The chapters assembled in this volume deal with preferential trade agreements (PTAs), a topic that has repeatedly attracted the interest of analysts. One might naturally wonder why we need to revisit this issue once again. We believe that there are various good reasons, not necessarily mutually coherent. First, from a pure policy perspective, it is the World Trade Organization (WTO) through its Director General that has placed this item among the priority items for (re)negotiation. Obviously, the feeling must be that something has not been functioning as expected. We want to explore the legitimacy of this claim. On the other hand, recent empirical research casts doubt to the old “trade diversion” school: papers have seen the light of day arguing that no (or insignificant) trade diversion has resulted from the formation of recent PTAs. If so, why should we deal with PTAs at all? Then there is the issue of content of PTAs: many recent PTAs (i.e., after the advent of the WTO) have a subject matter that does not come under the mandate of the WTO as we now know it. The obvious question in this context is what the role should be of the WTO when dealing with issues such as environmental protection or macroeconomic cooperation.

We have put together a stellar group of researchers to discuss this topic.

In his introductory piece, Alan Winters provides a helicopter view of the economics and policy issues surrounding PTAs.

This is the third volume in the series Columbia Studies on WTO Law and Policy. Our focus this time is on the Law and Economics of Contingent Protection. Our invited authors contributed chapters on antidumping, subsidies and countervailing measures, and safeguards.

Wouters and Coppens provide insight into the World Trade Organization (WTO) multilateral disciplines on subsidies and on measures taken to respond to subsidies (i.e., countervailing duties [CVDs]). These disciplines are articulated in the GATT 1994, the Agreement on Subsidies and Countervailing Duties (SCM Agreement), as well as the Agreement on Agriculture (AoA). After an overview of the historical and legal context of the SCM Agreement, the authors provide a systematic legal analysis of its main provisions, integrating the substantial amount of relevant case law. Finally, the specific disciplines for agricultural subsidies, as spelled out in the AoA in interaction with the SCM Agreement, are clarified.

Howse takes issue with the decision of the WTO Membership to abandon the so-called nonactionable subsidies, that is, subsidies against which no reaction by affected Members was permissible. These subsidies lapsed in 2001. Howse takes the view that this decision was not well thought out, and claims that developing countries might be the losers here. He offers arguments in favor of reinstating this category in the current SCM Agreement.

Francois provides an economist's reaction to the current regulatory framework regarding the calculation of benefit stemming from the payment of subsidy.

This chapter examines the World Trade Organization (WTO) rules and decisions concerning export subsidies in the nonagricultural context to determine why these disputes are so prevalent and contentious and whether the rules or their interpretation should be altered. It discusses the basic economic case against export subsidies and political economy explanations for their continued use. It then reviews two central concerns about the WTO rules on export subsidies. First, it examines issues surrounding identification of export subsidies, including defining what constitutes a subsidy, distinguishing export subsidies from other types of subsidies, and how closely the WTO should review domestic policies for potential (rather than actual) export subsidies. Second, it discusses the difficulty the WTO has had in finding an appropriate remedy for violations of the prohibition against export subsidies. It argues that existing WTO rules do not adequately address either set of issues. In particular, Panels and the Appellate Body should adopt a more appropriate level of penalty for the use of export subsidies, such as tying the level of penalty to the adverse trade effects from the subsidy.

Introduction

Export subsidies have been at the center of a long series of high-profile disputes at the WTO. For example, in the 1990s, Canada and Brazil initiated reciprocal complaints that each gave subsidies for the export of domestically made regional aircraft. A number of countries challenged the United States over its rules for “foreign sales corporations.”

INTRODUCTION

Over the postwar period, the General Agreement on Tariffs and Trade (GATT) has sponsored eight rounds of trade-policy negotiations. The most recent round of negotiations, which was completed in 1994, resulted in the creation of the World Trade Organization (WTO). The WTO includes the text of GATT, but it also goes further and embodies a set of agreements that build on and extend GATT principles to new areas. The central role played in the world economy by GATT/WTO is widely accepted. Indeed, through the eight rounds of GATT negotiations, the average ad valorem tariff on industrial goods has fallen from over 40 percent to below 4 percent. Over this period, GATT/WTO membership has also grown in number from twenty-three to now over 140 countries.

Given the significant influence of GATT/WTO on the world economy, it is of special importance to assess the progress that economists have made in providing a theoretical interpretation of GATT/WTO. This is the focus of the present essay. Our discussion proceeds in three broad steps. First, we consider the theory of trade agreements. We organize our discussion here around a simple but fundamental question: What is the problem that a trade agreement might solve? Second, we briefly describe the history and institutional design of GATT/WTO. Finally, we draw on the recent theoretical literature and interpret the design of GATT/WTO. Our discussion examines two key features of GATT/WTO: reciprocity and enforcement.

Introduction

Are preferential agreements at odds with the multilateral trading system? This is a question of fundamental importance to the design of the GATT–WTO system. And it is a question that has become increasingly pressing as more countries negotiate free trade agreements (FTAs) (in which member countries eliminate their internal barriers to trade) and Customs Unions (CUs) (in which member countries also set common external tariffs (CETs)) under the GATT's Article XXIV exception to the principle of non-discrimination.

An answer to this question requires an understanding of the key components of the multilateral trading system, and of the way that these components work to shape the trade agreements that can be implemented within the GATT–WTO. There are three components that serve as the cornerstones of the GATT system: the principles of reciprocity and nondiscrimination, which are regularly singled out as the ‘pillars’ of the GATT architecture, and the enforcement mechanisms, which Dam (1970, p. 81) calls the ‘heart’ of the GATT system. In this chapter, we describe how preferential agreements interact with the multilateral system in light of its three principal components.

We find it analytically convenient to divide the question posed at the outset into two parts. We first ask: are preferential agreements at odds with a multilateral trading system that is based on the principles of reciprocity and non-discrimination? A remaining question is then: how do preferential agreements interact with the enforcement provisions of the GATT? An answer to the first question requires a framework within which the principles of reciprocity and non-discrimination can themselves be interpreted and understood.