The economics of GATT.

• Author: Staiger, Robert W.
• Position: General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade (GATT) is an important institution. Established in 1947 to encourage the reduction of trade barriers among its 23 member countries, GATT (and now its successor, the World Trade Organization - WTO) has grown in membership to a roster that currently exceeds 125 countries. The expanding GATT membership reflects the success that this organization has had in facilitating multilateral tariff liberalization. As a consequence of the eight negotiating rounds that GATT has sponsored, the average ad valorem tariff on industrial goods has fallen from over 40 percent to below 4 percent. In light of its significance for the world economy, an important question for economists is whether a theoretical interpretation of GATT and its main features can be provided. Much of my recent research has been an attempt to answer this question, by seeking answers to four sets of related questions.

First, a most basic question: Why do governments bother to negotiate trade agreements? After all, major policy decisions are routinely made by governments without consulting their trading partners. If a government wishes to reduce its trade barriers, why must it wait for a trading partner to reach the same conclusion? Second, given that governments do choose to negotiate trade agreements with one another, what do they hope to accomplish in agreeing to a prior set of rules by which negotiations are to proceed and outcomes abide? These rules, which are contained in the articles of GATT, remain largely a mystery to economists. How do these rules affect trade bargaining outcomes, and why would governments choose to adopt them? Third, how are these agreements enforced, and how do the limits of enforcement shape the features of GATT? And finally, can the same set of principles on which postwar multilateral liberalization has been based be applied to the host of "new" trade policy issues (for example, labor and environmental standards) currently before the WTO? This article describes my research on each of these questions.

Why Negotiate Trade Agreements?

What do governments achieve when they negotiate a trade agreement? Because trade negotiations are voluntary, each government should gain as a result of them, and this is possible only if there exists an inefficiency (relative to the governments' own preferences) that the negotiations can correct. What, then, is the source of the inefficiency that a trade agreement can correct? My research points to two possibilities.

First, governments may face credibility problems, and view trade agreements as a means by which to make policy commitments relative to their own private sectors. In joint work,(1) Guido Tabellini and I have explored the inefficiencies that can arise if the unilateral trade liberalization announced by a government is not deemed credible by its private sector. We provide some empirical evidence in support of the general position that commitments made in a trade agreement can bolster the credibility of trade policy decisions. Our empirical investigation studies U.S. tariff choices, and exploits the fact that trade policy in the United States is implemented in a variety of institutional environments. One environment that we examine is the Tokyo Round of GATT negotiations, and in particular the decision by the United States to exclude certain industries from the across-the-board tariff cuts negotiated in that round. The other is the decision by the United States to grant protection to certain industries through GATT's "escape clause" (under which a government may temporarily "escape" from its GATT commitments). We observe that in each environment the U.S. government had to decide whether to address distributional concerns by granting costly tariff increases (or forgoing beneficial tariff reductions), but that only in the former environment did GATT rules and procedures place explicit constraints on the ability of the U.S. government to...