WTO Working Papers

In spite of their growing importance in international trade as well as in bilateral and multilateral trade negotiations, services have only attracted limited attention from researchers interested in determinants of trade policies and trade cooperation. This paper seeks to account for countries' varying levels of market access commitments under the multilateral General Agreement on Trade in Services (GATS). I develop an argument suggesting how levels of democracy and factor endowments are associated with more commitments. The empirical analysis supports these propositions, and also suggests that relative size, as well as regulatory capacity, are positively linked to GATS commitments.

The paper discusses a number of issues related to the treatment of trade credit internationally, a priori (treatment by banking regulators) and a posteriori (treatment by debtors and creditors in the case of default), which are currently of interest to the trade finance community, in particular the traditional providers of trade credit and guarantees, such as banks, export credit agencies, regional development banks, and multilateral agencies. The paper does not deal with the specific issue of regulation of official insured-export credit, under the OECD Arrangement, which is a specific matter left out of this analysis. Traditionally, trade finance has received preferred treatment on the part of national and international regulators, as well as by international financial agencies in the treatment of trade finance claims, on grounds that trade finance was one of the safest, most collateralized, and selfliquidating forms of trade finance. Preferred treatment of trade finance also reflects the systemic importance of trade, as in sovereign or private defaults a priority is to "treat" expeditiously trade lines of credits to allow for such credit to be restored and trade to flow again. It is not only a matter of urgency for essential imports to be financed, but also a pre-condition for economic recovery, as the resumption of trade is necessary for ailing countries to restore balance of payments equilibrium. The relatively favourable treatment received by trade finance was reflected in the moderate rate of capitalization for cross-border trade credit in the form of letters of credit and similar securitized instruments under the Basel I regulatory framework, put in place in the late 1980s and early 1990s. However, as the banking and regulatory communities moved towards internal-rating based and risk-weighted assets systems under the successor Basel II framework, a number of complaints emerged with respect to the treatment of trade credit – particularly in periods of crisis. Issues of pro-cyclicality, maturity structure and country risk have been discussed at some length in various fora, including in the WTO at the initiative of Members. Part of the issue was that Basel II regulation was designed and implemented in a manner that, in periods of banking retrenchment, seemed to have affected the supply of trade credit more than other potentially more risky forms of lending. With the collapse of trade in late 2008 and early 2009, the regulatory treatment of trade credit under Basel II clearly became an issue and was discussed by professional banking organizations, regulators and international financial institutions. A sentence made its headway into the communiqué of G-20 Leaders in London in April 2009, calling upon regulators to exercise some flexibility in the application of Basel II rules, in support of trade finance. As the issue of removing the obstacles to the supply of trade finance spread became part of the public debate, discussions with respect to the regulatory treatment of trade finance in the context of the making of "Basel III" rules are now raising political attention. Part of the underlying problem regarding the design of regulation of trade finance is that banking regulators may not have enough understanding of the way that trade and trade finance operate in practice. In turn, the banking community has made insufficient progress in explaining these issues to regulators and in providing evidence about the high level of safety and soundness of their activity, in collecting statistical information and even in defining clearly what comprises trade finance. This paper aims at clarifying such issues. The WTO, in its role as an "honest broker", is trying to help the parties concerned, and has been asked from time to time to act as a go-between between the two communities, in order to clarify issues. Section 1 looks at the overall Basel framework and its evolution over time, with particular emphasis on the regulation of trade finance. Section 2 looks at issues raised in the WTO context by the trading and trade finance communities, be it by WTO Members or by experts, and how this has helped to clarify some of the disputed issues. Section 3 raises a number of questions which need clarification from the trade finance community for regulators to be able to better capture the reality of trade finance operations, and allow them to regulate with full understanding of its implications.

We examine the effects of transit, documentation, and ports and customs delays on Africa’s exports. We find that transit delays have the most economically and statically significant effect on exports. A one day reduction in inland travel times leads to a 7 percent increase in exports. Put another way, a one day reduction in inland travel times translates into 1.5 percentage point decrease in all importing-country tariffs. In contrast, longer delays in the other areas have a far smaller impact on trade. We control for the possibility that greater trade leads to shorter delays in three ways. First, we examine the effect of trade times on exports of new products. Second, we evaluate the effect of delays in a transit country on the exports of landlocked countries. Third, we examine whether delays affect time-sensitive goods relatively more. We show that large transit delays are relatively more harmful because of high within-country variation.

It is becoming increasingly important to put freshwater issues in a global context. Local water depletion and pollution are often closely tied to the structure of the global economy. With increasing trade between nations and continents, water is more frequently used to produce exported goods. International trade in commodities implies long-distance transfers of water in virtual form, where virtual water is understood as the volume of water that has been used to produce a commodity and that is thus virtually embedded in it. Knowledge about the virtual-water flows entering and leaving a country can cast a completely new light on the actual water scarcity of a country. For example, Jordan imports about 5 to 7 billion m3 of virtual water per year, which is in sharp contrast with the 1 billion m3 of water withdrawn annually from domestic water sources. This means that people in Jordan apparently survive owing to the import of water-intensive commodities from elsewhere, for example the USA.

In this report we first give a brief overview of trade in seafood and seafood production. We then review the basic bioeconomic theory of the fishery and pinpoint why fisheries are different from most other industries. We next review the theoretical literature on trade and renewable resources that shows how unconventional outcomes from trade liberalization can emerge. Given this background, we discuss the most important policy issues in relation to seafood and trade, including sections on managing the global commons and domestic trends in management. In the final section, we discuss specific issues that are germane to the WTO and its rules.

