GATT

The General Agreement on Tariffs and Trade (GATT)

An in-depth study of the objectives, principles and IMF’s view of General Agreement on Tariffs and Trade (GATT)

Introduction of GATT:

The General Agreement on Tariffs and Trade (GATT) has its origin in 1947 at a conference in Genera where negotiations between some 23 nations resulted in an extensive set of bilateral trade concession which were then extended to all participants and incorporated in a General Agreement. GATT was founded at the wake of World War II in order to prevent the recurrence of protectionism policies of the then industrialized states which had resulted prolonged recession in the West prior to the war.

Objectives:

The main objectives with which GATT was founded included:

(a) Raising standard of living;

(b) Ensuring full employment and a large and steadily growing volume of real income and effective demand;

(c) Developing the full use of the resources of the world and

(d) Expansion of production and international trade.

The negotiating and contracting parties to the General Agreement aim at contributing to the objectives, given above, by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discrimination in international trade. Thus the GATT aimed at fulfilling its objectives through the promotion of free and multilateral trade. At present, altogether 132 countries including India are the members of GATT.

Fundamental Principle:

The final aim of GATT in to establish a free multilateral trading system and liberalisation of international trade, elimination of discrimination in international trade and also by reducing all sorts of trade barriers. In order to attain such objective, GATT has adopted certain principles to forbid unfair trade practices and also to set a code of conduct for all the participants of trading activities.

The following are some of these fundamental principles:

(i) Trade should be conducted on non-discriminatory basis.

(ii) All quantitative restrictions on trade are to be prohibited.

(iii) All trade disputes should be settled through consultations within GATT’s framework.

(iv) Through a series of multilateral negotiations of GATT rounds tariff reductions are to be accomplished.

 IMF’s View on New GATT:

The International Monetary Fund (IMF) in its annual report, 1994 admitted that it was difficult to quantify the potential gains to world trade and income resulting from the liberalisation and greater predictability of the new GATT.

While categorically stating that the gains undoubtedly would be ‘considerable’ the IMF has conceded that they would not be spread evenly across participants, as those with the flexibility to capitalize on new market opportunities would benefit most.

On the Uruguay Round of agreements, the annual report of the IMF conceded that there was a view that some countries may be “net losers” because their preferential market access would be eroded, leading to higher prices for their food imports.

However, in reality all countries were likely to gain from the Uruguay Round as a whole because of increased market access and export opportunities. IMF notes that greater predictability of the trading environment and the opening of markets across the globe provide opportunities for diversification of exports, and markets that are essential to sustained and successful economic reform efforts.

The “Finance and Development” of IMF and World Bank (March, 1995) observed, “WTO agreement, whose aim is to create a more open international trading environment, has far-reaching implications for the world economy and should lead to new opportunities for developing countries. Although some may lose advantage, afforded by current trading arrangements, most should benefit substantially from a more competitive environment.”

Countries that have relied on unpredictable margins of preference in a restricted number of markets would gain from new opportunities to integrate more fully into global markets. As far as net food imports are concerned, the gradual reform in export-subsidizing countries provides time for adjustment and an incentive to rebuild domestic food production.

The IMF, in its report, cautioned that it was necessary to ensure, therefore, that the positive effects of the round were not frustrated by new uncertainties as vested interests mobilized to defend their positions. Therefore, it is felt that successful co-operation between the Bretton Woods Institution and the World Trade Organisation (WTO) would help guard against losing what has been achieved.

GATT: General Agreement on Tariffs and Trade: Origin, Objectives, Tariff Negotiation

Origin of GATT:

Inspired by the success of agreement for international monetary co-operation as reflected in the formation of the IMF, similar co-operation as reflected in international trade also was desired by many trading nations for expansion of world trade.

It was thought that for healthy world trade, attempt must be made to relax the existing trade restrictions, such as tariffs.

As such, at the International Conference on Trade and Employment held in 1946 at Havana, a proposal for establishing an agency called the International Trade Organisation (ITO) was made with the miscellaneous and general objective of augmenting and maintaining world trade and employment.

Though the Havana Charter for ITO was designed as a sort of international trade constitution, it was not translated into practice due to various difficulties and lack of common agreement.

However, some of the countries took up one of the important issues of the Havana Charter regarding relaxation of trade restrictions by incorporating it into a General Agreement on Tariffs and Trade (GATT). This was signed in 1947 by some twenty-three major trading nations, including India. GATT membership has now gone up to more than 64.

As the name itself suggests, the General Agreement was concerned only with tariffs and trade restrictions and related international matters. It serves as an important international forum for carrying on negotiations on tariffs.

Under GATT, member nations meet at regular intervals to negotiate agreements to reduce quotas, tariffs and such other restrictions on international trade. GATT, by its very nature, is a contractual agreement among parties (or nations). It is a treaty that is collectively administered by the contracting nations.

However, it has become a permanent international organisation for safeguarding the conduct of international trade and an institution for the multilateral expansion of trade.

Objectives of GATT:

By reducing tariff barriers and eliminating discrimination in international trade, the GATT aims at:

1. Expansion of international trade,

2. Increase of world production by ensuring full employment in the participating nations,

3. Development and full utilisation of world resources, and

4. Raising standard of living of the world community as a whole.

However, the articles of the GATT do not provide directives for attaining these objectives. These are to be indirectly achieved by the GATT through the promotion of free (unrestricted) and multilateral international trade.

