The economics of international trade policy laws and institutions: Theory and evidence

The first chapter presents a theory establishing why trade disputes occur under the rules of the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO). Previously, economic theory had not provided a convincing rationale for why the existence of the GATT's Article XXIII could not prevent countries from violating the rules of trade. This paper illustrates the incentives facing countries that seek trade policy flexibility and who must choose between implementing changes under the GATT's safeguard provisions or in violation of GATT rules. We find that terms-of-trade motivations can be seen to influence a country's protection-implementation decision. The model is then used to provide an economic motivation and interpretation for some of the reforms establishing the WTO.; The second chapter analyzes empirically how countries implemented protection under the GATT. We build a data set in which countries offer two kinds of protection: (i) ‘legal’ protection in which trade restrictions are implemented under the safeguards provisions, and (ii) ‘illegal’ protection in which the GATT was not notified that the additional trade restrictions would be implemented, resulting in a trade dispute. The theory and data are then used to identify observable economic factors that influence a government's policy decision, and we implement a binary choice model to estimate the magnitude and influence of the international trade effects on the decision-making process. The empirical results provide substantial support for the proposed theory.; The third chapter turns to non-trade issues, as the focus of the WTO has moved beyond the realm of traditional trade relations covered under the GATT and into typical domestic policy areas such as environmental and labor standards, intellectual property, antitrust and regulation. With the expansion of the scope of the WTO, one predominant area to address is the issue of linking standards to trade and trade policy. By appealing to the issues involved in the onset of the “new” trade disputes concerning standards, we illustrate how a proposal linking domestic and trade policies through the reciprocity principle can be successful in restoring efficiency when governments need flexibility with respect to their domestic policies.