This paper provides a review of current thinking on the economics of international trade in mineral resources. There is not a great deal written on this topic, and so my review is necessarily broad rather than deep. In some cases I am only able to cite related and even tangential literature. I first define what is meant by trade in mineral resources. I then discuss patterns of trade in mineral resources. The paper then moves on to the five topics requested by the World Trade Organization: theoretical and empirical literature on international trade in minerals; trade impacts of mineral abundance and the resource curse; the political economy of mineral trade in resource-abundant states; non-economic considerations associated with strategic mineral resources; and the impact of domestic market structure and regulation on production and trade in minerals.

The General Agreement on Trade in Services (GATS) is broader in policy coverage than conventional trade agreements for goods and, at the same time, offers governments more flexibility, in various dimensions, to tailor their obligations to sector- or country-specific needs. An overview of existing commitments on healthcare and health insurance services shows that WTO Members have made abundant use of these possibilities. While most participants elected not to undertake bindings on healthcare services at the end of the Uruguay Round, nor to make offers in the ongoing negotiations, insurance services have been among the most frequently committed sectors. If there is a common denominator, regardless of the Members concerned (except for recently acceded countries), it is the existence of a lot of 'water' between existing commitments and more open conditions of actual access in many sectors. This may also explain, in part, why there have been very few trade disputes under the GATS to date - far fewer than under the GATT in merchandise trade. Also, governments appear to be generally hesitant in politically and socially sensitive areas to take action in the WTO. There are indications, however, that the same 'players' have acted differently in other policy contexts. For example, it appears that under recent preferential trade agreements (PTAs) the European Communities has been even more cautious in committing on hospital services and protecting scope for (discriminatory) subsidies than under the GATS. Yet, this is not necessarily true for the obligations assumed by many countries, including individual EC Member States, under bilateral investment treaties (BITs). These treaties overlap with the GATS, as far as commercial presence is concerned, and may be used by aggrieved investors to challenge policy restrictions in host countries. However, though frequently invoked, BITs do not meet the same standards, in terms of transparency, open (consensual) rulemaking and legal certainty, as commitments under the GATS.

Tariff water –the difference between bound and applied duties– provides relevant information on domestic trade policy and WTO trade negotiations. This paper examines the general and sectoral tariff structure of 120 economies, using exploratory data analysis.

We consider the purpose and design of the World Trade Organization (WTO) and its predecessor, GATT. We review recent developments in the relevant theoretical and empirical literature. And we describe the GATT/WTO architecture and briefly trace its historical antecedents. We suggest that the existing literature provides a useful framework for understanding and interpreting central features of the design and practice of the GATT/WTO, and we identify key unresolved issues.

I propose a framework within which to interpret and evaluate the major reforms introduced to the GATT system in its transition to the WTO. In particular, I examine the WTO Agreement on Safeguards that has replaced the GATT escape clause (Article XIX), and the Dispute Settlement Process (DSP) that resembles a court of law under the WTO. Using this framework, I interpret the weakening of the reciprocity principle under the Agreement on Safeguards as an attempt to reduce efficiency-reducing trade skirmishes. The DSP is interpreted as an impartial arbitrator that announces its opinion about the state of the world when a dispute arises among member countries. I demonstrate that the reforms in the GATT escape clause should be bundled with the introduction of the DSP, in order to maintain the incentive-compatibility of trade agreements. The model implies that trade agreements under the WTO lead to fewer trade skirmishes but this effect does not necessarily result in higher payoffs to the governments. The model also implies that the introduction of the WTO court, which has no enforcement power, can in fact improve the self-enforceability of trade agreements.

The article analyses the role of international supply chains as transmission channels of a financial shock. Because individual firms are interdependent and rely on each other, either as supplier of intermediate goods or client for their own production, an exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain. The transmission of the initial financial shock through real channels is tracked by modelling input-output interactions. The paper indicates that when banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and if assets are priced to market, then a resonance effect amplifies the back and forth transmission between real and monetary circuits. The paper illustrates the proposed methodology by computing a supply-driven indicator (IRSIC) and indirect demand-driven impacts on five interconnected economies of different characteristics: China, Japan, Malaysia, Thailand and the United States.

Using a dataset of 138 countries over a period from 1966 to 2004, this paper analyses the relevance of country specific shocks for income volatility in open economies. We show that exposure to country specific shocks has a positive and significant impact on GDP volatility. In particular, we find that the degree to which the cycles of different trading partners are correlated is more important in explaining exporters’ GDP volatility than the volatility of demand in individual export market. We also show that geographical diversification is a significant determinant of countries' exposure to country specific shocks. Keywords: income volatility, geographical export diversification, external shocks.

Two institutions provide multilateral venues for countries to discuss food safety measures at the international level: the Codex Alimentarius Commission (Codex) and the World Trade Organization. Both institutions encourage their members to base food safety standards on scientific evidence. In this paper we provide a description of how food safety related scientific evidence is generated and how it is used in the context of risk assessment for international standard-setting at CODEX and in WTO trade disputes. In particular, we discuss the processes leading to policy conclusions on the basis of scientific evidence, with a focus on the interactions involved between private and public sector actors and those between “scientific experts” and others. We identify weaknesses in the current institutional set-up and provide suggestions on how to improve the interaction between different players at the national and international level so as to strengthen the existing system and increase its cost efficiency.

