Three int'l organisations & global free trade

Asjadul Kibria | Published: August 10, 2024 20:38:35

In principle, free trade means the free movement of goods, services, capital and people across borders. In practice, it means national policies and regulatory objectives put greater or lesser constraints on the movement of each. It is how the Dictionary of Trade Policy Terms [P-181; Fifth Edition; Cambridge University Press, 2007] defines free trade, adding that the meaning of 'free trade' has changed over the decades. For instance, in the case of American policy, free trade meant a tariff under 20 per cent in the early 19th century. By the middle of the 20th century, it meant a tariff of less than 5 per cent. Thus, the tariff level is critical to understanding a country's trade liberalisation process, which emphasises the gradual or complete removal of existing trade impediments in goods and services. Free trade is the ultimate aim of trade liberalisation.
During the final phase of the Second World War, leaders of the Allied Powers, Britain and the United States (US) started to plan a new world order where free trade was one of the major priorities. To that end, 44 nations gathered at Bretton Woods in New Hampshire, USA, and decided to launch three international institutions: the International Monetary Fund (IMF; the International Bank for Reconstruction and Development (IBRD), later known as the World Bank; and the International Trade Organization (ITO). Though the first IMF and World Bank became a reality in later years, ITO never came into existence due to the non-cooperation of the USA, whereas it was planned to deal with the real side of trade relations and promote a liberal trade regime. Instead, the General Agreement on Tariffs and Trade (GATT), the codification of a set of mutual tariff reductions agreed by 23 nations in Geneva in 1947, became the framework of trade relations globally. In 1995, GATT was replaced by the World Trade Organization (WTO), which is a modern-day form of the ITO planned eighty years ago. WTO is a multilateral body that discusses, negotiates, and resolves trade issues, covering goods, services, intellectual property, and other issues. It is also designated to assist in resolving trade disputes and overseeing national trade policies to facilitate free trade.
It is relevant to ask to what extent the WTO contributed to reducing tariffs and liberalising trade among nations during its thirty years of existence. In the last three decades, global trade has surged significantly, reaching over US$30.4 trillion in 2023, registering a fivefold growth since 1995. Between 1995 and 2023, total global trade-goods and commercial services-grew strongly, 5.8 per cent annually on average.
There has also been a clear downward trend in tariffs since the WTO was established in 1995. Statistics available with the WTO showed that the simple average tariff applied by WTO members on a most-favoured nation (MFN) basis has declined from 13.1 per cent to 8.8 per cent from 1995 to 2022. A similar trend emerges for tariffs applied on a trade-weighted basis, with the average MFN tariff dropping from 7.1 per cent to 3.8 per cent. Again, between 1996 and 2022, the trade-weighted average of applied tariffs dropped from 6.9 per cent to 2.0 per cent, respectively. But is it solely WTO's contribution? The answer is no. Instead, two other international organisations known as Bretton Wood twins also played a critical role in this connection.
Tariff reduction is the primary and most significant move to reform the trade regime of a country on the path to liberalisation. During the '80s and '90s, many highly protected economies were opened to world trade through trade policy reforms. Generally, three types of reforms were undertaken by the developing nations. These are (a) devaluing the local currencies and adopting competitive exchange rates, (b) abolishment of foreign exchange controls and conversion of quantitative import restrictions into tariffs, and (3) gradual reduction of the dispersion and level of those tariffs. In a paper titled 'The World Bank, the IMF, and the GATT/WTO: Which Institution Most Supported Trade Reform in Developing Economies?' economist Douglas A Irwin argued that in most cases, these reforms were undertaken unilaterally, often amid an economic crisis. He, however, acknowledged that the above-mentioned three international organisations 'supported and encouraged the reform efforts.'
The paper, published by the Washington-based Peterson Institute for International Economics in 2022, highlights the unilateral efforts of developing economies to reduce tariffs. Between 1983 and 2003, these economies undertook most tariff reductions unilaterally, leading to a significant decline in the average applied tariff rate from 29.90 per cent to 11.30 per cent. Of the total cut of 18.60 percentage points, 12.30 percentage points were unilateral, demonstrating their strong commitment to trade reform.
Again, in 2001-13, tariffs were reduced from 7.2 per cent to 4.6 per cent on average, and most of the reduction in applied tariffs of developing nations was made unilaterally. Of this 2.6 percentage point decline, unilateral liberalisation accounts for 1.3 percentage points, WTO commitments for 1.0 percentage points, and regional agreements for 0.3 percentage points. Citing the example of India, the paper mentioned that India's tariff fell from 30.0 per cent to 9.7 per cent over this period, almost all of which was done unilaterally.
Bangladesh was not committed to reduce tariffs under the WTO due to its Least Developed Country (LDC) status. Nevertheless, the country's MFN simple average tariff rate declined from 26.70 per cent in 1998 to 15.30 per cent in 2005 mainly due to conditions set in the IMF and WB assistance programmes. The country's MFN tariff rate declined slowly further and came down to 14.10 per cent in 2023.
Irwin concluded that finance ministries and central banks were the key actors in all the countries that undertook extensive reforms to open their economies during the '80s and '90s. He also added that 'the Bank, the Fund, and the GATT/WTO contributed in some way and in some countries in this effort, but often more indirectly than directly.' A missing point here is that finance ministries and central banks were largely driven by the Bank and the Fund to undertake the reform programmes including reduction of tariffs.
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