8 Who are the WTO, and What

Do They Have Against

Dolphins?
International Trade
John McLaren

The Dolphin Fiasco.

Yellowfin tuna often swim below schools of dolphins in
Pacific.
As a result, dolphins are often caught in the tuna net and
drown.
US Marine Mammal Protection Act (1972) banned
imports of tuna from countries that cannot demonstrate
that they are ‘dolphin-safe.’
(‘Primary country embargo.’)

The Dolphin Fiasco.

Also banned: Imports from countries that buy from
those countries. (‘Intermediate country embargo.’)
1990-1: Primary embargo imposed on imports from
Mexico, Venezuela and Vanuatu.
Intermediate embargoes: Costa Rica, Italy, Japan, and
Spain, France, the Netherlands Antilles, UK.
1991: Mexico complained to GATT dispute panel.
Panel ruled for Mexico.
Reasons:
(i) ‘Process’ standards said incompatible with GATT
obligations. (Unlike ‘product’ standards.)
(ii) ‘Extraterritoriality’ said incompatible with GATT
obligations. (Dolphins are not endangered species)
Environmentalists were furious.
Event fueled much anti-globalization, anti-
GATT activism. (‘We’re losing our
sovereignty to faceless bureaucrats in
Geneva.’)
US and Mexico worked out a private
arrangement.

For many commentators, this is exhibit A

in what’s wrong with globalization:
“The institutions of international trade
have got in the way of protecting the
environment.”
A Contrary Example:
Chilean Grapes.
Chile is a major supplier of grapes to the US.
March 1989: Anonymous calls to US embassy
in Santiago warn of cyanide-contaminated
grapes on their way to the US from Chile.
US officials quietly check 10% of all grape
shipments from Chile.
(Total shipments: 600,000 boxes per day.)

March 12, 1989: Two grapes are found with

what look like puncture marks.
Tests: Traces of cyanide. (Not enough to kill
anyone.)
March 13, 1989: US officials proclaim ban on
all Chilean grape exports to the US.

This was the peak of the export season: 45% of

the crop had already left Chile.
Panic; widespread spoilage. Ban lasts 4 days.
Ban is estimated to have caused $400 million
of harm to the Chilean economy.
Later, Wall Street Journal (WSJ) article alleges
that evidence points toward US origin of
contamination.
Chilean Chamber of Deputies report argues
contamination occurred in US Food and Drug
Administration (FDA) lab (!).
Many attempts by Chilean government to get
some compensation; no luck.

Chilean government argues that in this case:

“A weak claim of a health or environmental
issue has been used in a reckless and
unwarranted way to disrupt international
trade.”

A large part of what the WTO does is to try to

balance these two problems by helping
negotiate rules for government conduct.
We’ll look at the case for multilateral
coordination on trade and trade-related policy
with a simple model.
A simple model of international
trade policy setting.

Suppose we have two countries: US and Japan.

Two goods: Apples and Tuna.
Demand curve for tuna in either country is:
DT = 100 - PT.
(Quantity is pounds of tuna; price is in dollars.)

Supply of tuna in the US:

ST,US = PT.

Supply of tuna in Japan:

ST,J = 2PT.

Japan has a comparative advantage in tuna.

The market for apples is identical, with the

roles of the countries reversed.
Suppose the US imposes the optimal tariff on
tuna (as in Ch.7).
This amounts to $4.80 per pound.
At the same time, Japan imposes the optimal
tariff on apples.
Also $4.80 per pound.
This is a Nash equilibrium in tariffs.
Also often called a trade war.
 Each country’s green terms-of-trade benefit (E)
is equal to the other country’s red terms-of-
trade loss (C’).
Add up the social welfare effects in tuna with
those in apples and the E’s and (C’)’s all cancel
out: Only losses remain.
“Prisoner’s dilemma” problem in trade policy.

Because of the terms-of-trade externality,

world social welfare is higher under free
trade than under the Nash tariffs, and both
countries can be made better off by
negotiating to free trade.
 This is the general idea of the General
Agreement on Tariffs and Trade (GATT).
Agreement to bring trade barriers down from
Nash levels to benefit every country.
First agreement: 1948.
Several subsequent ‘rounds’ renegotiated it,
deepening and broadening the liberalization.

World Trade Organization (WTO): Organization

formed between governments in 1995 to help
formalize GATT rounds and manage disputes.

Key GATT Principles:

(i) Most-favored-nation status (MFN).

This is a non-discrimination principle that says
any concession offered to one GATT country
must be offered to all of them.
Key GATT Principles:
(ii) National treatment.
This says that once a product is inside the
country, it must be treated the same regardless
of where it was made.
E.g., Switzerland can’t have a different set of
safety standards for French-made and Swiss-
made brake pads.