Recent empirical evidence has shown that trade liberalization promotes innovation and productivity growth in individual firms. This paper argues that different types of trade liberalization – multilateral versus regional – may lead to different R&D and productivity levels of firms. Trade agreements between countries are modelled with a network: nodes represent countries and a link between the nodes indicates the existence of a trade agreement. In this framework, the multilateral trade agreement is represented by the complete network while the overlap of regional trade agreements is represented by the hub-and-spoke trade system. Trade liberalization, which increases the network of trade agreements, reinforces the incentives for firms to invest in R&D through the creation of new markets (scale effect) but it may also dampen these incentives through the emergence of new competitors (competition effect). The joint action of these two effects within the multilateral and the regional trade systems gives rise to the result that, for the same number of direct trade partners, the R&D effort of a country in the multilateral agreement is lower than the R&D effort of a hub but higher than the R&D effort of a spoke. This suggests that a ”core” country within the regional trade system has higher R&D and productivity level than a country with the same number of trade agreements within the multilateral system whereas the opposite is true for a ”periphery” country. Additionally, the paper finds that while multilateral trade liberalization boosts productivity of all countries, regional trade liberalization increases productivity of core economies but may decrease productivity of periphery economies if the level of competition in the new trade partner countries of the periphery economy is ”too high”. Furthermore, the aggregate level of R&D activities within the multilateral trade agreement exceeds that in the star – the simplest representative of the hub-and-spoke trade system.

WTO arbitrators rely on economics to establish the permissible retaliation limits authorized by the Dispute Settlement Understanding (DSU) which arguably serves to enforce the overall agreement. We examine how theoretical and quantitative economic analysis has and can be used in this stage of the DSU process. First, we identify, characterize, and categorize the major classes of disputes – e.g., those affecting import protection versus export promotion – and use the Bagwell and Staiger interpretation of the WTO principle of reciprocity to provide a theoretical framework that arbitrators can use to identify the maximum level of retaliatory countermeasures. Second, we allocate each of the ten DSU arbitrations that have taken place thus far into one of these categories and compare the arbitrators’ actual approach with the theory. Third, we use this framework to identify three crucial elements to the arbitrators' decisionmaking process for each case: i) the formula that they decide to adopt for identifying appropriate countermeasures, ii) their political-legal-economic decision on a WTOconsistent counterfactual to use to implement the formula, and iii) the quantitative methods they use to necessarily construct the (unobserved) WTO-consistent counterfactual. We examine not only the arbitrations that have taken place thus far, but our approach also illustrates a template for many additional types of arbitrations likely to take place under the DSU. Finally, in the disputes in which this reciprocity approach has not been used, we identify procedural difficulties that arbitrators confront thus highlighting the constraints that hinder their use of economic analysis in practice.

As an internationally standardized product nomenclature, the Harmonized System (HS) is used by WTO Members in their schedules of concessions and in the definitions of product coverage for a number of WTO agreements. The Harmonized System is normally amended by the World Customs Organization every four to six years. These amendments pose considerable challenges for the WTO and its Members. On the one hand, Members need to periodically update their historical schedules of concessions into the latest nomenclature. On the other hand, these amendments may have implications for the definition and thus also the implementation of some WTO agreements where the product coverage is defined in terms of the HS. In either case, the product codes and/or descriptions in the old HS version need to be transposed precisely into those in the new version of HS nomenclature in order to retain the historical concessions or the product coverage unchanged. Given the complexity of HS amendments, this process could be very technical and sometimes tricky. This paper starts by providing an overview of the HS amendments and proposing a categorization of those HS changes in the context of transposition. It then looks back at the history of the introduction of the HS and its subsequent amendments into the WTO schedules and assesses the difficulties and problems which have been faced by WTO Members. On the basis of such analysis, it introduces the successful procedures and methodologies used by WTO Members and the WTO Secretariat to deal with the recent HS2002 transposition. The paper also discusses the implications of the HS amendments to three WTO agreements and the possible approaches to transpose their product lists into a new HS nomenclature.

