, many Asian countries made important concessions that will allow significant foreign participation in their financial services sectors for the first time.

The Future: Unresolved Issues

The 1994 GATT deal still leaves a lot to be done on the international trade front. Substantial trade barriers still remain in areas such as financial services and broadcast entertainment, although these seem likely to be reduced eventually. More significantly perhaps, WTO has yet to deal with the areas of environmentalism, worker rights, foreign direct investment, and dumping.35

High on the list of the WTO's future concerns will be the interaction of environmental and trade policies and how best to promote sustainable development and ecological well-being without resorting to protectionism. The WTO will have to deal with environmentalists' claims that expanded international trade encourages companies to locate factories in areas of the world where they are freer to pollute and degrade the environment.

Paralleling environmental concerns are concerns that free trade encourages firms to shift their production to countries with low labor rates where worker rights are routinely violated. The United States has repeatedly and unsuccessfully pressed for discussion of common international standards on workers rights--an idea strongly opposed by poorer nations who fear that it is just another excuse for protectionism by the rich.

GATT regulations have never been extended to embrace foreign direct investment (investment by a firm based in one country in productive facilities in another country). Given the globalization of production that we are now witnessing, barriers to foreign direct investment seem antiquated, and yet they are still widespread (we will discuss these in detail in Chapter 7). Currently many countries limit investment by foreign companies in their economies (e.g., local content requirements, local ownership rules, and even outright prohibition).

A final issue of concern has been the proliferation of antidumping actions in recent years. WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are being harmed. Unfortunately, the rather vague definition of what constitutes "dumping" has proved to be something of a loophole which many countries are exploiting to pursue protectionism. In the United States, for example, 26 antidumping cases were launched in 1998, up from 16 cases in the prior year. There has also been a rise in cases filed by the European Union. Increasingly, it seems to be that whenever an industry faces strong foreign competition, the first response of some firms in that industry is to cry foul and accuse the foreign producers of dumping. The process can then become politicized, as representatives of businesses and their employees lobby government officials to "protect domestic jobs from unfair foreign competition." If this trend continues, it is likely that the WTO will try to strengthen the regulations governing the imposition of antidumping duties.

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