300 Trade
treaty, which was subsequently ratified by member states under their individual
constitutional provisions.
The WTO is based on three primary norms. First, all members agree to extend
unconditional most-favored-nation (MFN) status to one another. Under this
agreement, no country receives any preferential treatment not accorded to all other
MFN countries. Additionally, any benefits acquired by one country are automatically
extended to all MFN partners. The only exceptions to this rule are customs unions,
such as the European Union.
Second, the WTO is based on the norm of reciprocity—the concept that any
country that benefits from another’s tariff reduction should reciprocate to an
equivalent extent. This norm ensures fair and equitable tariff reductions by all
countries. In conjunction with the MFN (or nondiscrimination) norm, it also
serves to reinforce the downward spiral of tariffs initiated by the actions of any
one country.
Third, “safeguards,” or loopholes and exceptions to other norms, are recognized
as acceptable if they are temporary and imposed for short-term balance-of-payments
reasons. Exceptions are also allowed for countries experiencing severe market
disruptions from increased imports.
The GATT and WTO have been extremely successful in obtaining the declared
goal of freer trade and lower tariffs. By the end of the Kennedy Round of the
GATT in 1967 (initiated by President John F.Kennedy in 1962), tariffs on dutiable
nonagricultural items had declined to approximately 10 percent in the advanced
industrialized countries. In the Tokyo Round, concluded in 1979, tariffs in these
same countries were reduced to approximately 5 percent, and member countries
pledged to reduce their remaining tariffs by a further 40 percent in the Uruguay
Round, concluded in late 1993. These significant reductions initiated an era of
unprecedented growth in international trade, which continues today. The two most
rapidly increasing areas are the overlapping realms of trade between advanced
industrialized countries and intrafirm trade (the exchange of goods within, rather
than between, corporations).
The WTO continues to be an active force for liberalization. In the late 1980s
and early 1990s, the Uruguay Round focused on the thorny issues of services
and agricultural trade—two areas that had been excluded from earlier negotiations.
Governments have long regulated many of their domestic service industries,
such as insurance, banking, and financial services. Often differing dramatically
from country to country, these regulations have become politically contentious
barriers to trade. Likewise, governments in most developed countries subsidize
their agricultural sectors, leading to reduced imports and increasing surpluses
that can only be managed through substantial sales abroad. Nearly all analysts
agree that national and global welfare could be enhanced by reducing agricultural
subsidies and returning to trade based on the principle of comparative advantage;
yet as the prolonged negotiations of the Uruguay Round demonstrated, politicians
have found it difficult to resist demands from farmers for continued government
intervention. Here, as in other areas, the tension between national wealth and
the self-seeking demands of domestic interest groups has created a difficult
diplomatic issue—but one that, after years of comparative neglect, finally made