The paper discusses the efforts deployed by various players, mainly multilateral financial institutions, regional development banks, export credit agencies, to mobilize greater flows of trade finance for developing countries, with a view to help them integrate in world trade. As an institution geared towards the balanced expansion of world trade, the WTO is in the business of making trade possible. Its various functions include reducing trade barriers, negotiating and implementing global trade rules, and settling disputes on the basis of the rule of law. The WTO is also interested in strengthening the "supply-side" of developing countries so that they can respond to new market opportunities. To this end, it supports various initiatives aimed at improving the "trade infrastructures" of developing countries, ranging from the ability to meet international product, safety and sanitary standards, to run efficient customs, or to participate effectively to the multilateral trade negotiations by training public servants. The WTO carries out various initiatives with other partners (public and private sector institutions), in the context of its own technical assistance program, or in the context of multi-agency projects such as the Integrated Framework or the Aid-for-Trade Initiative. Since more than 90% of trade transactions involve some form of credit, insurance or guarantee, one can reasonably say that trade finance is the lifeline of trade. Producers and traders in developing or least-developed countries need to have access to affordable flows of trade financing and insurance to be able to import and export, and hence integrate in world trade. From that perspective, an efficient financial system is one indispensable infrastructure to allow trade to happen. In line with the above initiatives, the WTO has been following actively, and at times, directly supporting, initiatives to boost the availability of trade finance in developing and least-developed countries wherever it was needed. Since the WTO is not a financial institution, it has been supporting in the past few years partners engaged in this effort such as international financial institutions, export credit agencies, large banks and regional development banks. Initially, the WTO has been asked by its members at several points in recent years to examine the issue of availability of trade financing – as a key infrastructure needed by developing and leastdeveloped countries to integrate in world trade. Paragraph 36 of the Ministerial Declaration of Doha requested WTO Members to examine, and if necessary come up with recommendations, on measures that the WTO could take, within its remit, to minimize the consequences of financial instabilities on their trade opportunities. In the context of the newly created Working Group on Trade, Debt and Finance (WGTDF), the interruptions of the flows of trade finance in emerging markets during the Asian and Latin American financial crises were quickly identified as concerns by Members, as well as the chronic difficulties of low income Members to secure more affordable flows of trade financing in the long-run. These concerns were channelled to the WTO Ministerial Meetings in Cancun (2003) and Hong-Kong (2005).2 During this period of examination, the Heads of the IMF, World Bank and the WTO agreed at the General Council Meeting on Coherence of 2002 to form an expert group including all interested parties, multilateral and regional public institutions, export credit agencies, private banks to examine what went wrong in this segment of financial markets, and how to create an enabling environment in local markets to provide adequate flows of trade finance on a on-going basis. In chairing one of these meetings, the Director-General of the WTO defined the role of the WTO in this area: encouraging liberalization of this type of financial services under the financial services agreement, being a regulator of export credit and guarantee subsidies under the ASCM, and serving as a forum to discuss WTO-compatible ways of providing support to developing countries. Conclusions by the Working Group were presented at the WGTDF, and later at the General Council. WTO Secretariat work on this topic up to 2003, in particular its contribution to the WGTDF and to the expert group, was summarized in WTO Discussion Paper 2.4 While the liquidity in financial markets improved from 2002 until the recent turmoil created by the crisis of the sub-prime mortgage markets, trade finance remained an issue for concern for WTO Members, in particular the poorest, which do not have access to international financial markets or for emerging markets which remain prone to changes in market sentiment, and hence credit rating. Despite the rapid development of "trade finance facilitation" schemes developed by regional development banks and the IFC, with immediate success in low income countries, the issue of availability of trade finance came back among other "supply-side" constraints identified by the Aidfor- Trade Task Force, after the WTO Ministerial Meeting in Hong-Kong. While the mandate of the WTO under the Aid-for-Trade is essentially one of evaluation and monitoring, it may be in cases one of advocacy. Based on the work being carried out since 2002, and after consultation with partners (regional development banks, multilateral institutions, export credit institutions,...), input by the WTO Secretariat to boost the availability of trade finance for developing countries under the Aid-for-Trade umbrella was welcomed by Members. Lack of trade financing and guarantee infrastructures were identified as one of the barriers to integration of low income countries in world trade by each of the three regional Aid-for-Trade Reviews. It was acknowledged that the current Aid-for-Trade Initiative could provide the extra leverage to convince WTO partners to deliver more plentiful of trade credit and guarantees to WTO members that need it the most. This paper provides background on the difficulties of some countries and traders to access affordable trade credit and finance, on the growing divide between these low income countries and economically advanced countries in handling modern trade finance instruments, and on the joint reflection undertaken by the WTO, most recently under the Aid-for-Trade programme, and previously under the umbrella of the WGTDF and the Coherence Mandate, to help strengthen developing countries' capacities in this area.

Economic theory has made considerable progress in explaining why sovereign countries cooperate in trade. Central to most theories of trade cooperation are issues of self-enforcement: The threat of reprisal by an aggrieved party maintains the initial balance of concessions and prevents opportunism. However, economic scholarship has been less coherent in explaining why countries choose to settle and enforce their trade disputes with the help of an impartial third party, a “trade court”. Typically, economists focusing on the purpose of trade agreements have assumed away the very reasons why institutions are needed, since under standard assumptions, neither defection from the rules nor disputes are expected to occur. This paper is a step towards the formulation of a coherent economic theory of dispute settlement. It challenges traditional models of enforcement (primarily concerned with acts of punishment) for being insufficient in explaining the existence of dispute settlement institutions. We perform a comprehensive analysis of the economics of dispute settlement institutions and demonstrate to what extent the literatures of trade cooperation and dispute institutions are (and should be) interlinked. On the basis of these theories, we show that dispute settlement institutions in trade agreements may assume a variety of roles, including that of an information repository and disseminator, an honest broker, an arbitrator and calculator of damages, an active information gatherer or an adjudicator.

This paper examines the impact of telecommunications liberalization in Africa on both sectoral performance and economic growth. Besides unilateral measures, we account for WTO commitments fostering the credibility of reforms. Actual regulatory quality plays a major role in bringing down prices and in improving access to telecommunication services in Africa. Competition, notably in the mobile telephony segment, also improves sector performance. Increasing access to mobile networks by 1 per cent translates into a 0.5 per cent increase in real GDP per capita. In Africa, multilateral commitments do not reflect recent reforms. However, at the global level, adherence to the WTO Reference Paper entails lower prices.

The General Agreement on Trade in Services (known as the GATS) is an important new element in the international framework that affects the regulation of every WTO Member's financial sector. However, except for a limited number of country-specific case studies, no attempt has been made to compare WTO commitments to open the domestic banking sector to foreign banks with actual regulatory practice in a systematic and comprehensive manner on a cross-country basis. Nor has much attention been devoted to systematically and comprehensively assess the degree to which WTO Members discriminate against foreign bank. This paper draws upon a new and comprehensive dataset consisting of the commitments countries made at the WTO and the regulations actually imposed on foreign banks by those countries. The dataset covers 123 WTO Members for whom there was also information available on their current regulatory regime for banking (based on the responses to a World Bank survey as discussed in Barth, Caprio, and Levine (2006)). On the basis of that data, the authors develop indices measuring the degree of openness to foreign banking based upon both commitments made and actual regulatory practice, with a view to assessing the overall extent to which countries open their borders to foreign banks more than they are legally obliged to do based upon their WTO commitments. The dataset is also used to assess the overall extent to which countries discriminate against foreign banks by regulating them less favorably than domestic banks. Although our results are still quite preliminary, they do show substantial divergences between commitments and practices. Indices of market openness and discrimination reveal wide differences among the 123 countries in the sample. The paper also identifies various factors that help explain the level of commitments that WTO Members have made.

