Fragmentation of the international trading system

Other Names:
Circumvention of international trading agreements
Inadequate international trading system
Breakdown of international trading discipline
Deterioration in long-term trade policies
Uncertainty in the international trading system
Declining credibility of the international trading system
Growth and development require an increase in imports and hence in exports. Even if imports are financed in part through borrowing, exports need to grow to allow the additional debt to be serviced. A defective trading system which limits exports from developing countries can therefore hold back development. Indeed, at a time of weak commodity prices and contraction of net financial inflows, it can make it impossible for some countries to avert a downward spiral triggered by import reduction and investment cuts. The contraction in imports into developing countries inevitably has adverse effects on the output of the export industries of the industrialized countries, tending to create a self-reinforcing contractionary spiral that constitutes a major challenge for the international community.
One of the main factors undermining the international trading community's resolve to deal in a concerted manner with the tendencies eroding the multilateral system has been the widely shared perception that other trading partners are giving less and deriving more from the system. Part of this problem can be attributed to historical factors present at the birth of the system itself, in that the failure to put the Havana Charter of 1948 fully into effect resulted in issues of crucial interest to certain countries being left outside the system of contractual rights and obligations. Other factors have arisen from developments that could not have been foreseen at that time.
The post-Bretton Woods international financial and monetary system has in the 1980s signally failed to provide the necessary finance in amounts and on terms which would enable development to be effectively pursued. The international trading system is in disarray. Far from the integration of trade practices into a comprehensive and universal set of rules accepted by all governments, the past decade has seen a fragmentation of the trading system, with an ever-increasing number of trade issues being treated outside the framework of GATT and a large and growing number of GATT rules themselves being circumvented. Such circumvention is often the reflection of the particular interests of domestic high-cost producers, thus attenuating the broader international benefits of a properly functioning trading system.

From the outset the GATT system had a clear aim, namely the negotiation of binding commitments and of the reduction of tariffs and of tighter disciplines on non-tariff measures to reduce to a minimum the possibilities of "nullification" and "impairment". This course of action was pursued with success from 1947 through the Tokyo Round, which concluded in 1979. However, at the same time as the commitments and disciplines were being negotiated, tendencies serving to frustrate the benefits of these accomplishments emerged and threatened to reverse the whole process. By 1982, the international trading community recognized the "erosion" of the system, which has been manifested by a variety of symptoms. These include: (a) a neglect of the unconditional most-favoured-nation principle, the fundamental rule of GATT, in particular in application of discriminatory trading measures against developing countries; (b) the introduction (or resurrection) of concepts such as "market disruption" and "conditional" treatment to provide justification for such discrimination and for trade policies which conflict with basic principles of the multilateral system; (c) the decline of the relevance of the tariff as an instrument of trade policy; (d) an increased resort to non-tariff measures of flexible application, especially those designed to "harass" trade; (e) the proliferation of mechanisms for the management of the quantities, prices, and often the sources of imports; (f) an unravelling of previous commitments and undertakings, including those with respect to particular products or in favour of the developing countries; (g) general dissatisfaction with, and lack of commitment to, multilateral dispute settlement mechanisms; (h) an inability to translate multilateral rules and principles into national laws an regulations in such a way as to effectively guarantee their respect in the national context; (i) an emphasis on bilateral trade flows and a drift away from multilateral reciprocity. Developing countries have been particularly penalized by these tendencies.

Most governments are quick to demonstrate how the trading system works primarily to the advantage of others. The net result, however, is an ambiance of indiscipline, which has impeded the ability of the international community to address effectively the recognized problems confronting the trading system, created frustrations, exacerbated tensions in international trade relations and led to "pragmatic" solutions or retaliation.

In addition to this breakdown of trade discipline, trade policy has increasingly been affected by financial disturbances, in particular, by sharp swings in real effective exchange rates and interruptions of capital flows to developing countries. As a result of their severe external payments problems, the trade policies of developing countries are now being determined by external pressures arising from adverse movements in the terms of trade and changing exchange rates, interest rates, foreign investment patterns and capital flows, rather than by national development objectives.

Problem Type:
C: Cross-sectoral problems
Date of last update
03.12.2017 – 07:39 CET