Important Exemptions.
(i) Article XXIV: Preferential trade agreements.
Two or more GATT signatories can agree to
eliminate mutual trade barriers, as, e.g., in a
free-trade agreement.
Must be essentially all the way to free trade.
Must not raise barriers on others.
Must report the agreement to WTO.

Important Exemptions.
(ii) Article VI: Anti-dumping and
countervailing duties.
‘Dumping’ is exporting a product either at
below cost or below the price at which it is
sold domestically.
Not clear why this is supposed to be a
problem, but Article VI allows countries to
charge a special tariff (‘duty’) if it finds a
country has been doing this, or subsidizing its
exports.
Important Exemptions.
(iii) Article XIX, the “Escape Clause.”
Allows a country to raise tariffs temporarily to
protect an industry that has received ‘material
injury’ due to an import surge.
(iv) Article XX:
Exceptions for the protection of life, health, or
natural resources, and for similar motives.

Conclusion so far:
International trade policy setting exhibits a
serious prisoner’s dilemma property:
Trade protection confers a negative externality
on trade partners.
The GATT/WTO have evolved to deal with this
issue.
PROBLEM: In an integrated world economy,
almost any domestic policy can act as a trade
policy.

Introducing environmental
issues.
As we noted, in the 1990’s the US became
concerned that tuna purchased from Japan was
not dolphin-safe.
Think of this as creating a social cost to buying
the Japanese tuna.
For simplicity, if any Japanese tuna is consumed
in the US, then US social welfare incurs a cost
H.
At the same time, the Japanese government
has claimed that US apples are unsafe for
export to Japan: Insect problems.
(Bitterly disputed by US growers, but right
now we’ll assume that it’s true.)
Think of this as a social cost to buying US
apples in Japan.
For simplicity, if any US apples are consumed
in Japan, then Japanese social welfare incurs a
cost H.

In this situation, the US will ban Japanese tuna

if the loss in gains from trade is smaller than H,
and Japan will ban US apples if its loss from
gains from trade are smaller than H.
But again -- there is an externality.
 If H > G, each country will ban the other’s
product.
But then the effect on each country’s social
welfare will be H - G - G’.
The G’ is the externality.
Of course, it is possible that H - G > 0 but
H - G - G’ < 0.
In this case, again, we have a prisoner’s dilemma
problem.

The Sham Problem.

In practice, a lot of countries whose exports are

hurt by environmental or other regulation claim
that the stated reason for the regulation is
invalid.
The claim is that the environmental problem is
made up as an excuse for protectionism.

For an example, suppose that each government

maximizes not PS + CS + TR, but Aprod*PS + CS
+ TR, where Aprod > 1.
I.e., suppose that in each country producers have
disproportionate political sway.
(Like sugar in Ch. 7.)
 If Aprod is big enough, the US government will
want to ban Japanese tuna just to raise US tuna
producer surplus.
Japan will do the same thing with apples.
But US total producer surplus -- apples and
tuna -- will be lower.
Again, a prisoner’s dilemma.

Summary so far.

Trade restrictions confer a terms-of-trade

externality.
Hence, a prisoner’s dilemma problem that
leads to a role for international coordination.
GATT/WTO are supposed to help with that.
Summary so far.
Any environmental/health/safety regulation
can create the same sort of terms-of-trade
externality.
Same motive for coordination, hence possible
GATT/WTO role.
This extends even to the case in which the
environmental issue is a sham to provide an
excuse to protect a domestic interest group.

WTO’s tightrope walk.

The WTO (and GATT panels before it) has

tried to balance the need to protect the
environment against the need to avoid the
prisoner’s dilemma problem.

Dolphin-Tuna.
GATT panel ruled (1991) that US law could
impose product regulations on tuna imports but
not process regulations.
Ruled that Article XX could not be used to
protect the environment in other countries, just
the importing country.
i.e., ruled against extraterritoriality.
Shrimp-Turtle.
Sea turtles were entrapped by shrimp nets.
1989: US banned shrimp caught without Turtle-
Excluder Devices (TED’s).
1997 WTO ruling: Disallowed US ban, but only
because it was discriminatory: Didn’t treat all
exporters the same way.
It allowed process regulations in principle, and
extraterritoriality.

Two main principles have emerged from WTO

rulings since the 1990’s:
(i) Health/safety/environmental regulations that
affect trade must be based in some sort of hard
science.
(ii) The regulations must be non-discriminatory
and must not interrupt trade more than
necessary to achieve the
health/safety/environmental purpose.
Overall:

Initially, the GATT system seemed to be too

eager to protect trade and not enough interested
in allowing protection of the environment.
Balance seems to have improved.