This paper attempts to fill a gap in the trade literature by providing a comprehensive overview of services liberalization commitments in the new generation of preferential trade agreements (PTAs) as compared to prevailing GATS commitments and Doha Round offers. By developing a new database, the paper reviews the commitments undertaken by 29 WTO Members (counting the EC as one) under mode 1 (cross-border supply) and mode 3 (commercial presence) in 28 PTAs negotiated since 2000. The paper presents a general analysis from both a cross-country and cross-sector perspectives, and also examines in more detail the GATS+ commitments undertaken in a number of key sectors (audiovisual, distribution, education, financial, professional, and telecommunication services). The paper also discusses the potential economic costs arising from these preferential agreements, as well as the potential implications for the multilateral trading system, and for the Doha round of negotiations in particular. The paper concludes by discussing possible approaches to overcome the potential downsides of PTAs, including proposals for a more pro-active role for the WTO in the surveillance of these agreements.

This paper develops a set of time series models to provide short-term forecasts (6 to 18 months ahead) of international trade both at the global level and for selected regions. Our results compare favourably to other forecasts, notably by the International Monetary Fund, as measured by standard evaluation measures, such as the root mean square forecast error. In comparison to other models, our approach offers several methodological advantages, inter alia, a focus on import growth as the core variable, the avoidance of certain difficulties affecting the performance of structural models, the selection of variables and lags on the basis of theoretical considerations and empirical testing as well as a full documentation of the modelling process.

This paper analyses the possible gains from regional and multilateral liberalization of financial services trade for African countries taking into account the implications of such liberalization for financial regulation and capital account liberalization. It also describes existing efforts to integrate financial markets within four African regions (WAEMU, CEMAC, SADC and COMESA) and discusses the existing GATS commitments of the relevant countries with respect to financial services. Although the regions differ significantly, there is scope for further regional integration in all of them. Significant scope also exists for further multilateral liberalization of financial services, in particular with respect to Mode 3.

Economists have increasingly become involved in trade remedy and litigation matters that call for economic interpretation or quantification. The literature on the use of econometric methods in response to legal requirements of trade policy is rather limited. This article contributes to filling this gap by demonstrating the efficacy of using a simple ‘probabilistic’ model in analyzing the ‘likelihood’ of injury to the local industry concerned, following a finding of continuation or recurrence of dumping (or countervailable subsidies). The legal concept of ‘likelihood’ is not only particularly well-suited to illustrate the systemic need for trade lawyers and economists to cooperate. It is also of imminent practical relevance with a groundswell of ‘sunset’ reviews looming on the horizon. We discuss the significance of economic analysis for trade remedy investigations by reviewing the literature, the applicable WTO rules and, in particular, the pertinent case law. The potential value of probabilistic simulations for ‘likelihood’ determinations is exemplified using a real-world application. Using data from past United States International Trade Commission investigations, we find that a probabilistic model that takes account of the uncertainty surrounding economic parameters reduces the risk of misjudging the effect on the domestic industry of a termination of trade remedies.

This paper analyzes the risks of preference erosion arising from MFN trade liberalization in manufactured products. It focuses on developing countries that receive non-reciprocal preferences in the markets of United States, EU, Japan, Canada and Australia. The paper estimates preference margins as the difference between non-reciprocal preferential rates received by individual countries and the best available (MFN or better-than-MFN) treatment received on average by all other suppliers. Most previous work on this subject has compared the preferential rates for individual countries with MFN rates alone, which the paper found to have the effect of over-stating the margin at risk from erosion following MFN reductions. The paper also considers the effect of less than full utilization of preference margins by beneficiaries, but a lack of data prevented the inclusion of this additional moderating factor relating to erosion risk. The paper finds that developing countries as a whole do not loose from preference erosion following MFN liberalization, although significant gains and losses underlie the estimate of the average. Almost all least-developed countries either lose from preference erosion or are unaffected by it because their exports are already largely MFN duty-free. A large number of LDCs are in the latter group. The main sectors where preference erosion occurs are textiles, fish and fish products, leather and leather products, electrical machinery and wood and wood products. As regards trade solutions to preference erosion, options are somewhat limited. Improved utilization rates may help certain countries but certainly do not offer a generalized solution. Limited scope exists for expanding the coverage of preference schemes within the destination markets considered in the paper. Other destination markets might offer some prospect, but these are limited by the fact that the markets studied dominate the trade flows of the beneficiary countries.

The status of public services is one of the most hotly debated issues surrounding the GATS. There are two approaches to distinguish such services from any other services: an institutional approach that focuses on the legal and institutional conditions governing supply (e.g. ownership status, market organisation), and a functional approach based on the policy objectives that may be involved (e.g. distributional and quality-related considerations, concepts of universal access). Given the wide range of institutional arrangements that exist in different jurisdictions, with significant variations over time, the former approach does not appear appropriate. The services provided by government-owned facilities, whose costs are covered directly by the State, may well be indistinguishable, for all practical purposes, from the services provided by private commercial operators, whose users (students, patients, passengers, etc.) are reimbursed. This paper discusses the relevance of the GATS for different organisational settings - from government monopolies to regulated and/or subsidized private provision - that may be used by WTO Members to meet typical public service objectives. It turns out that virtually all forms of organisation can be accommodated within the framework of the Agreement. To fully exploit its opportunities and avoid unpleasant surprises, however, governments would need to thoroughly analyse the relevant provisions in the light of their own policy objectives.

