The Uruguay Round has produced the most fundamental reform of the world trading system since the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947. It extends coverage to more products and countries and reflects a wider and deeper commitment to trade liberalization. The establishment of the World Trade Organization (WTO) will contribute to a necessary strengthening of the global trading system, with stronger procedures for settling disputes, a mechanism for reviewing country trade policies, and greater involvement of ministers in decisionmaking.
The Round is likely to generate global income gains of up to $200 billion a year, with somewhere between a third and a half of the gains going to developing countries, primarily to the ones that have reduced their own protection and locked in the benefits of earlier reforms.
The reductions in the protection provided to manufactures were generally substantial, with deep tariff cuts and the outlawing of important nontariff barriers---such as voluntary export restraints, including the Multifibre Arrangement. If this success does not lead countries to turn to other routes to protection---such as antidumping and safeguard mechanisms, which were not significantly changed by the Round---it will generate strong benefits. Where a complete framework of rules had to be negotiated, as in agriculture and services, less progress was made in reducing protection. In agriculture the agreed reductions in protection were attenuated by the way nontariff barriers were converted to tariffs, while in services almost no liberalization occurred.
The Round went far beyond what had been achieved in previous rounds, in involving developing countries in the multilateral trading system, in extending coverage to agriculture and services, and in covering new aspects of trade such as trade-related intellectual property rights (TRIPs) and trade-related investment measures (TRIMs). The General Agreement on Trade in Services (GATS), although achieving little in immediate reductions in protection, is a landmark in creating trade disciplines in virgin territory. And the TRIPs agreement will eventually increase the protection of intellectual property rights worldwide.
Some of the most important changes produced by the Uruguay Round are institutional. Trade rules were reformed across the spectrum and brought under the aegis of the newly created WTO, now responsible for overseeing the implementation of reforms in trade in goods (under the GATT as modified by the Uruguay Round), in services (under the GATS), and in intellectual property rights (under the TRIPs agreement).
The Round's agreements remove several distortions that previously weakened the integrity of the trading system---abolishing the voluntary export restraints and phasing out the Multifibre Arrangement. The dramatic increase in tariff bindings in developing countries, both in agriculture and in manufacturing, intensifies the importance of the global trading system for regulating national trade policy. The reassertion of the GATT's coverage of agriculture is particularly important, not so much for the reductions in protection---they were generally small---as for getting agricultural trade back under multilateral discipline and laying the foundations for future negotiations. The incorporation of services expands the scope of the system and thus the scope for further gains from negotiation. But the GATS architecture presents difficulties both in enforcing the current agreement and in extending it to new areas.
The WTO's dispute settlement procedures are substantially stronger than those of the previous GATT, whose dispute resolution process could be blocked at the stage of forming a panel or of adopting a panel's report and could be delayed interminably. Under the new system the right to a panel is virtually automatic, and the panel's report may be rejected only if there is a consensus among WTO members to reject it. Moreover, all procedures must now follow a strict timetable.
The permanent establishment of the trade policy review mechanism (TPRM), with a broad mandate to review the trade policies of member countries in goods and to extend its purview to services, should increase the transparency of national trade policies. The interest groups that benefit from protection are typically very well informed about the measures that affect them directly, but the opacity of many forms of protection and the complexity of their effects has made it difficult to build opposition to such measures. The greater transparency resulting from TPRM reviews is beginning to change this.
In many areas the Round's agreements clarify the rules of the game. Replacing the plethora of nontariff barriers in agriculture with bound tariffs is clear progress in refining the rules, as is incorporating a common definition of subsidies in the agreements on subsidies and countervailing duties.
The full impact of the Round on the strength of the global trading system is difficult to gauge, however. The fact that it was introduced as a single undertaking---with almost all its disciplines applying to all members---is a big advance on the Tokyo Codes approach, under which many disciplines were optional and many developing countries did not sign on to some of them. But since international law is limited by the willingness of sovereign nations to accept its disciplines, implementation of the Round's agreements must walk a fine line between being too restrictive for countries to accept and being too lenient to be effective. The WTO will undoubtedly be challenged. If the implementation of agreements does not proceed as agreed, many of the gains it makes possible will be in jeopardy.
The Uruguay Round will produce significant increases in world income and distribute them widely among industrial and developing countries. These gains will naturally require countries to make adjustments, but the needed restructuring is generally likely to be much smaller than that required to accommodate the normal processes of growth and structural change. Moreover, the impact on real wages will generally be positive, particularly in developing countries.
The Round's agreements on merchandise trade are expected to generate substantial income gains because they result in sizable reductions in protection on manufactures and because the relatively small reductions in agricultural protection occur in a highly protected sector where very sizable efficiency gains are possible.
A number of recent studies point to significant gains in global incomes from the increases in market access for agricultural and industrial products negotiated under the Round (table 1). The studies differ in detail because their methodologies differ, but together they constitute strong evidence of the benefits of the Round.
One study (Francois, McDonald, and Nordstršm) estimated the gains from merchandise trade liberalization with firms assumed to produce differentiated products under imperfectly competitive conditions, and consumers assumed to exhibit a preference for variety in the goods available to them. The estimated benefits come to $94 billion a year in 1992 U.S. dollars. When induced increases in the capital stock are also incorporated, the gains rise to $214 billion a year, or 0.94 percent of global output. Almost half of this gain is estimated to accrue to developing countries, where the gains constitute a higher percentage of base GDP (about 2 percent).