Over the past months, it has become increasingly clear that the services negotiations under the Doha Development Agenda will not produce significant improvements on current commitments unless major new impetus is provided. In an introductory section, this paper discusses various impediments, from the perspective of participating governments, that may explain the lack of negotiating momentum to date. It then provides an overview of existing commitments under the GATS (by sector, mode of supply, and level of development) and of the initial offers that had been tabled by early 2005. Despite the substantial benefits that may be associated with the liberalization of services trade, the GATS has obviously not yet lived up to ambitious expectations. For example, on average across all WTO Members, only one-third of all services sectors have been included in current schedules of commitments; and many entries have been combined with significant limitations on market access and national treatment or with the complete exclusion of particular types of transactions (modes of supply) from coverage. While the ongoing services negotiations provide an opportunity to complement the rule-making efforts of the Uruguay Round with genuine market opening, many governments apparently have found it difficult, despite generally more restrictive access regimes and, thus, potentially higher gains from liberalization than in merchandise trade, to undertake or envisage economically significant bindings across a broad range of services. Five years after the inception of the services round, current negotiating arrangements, based mainly on (bilateral) exchanges of requests and offers, may need to be complemented by common points of reference to provide greater focus and guidance.

This paper estimates the impact of liberalization of temporary movements of individual service suppliers on trade in goods and services. In particular, the paper looks at the impact of the so-called forth mode to provide a service on trade in services under the other three modes: cross-border service supply (Mode 1), consumption abroad (Mode 2) and commercial presence abroad (Mode 3). Estimates are obtained using a gravity model of trade augmented for a measure of temporary movements of service suppliers. Estimates of the size of a country’s Mode 4 trade in services are based on specific information regarding the number of temporary foreign workers occupied in the service sector and their estimated average earnings, thus overcoming the limitations of traditional measures of Mode 4 based on remittances or compensation for employees. We find a positive and significant effect of temporary movements of service providers on merchandise trade and services trade under Mode 1 and 3. No significant relationship is found between services trade under Mode 2 and Mode 4.

This paper explores the role that quality of infrastructure has on a country's trade performance, estimating a gravity model that incorporates bilateral tariffs and a number of indicators for the quality of infrastructure. The paper looks at the impact of the quality of infrastructure (road, airport, port and telecommunication, and the time required for customs clearance) on total bilateral trade and on trade in the automotive, clothing and textile sectors. In order to obtain unbiased estimators, multilateral resistances for tariffs and remoteness are introduced in the gravity equation. Moreover, the robustness of the results is tested by estimating a fixed-effect model, where bilateral indexes of the quality of infrastructure are included. The results can be summarised in four main findings: (i) bilateral tariffs, generally neglected in gravity regression of bilateral flows, have a significant negative impact on trade; (ii) quality of infrastructure is an important determinant of trade performance; (iii) port efficiency appears to have the largest impact on trade among all indicators of infrastructure; (iv) timeliness and access to telecommunication are relatively more important for export competitiveness in the clothing and automotive sector respectively.

This paper analyses to which extent domestic institutions affect trade flows. We use two complementary approaches, one focusing on the size of total trade flows and one focusing on bilateral trade patterns (gravity equation). Besides, we control for two other domestic policy variables: trade policy and domestic infrastructure. We find that the quality of institutions has a positive and significant impact on a country’s level of openness. Domestic tariffs have no statistically significant impact on their own, but do affect total trade flows when combined with good institutions. Domestic institutions also have a positive and significant impact on bilateral trade flows, but the parameter of our institution variables is reduced by almost a half and may turn insignificant when the quality of domestic infrastructure is included in the regression.

This paper explores the role of producer services and ICT on international outsourcing. The motivation for outsourcing is to focus on core business and improve efficiency and outsourcing companies usually outsource a number of functions and the efficiency gains depend on the ability for the suppliers to deliver the required quality at the right time. The timeliness of delivery and the fulfilment of quality standards depend critically on the availability of producer services. I therefore argue that international outsourcing can best be understood within an analysis framework of many suppliers that are interdependent, and the O-ring theory of production is such a theory. The paper first presents and modifies this model and then explores its predictions in an empirical analysis of the determinants of international vertical specialization as defined by an index developed by Hummels et al. (2001). The index is calculated for a cross-section of 52 countries and 5 sectors and regressed on a number of variables affecting the timeliness of delivery. It is found that vertical specialization is sensitive to trade barriers and infrastructure quality and cost of infrastructural services. The relative importance of trade barriers and various indicators of infrastructure vary between sectors. Vertical specialization in the electronics sector appears to be most sensitive to trade barriers and the density of the telecommunication network. This is also the case for the motor vehicles sector, but the size of the parameters is somewhat lower. The chemicals sector is most sensitive to the restriction on maritime services, while for textiles and clothing the aggregated measure of infrastructure had the highest explanatory power. Only in the electronics sector did the wage level (GDP per capita was used as a proxy) matter for vertical specialization.

This paper discusses how information and communication technology (ICT) affects the quality and reach of consumer services. These services need to be provided locally, but consist of several components, some of which can be digitised and transmitted over long distances. A general equilibrium model is developed and numerical simulations in a stylised two-factor, two-region, centre-periphery setting are presented. Trade in intermediate services improves the quality of consumer services enormously in the periphery, but may reduce the quality at the centre. Trade in intermediate services also has a dramatic impact on skilled workers’ wages in the periphery, both relative to unskilled workers in their own region and relative to skilled workers at the centre and leads to a more equal distribution of income both between the centre and the periphery and within the periphery.

The purpose of the paper is to discuss the effects of WTO accession on policy-making and institutional reforms in transition countries. This is done by looking at the experience of those transition countries which are already Members of the WTO. We start by examining the effect of accession on trade policy and distinguish between the effects of accession negotiations and those of autonomous policy initiatives. We find that no precise blueprint of accession conditions can be ascertained, that WTO played a role, albeit not an exclusive one in the process of liberalization, that the costs of WTO Membership are not negligible, that the benefits of WTO Membership are also significant in terms of a better market access, improved governance and a recourse to better economic policies.

Non-transparency is a term given in this paper to a set of government policies that increase the risk and uncertainty faced by economic actors foreign investors. This increase in risk and uncertainty stems from the presence of bribery and corruption, unstable economic policies, weak and poorly enforced property rights, and inefficient government institutions. Our empirical analysis shows that the degree of non-transparency is an important factor in a country's attractiveness to foreign investors. High levels of non-transparency can greatly retard the amount of foreign investment that a country might otherwise expect. The simulation exercise presented in the statistical part of this paper reveals that on average a country could expect 40 percent increase in FDI from a one point increase in their transparency ranking. Pari passu, non-transparent policies translate into lower levels of FDI and hence lower levels of welfare and efficiency in the host country's economy. A nation that takes steps to increase the degree of transparency in its policies and institutions could expect significant increases in the level of foreign investment into their country. This increased investment translates into more resources, which in turn increases social welfare and economic efficiency.

The revolution in the telecommunication industry of recent years raises a number of interesting economic questions with significant policy implications. One of these questions is the extent to which foreign investments in the telecommunication industry is accompanied by policies that are conducive to cross–border investments. These policies can be both domestic and international. The discussion in this paper is limited to the latter by concentrating on the role of the WTO and other international agreements. The purpose of the paper is to evaluate the GATS/Telecom Agreement. This is done by looking at the guiding principles for negotiating market access for foreign investors, by comparing the Agreement with the Telecom Agreement under NAFTA and by discussing the merits of the multilateral approach to negotiating foreign investment in the telecommunication sector. The WTO GATS/Telecom Agreement comes out rather well from this evaluation exercise.

Discussions about international capital movements raise extremely important and controversial questions. Why should countries open up their capital accounts, especially considering that unrestricted international capital movement is a relatively new phenomenon? For example, many OECD countries have not eliminated their foreign exchange restrictions only until the 1980's. If the answer is unequivocally affirmative, does it matter how fast should countries do so? Should they wait until "all essential pieces" of the policy package are in place before they eliminate all restrictions? How are international capital movements related to domestic financial sectors? Is there a difference between opening to competition an industry such as car manufacturing as compared to the banking sector? Should the opening of the banking sector be governed by different rules? Rules about foreign exchange restrictions are already in place in the IMF Articles. Until recently, the IMF Articles only called for the elimination of foreign exchange restrictions on the current account. The ongoing discussion and the controversy about globalization that calls for the capital account liberalization introduces, therefore, a relatively new element into the whole discussion. These questions have also implications for the World Trade Organization. It is well known, that the Uruguay Round Agreements have already provided a coverage for a number of aspects that are directly related to foreign investment. Rules established elsewhere such as in the context of changes to the IMF Articles will obviously have an important bearing for the implementation of rules agreed in the Uruguay Round. This raises a variety of other questions in the mind of some observers. Who should decide about the rules on capital account liberalization? What rules? IMF? What is the role of the WTO? How does one link the two? All of the questions raised above are clearly extremely important and most of them are discussed in the following paper by John Williamson. Mr. Williamson's presentation is based on his lecture and discussion which was delivered on 17 June 1999 at the WTO. The actual text that follows is a transcript of that lecture.

The customs union between the European Union (EU) and Turkey, which entered into force in January 1996, extended and deepened the Association Agreement, signed in 1964 and which foreshadows full EU membership for Turkey. In a number of areas, the new relationship goes beyond the minimum requirements for a customs union: Turkey is also having to implement a number of measures which are part of the acquis communautaire, similar to those applicable within the EU. This paper addresses the question whether this adoption of the EU model is beneficial to Turkey and third countries. The importance of this issue is the spreads of this model through the extension of the EU itself and the building of an increasing web of partnerships between the EU and other countries in Central and Eastern Europe as well as Mediterranean countries. Moreover, other regions are looking at the EU model as a way in which to deepen their own preferential trading arrangements.

This note discusses capital controls using insights from the trade policy literature. It highlights some key issues that have been neglected in the current international debate on capital controls. Capital is tradable in the same way as many goods and services are. As a result, much of the analysis pertaining to trade and trade policy in goods and services applies with equal force to capital movements. Free trade is typically the best trade policy, no matter whether it is trade in goods, services or capital. But if investor behaviour and the prevailing policy environment are not conducive to immediate free trade, the choice of instrument for controlling capital flows becomes important. Tariffs and other price-related restrictions are preferable to quantitative restrictions or prohibitions because: (i) they cause less rent seeking, and (ii) they do not insulate the domestic market from price changes and innovations in international markets.

It has sometimes been argued that "globalization" benefits only a small number of countries, and that this leads to greater marginalization of excluded countries. This paper argues that globalization is not necessarily biased towards greater concentration in international trade and investment flows. Marginalization is more likely to be explained by domestic policies in relatively closed countries. The paper shows that among relatively open economies, the concentration of international trade and investment flows has declined over the last two decades, whereas the opposite is true among relatively closed economies. Thus, marginalization is not intrinsic to globalization. Key Words: Globalization, international trade and investment flows concentration.

The paper studies empirically the fiscal policy instruments by which governments try to influence election outcomes in 24 developing countries for the 1973-1992 period. The study finds that the main vehicle for expansionary fiscal policies around elections is increasing public expenditure rather than lowering taxes, and public investment cycles seem particularly prominent. Institutional mechanisms which constrain discretionary expenditure policies and which strengthen fiscal control are therefore worthwhile considering to prevent opportunistic policy making around elections.