A second study (Harrison, Rutherford, and Tarr) preferred a model in which economies of scale allow for a rationalization of firms as markets expand. This study assumed that the capital stock will adjust to keep the return on capital constant and recognized that new investment allows greater substitution possibilities between uses of resources than is found in the short run. That led to income gains of $171 billion, or 0.74 percent of global GDP, with roughly a third to developing countries.
A third study (Hertel, Martin, Yanagishima, and Dimaranan) focused primarily on manufactures and incorporated the projected growth and structural change over the period up to full implementation of the Round in 2005. This tends to increase the estimated gains because the world economy is larger and, without the Round, would be more distorted in 2005 than in 1992. The greater distortions arise because of faster growth in developing countries, where current average protection rates are higher, and the increased restrictiveness of the Multifibre Arrangement. In this model the estimated income gains from the Round are $258 billion a year, or about half of 1 percent of GDP in 2005, even without economies of scale or Round-induced capital accumulation.
Another important issue affecting the level and distribution of benefits from liberalization is the performance of labor markets. If unemployment exists because real wages are tied to the cost of living, trade liberalization can provide a substantial stimulus to employment and output by lowering living costs and hence the cost of employing labor. A fourth study (Goldin and van der Mensbrugghe) added this consideration to its model and found the gains to be $235 billion a year, with $56 billion going to developing countries.
Which to believe? None too literally. The idea is merely to give some indication of the range of gains likely.
Analysts also disaggregated the effects of the Round on real incomes and real wages by region (table 2, based on Harrison, Rutherford, and Tarr).
The results for each region depend on the efficiency gains from each country's liberalization, the terms of trade effects, and the implications of abolishing the Multifibre Arrangement (increasing efficiency and reducing excess profits).
The regions whose liberalization implies larger reductions in the domestic prices of imports generally enjoy larger gains in real income (figure 1, based on Hertel and others). Consumers can buy what they need from the most efficient source. Producers can scale back the production of goods made more efficiently in other countries and increase the output of goods produced most efficiently at home. The government collects its remaining trade taxes on a larger trade volume. Further gains can be achieved by greater exploitation of scale economies in production---and from improvements in the range and quality of specialized products available to producers and consumers. In addition, countries can gain from reductions in protection by their trading partners, particularly if this increases the demand for their exports and improves their terms of trade.
Despite their large absolute size, the gains for the industrial country blocs are generally small as shares of GDP, whereas for the developing countries undertaking substantial liberalization, the benefits account for much larger shares of GDP.
What lies behind these big gains? Tariffs on manufactures imports into industrial countries were reduced from a trade-weighted average of 6.3 percent to 3.8 percent, a cut to be phased in over five years. The reductions were not uniform, but were the outcome of a series of bilateral request-and-offer negotiations whose results were extended to all Round participants. For industrial countries, tariffs were reduced by an average of 45 percent on imports from other industrial countries and by only 30 percent for imports from developing countries. For developing countries, the reductions in tariff rates on manufactures averaged 28 percent on products from industrial countries and 29 percent on those from developing countries.
Commitments under the GATT take the form of bindings---commitments not to levy a duty exceeding a particular (bound) rate. The proportion of industrial countries' tariffs on industrial products subject to bindings rose from 94 percent to 99 percent as a result of the Round. With 18 percent of the imports into these countries already bound duty-free, tariff reductions were feasible on only 82 percent of imports. Tariffs were, in fact, reduced on 64 percent of imports---with the remaining 18 percent divided between bindings without reduction and no offer.
The proportion of developing countries' imports of industrial products subject to bindings rose from 13 percent before the Round to 61 percent after it. This increase in the coverage of bindings was very widespread, with substantial increases in all regions. With only 1 percent of their manufactured imports initially bound duty-free, there was scope for tariff reductions on 99 percent of imports. Bindings involving tariff reductions were offered on 32 percent of imports, while bindings without reductions (ceiling bindings) were offered on a further 26 percent; no offers were made on the remaining 42 percent. So, developing countries made very substantial progress with their tariff bindings and reductions, but clearly much remains to be done.
If the average tariff cut in the Round had been uniform, it would have had the economically desirable feature of implying a larger reduction in the tariff-inclusive price of more highly protected goods. But there was only a very weak relationship between the initial rate of protection and the price reduction achieved. For industrial countries' imports from developing countries, the two sectors with the highest tariffs (textiles and clothing, and footwear) experienced smaller price reductions than did many other sectors.
For developing countries' imports from industrial countries, there is no evidence of a consistent relationship between the initial tariff level and the reduction in the domestic prices of imported goods. What is clear, however, is that the average depth of the tariff-induced price cuts from the Round was greater in developing countries than in industrial countries. While the proportional tariff cuts were smaller in developing countries, the price cuts are larger because they apply to higher initial tariffs.
Tariff escalation in industrial country markets---an increase in tariff rates with the stage of processing---is a long-standing concern of developing countries because it discourages the export of processed raw materials. Tariff cuts under the Round reduced the absolute degree of tariff escalation on imports of manufactures, although some escalation clearly remains.
Drawn from Will Martin and L. Alan Winters, The Uruguay Round: Widening and Deepening the World Trading System, Washington, DC: World Bank, 1995.
For further readingThe papers listed below are available in Will Martin and L. Alan Winters, editors, The Uruguay Round and the Developing Economies, World Bank Discussion Paper 307, Washington, DC, 1995. For ordering information for this publication and that cited above, see page 16.