Management of capital inflows has unexpectedly become a major challenge in transition economies. These countries were expected to have an insatiable demand for foreign capital, and an excess demand for capital inflows was, therefore, predicted by most observers. Foreign investors are also known to be very selective in their choice of markets, and these countries were a big unknown. Moreover, macroeconomic policy in these countries has been dominated by the objective of disinflation. We explain in this paper the reasons why some transition countries have been an attractive market for foreign investors and how important has foreign capital been for these countries. But the bulk of the paper provides an assessment of government policies to manage foreign capital inflows. We evaluate the policies against the background of different government objectives and in terms of the actual policy instruments used by the monetary authorities, the timing and sequencing and the costs of these interventions. We argue that the initial responses to capital surges were poor; the authorities were reluctant to adjust their original policies and learn from the experiences elsewhere. Eventually, their policy responses were changed but until the costs of inertia became too high. The authorities have effectively used sterilization policies, more flexible exchange rate policies combined with tight monetary and fiscal policies. They also understood that an effective management of capital flows must start from well functioning markets, and have been prepared to adopt structural policies whenever market imperfections could be identified.

Using the influence-driven approach to endogenous trade-policy determination, we show how a free-trade agreement (FTA) with rules of origin can work as a device to compensate losers from trade liberalization. The FTA constructed in this paper is characterized by external tariff structures that are negatively correlated across member countries, ensuring efficiency gains and, through reduced average protection, compatibility with the multilateral trading system's requirements. It is also politically viable, and we demonstrate that, in the countries concerned, governments are willing to include its formation in the political agenda in spite of the fact that, in equilibrium, political contributions from producer lobbies decline after the agreement.

Market access negotiations in merchandise trade at the multilateral level cover tariffs and non-tariff measures (NTMs). While tariffs have been substantially reduced in earlier rounds, they remain high in certain areas and further reductions involve a number of complex technical issues. Some formulae approaches, not used in the Uruguay Round, seem more favourable to developing countries. Elimination or phased reductions of NTMs in agriculture is one of the main areas for further market access negotiations in trade in goods. However, most NTMs are now the subject to negotiations on the rules under which they may be applied, e.g. in the areas of contingency protection and technical barriers to trade.

This paper analyses the results of the financial services negotiations under the General Agreement on Trade in Services (GATS) at the World Trade Organization (WTO). It shows that the negotiations have contributed to more stable and transparent policy regimes in many developing and transition countries. The wide range of market access and non-discrimination commitments should advance the process of progressive liberalization. The commitments do not compromise the ability of countries to pursue sound macroeconomic and regulatory policies. However, other aspects of the outcome do raise some concerns. First, there has been less emphasis on the introduction of competition through allowing new entry than on allowing (or maintaining) foreign equity participation and protecting the position of incumbents. Secondly, even where immediate introduction of competition was not deemed feasible, not much advantage has been taken of the GATS to lend credibility to liberalization programmes by precommitting to future market access.

The paper studies empirically fiscal policies around elections in 25 developing countries as affected by the exchange regime. It is argued that countries with flexible exchange regimes are less likely to engage in expansionary fiscal policies before elections because such policies can result in devaluations and inflation which affects government popularity adversely. The empirical results show that governments indeed try to improve their re-election prospects with the help of expansionary fiscal policies only in countries with fixed exchange rates and adequate reserve levels. For some countries, this raises doubts about the usefulness of fixed exchange rates for stabilizing the macro economy, unless reforms of the institutional framework reduce the scope for election-oriented fiscal expansion.

The EU's import policies towards developing countries are complex, stemming from important sectoral and country variations in policy. Average tariffs are modest, and, while there are tariff peaks and escalation in some areas of interest to developing countries, these are being reduced as a result of the implementation of the results of the Uruguay Round. The use of non-tariff measures has fallen, particularly as a result of agricultural tariffication, and is being further reduced in textiles and clothing. The elimination of VERs has not led to an increase in the use of alternative measures. Contingency protection falls more heavily in chemicals, iron and steel, certain textile items and certain electrical consumer goods and on Asian, Central and Eastern European and former Soviet Union countries. The operation of various factors appears to be working to mitigate the use of trade defence measures in recent years, helping to counter pressures that seem likely to arise as liberalization proceeds.

This paper is concerned with three problems in the interpretation of the national treatment obligation in the General Agreement on Trade in Services (GATS). First, the precise domain of Article XVII on national treatment has not been clearly delineated, particularly in relation to Article XVI dealing with market access. Secondly, there is a difference between the text of Article XVII and the structure of the schedules of commitments, which makes it difficult to interpret the scope of the national treatment obligation even for identical services supplied through different modes. The final, and most complex, problem arises in establishing the definition of "like" services and "like" service suppliers. Uncertainty about the precise meaning of the national treatment obligation may undermine the key GATS objective of creating a secure, predictable trading environment. Moreover, the extent of liberalization implied by the commitments under GATS depends on the precise choice of interpretation.

The objective of this paper is to assess the adequacy of multilateral rules dealing with monopolies and state enterprises, particularly in the domain of services. This paper argues that since these rules depend largely on the other obligations undertaken by Members, a variety of exemptions and exclusions have weakened the rules considerably. Furthermore, liberalization of services trade, aided by negotiations under the GATS, is leading to changes in market structure and the pattern of ownership. These changes imply that government-mandated monopolies or non-competing oligopolies are disappearing from the infrastructural services for which Article VIII of GATS is most relevant. The behaviour of dominant suppliers that often remain does not fall within the scope of Article VIII and has been addressed by creating other disciplines. The paper assesses how much emphasis needs to be placed on pro-competitive regulation to ensure competitive market conditions and argues that there is a need to strengthen Article VIII and widen its scope to deal with certain generic problems.