As such, the rules adopted by GATT are based on the following fundamental principles:

1. Trade should be conducted in a non-discriminatory way;

2. The use of quantitative restrictions should be condemned; and

3. Disagreements should be resolved through consultations.

In short, members of GATT agree to reduce trade barriers and to eliminate discrimination in international trade so that multilateral and free trade may be promoted, leading to wider dimensions of world trade and prosperity.

Most Favoured Nations Clause:

In general terms, members of GATT agree that reduction in tariffs and elimination of discrimination in international commerce should be on a reciprocal and mutually advantageous basis.

To ensure against discrimination, members agree to grant to each other unconditional most favoured nation status in all import and export duties, with certain exceptions. Article I of the Agreement deals with the ‘most favoured nation clause meaning that any advantage, favour, privilege or immunity granted by a contracting party to any product originating in or designed for any other country shall be accorded immediately and unconditionally to a like product originating in or destined for the territories of all other contacting parties.

Thus, the principle of most favoured nation implies that each nation should be treated as the most favoured nation. As such, the contracting parties are forbidden from granting any new preference. And the negotiations and concessions materialised under bilateral agreements should be extended to all member countries on an equal basis so that the concessions are multilateralised. It also signifies that the permitted quantitative restrictions should be administered without favouring any party.

GATT permits such restrictions only for:

(i) Safeguarding exchange reserves when a country has balance of payments difficulties.

(ii) Restricting imports that would harm domestic price supports and production control programmes of a country.

GATT also lays down that state trading should be non-discriminatory. However, the formation of customs unions or free trade areas are allowed by the General Agreement provided their purpose is to facilitate trade between the constituent territories and not to raise barriers to the trade of other member nations.

(iii) Underdeveloped countries to further their economic development under procedures approved by GATT.

Tariff Negotiations:

GATT recognises that tariffs are the main impediments to the growth of international trade. Thus, the contracting parties are authorised to occasionally negotiate for a substantial reduction of tariffs.

The following guidelines are to be followed in tariff negotiations:

1. Reduction in tariffs is to be negotiated on a reciprocal and mutually advantageous basis.

2. The negotiations should be either for reduction of tariffs or binding of low tariffs. Binding of low tariffs is advantageous as traders will be assured of the continuance of low tariffs so that they can take up business expansion and productive investments without any risk (of high tariff).

3. Each member has to work in good faith and not raise its tariffs and other qualitative measures with a view to increasing its bargaining power in tariff negotiations (when anticipated).

The GATT adopted the bilateral-multilateral technique of negotiating reduction in tariffs. It was a bilateral method in the sense that the negotiations were carried on a nation-to-nation basis. In fact, the contracting parties formed pairs among themselves and each pair conducted negotiations on a selective commodity-by- commodity basis. The negotiations had multilateral aspects also as the tariff reductions agreed within bilateral pairs of negotiating parties were made generally applicable to all contracting parties through the ‘most-favoured nation clause.’

The bilateral-multilateral method of tariff negotiations was in vogue till the operation of the Kennedy Round, on May 4, 1964. Before Kennedy Round five main tariff negotiating conferences had been held which effected agreements (bindings) to reduce or to stabilise about 60,000 tariff rates between the participating countries.

The bilateral-multilateral technique of tariff reduction has the following drawbacks:

1. It leads to unfavourable terms of trade to the underdeveloped primary producing nations on account of their weak bargaining position in a bilateral agreement with an advanced nation. The principle of reciprocity was injurious to their interest.

2. It creates uncertainty and instability in the tariff structure of various countries.

3. It causes injustice to the already low-tariff countries, as they are in a very weak bargaining position and have little to offer in exchange for concessions offered by other countries (previously with high tariffs).

4. It is a very slow method of reducing tariffs. Hence the achievements made during a long period of 14 years of its operation are not very substantial or encouraging.

In fact, at the ministerial meeting of the contracting parties in 1961, it was agreed that the reduction of tariffs on a most favoured nation basis should be continued but in view of the changing conditions of world trade, the traditional GATT technique for tariff negotiation on a commodity-by-commodity and nation-by-nation basis are inadequate and inappropriate. Hence, ultimately the bilateral aspect of negotiations was given up in Kennedy Round.

General Agreement on Tariffs and Trade (GATT): History and Principles of GATT

Introduction:

The General Agreement on Tariffs and Trade, known as the GATT, is one-third of the Bretton Woods system that was created after World War II to ensure a stable trade and economic world environment. The International Monetary Fund (IMF) and World Bank are the other two bodies of the Bretton Woods system.

While often referred to as an international organization, the GATT had a “defacto” role as an international organization before the creation of the World Trade Organization (WTO). The WTO was established on January’ 1, 1995 by the Final Act of the Uruguay Round of negotiations.

History and Basic Information:

After World War II, the United Kingdom (UK) and the United States (US) submitted proposals to the Economic and Social Council (ECOSOC) of the United Nations regarding the establishment of an international trade body that was to be named the International Trade Organization (ITO). That is, perhaps, why the GATT is often referred to as a UN related body and its documents are sometimes mistakenly referred to as UN documents.

ECOSOC convened a conference, the United Nations Conference on Trade and Employment in 1946, to consider the UK and US proposals. A Preparatory Committee drafted the ITO Charter and it was approved in 1948 at the conference in Havana, Cuba. The Charter is often referred to as the Havana Charter or the ITO Charter.

The first round of trade negotiations took place while the Preparatory Committee was still working on drafting the Charter because the participants were anxious to begin the process of trade liberalization as soon as possible. Their results were incorporated into the General Agreement, which was signed in 1947.

Since the original signatory nations expected the agreement to become part of the more permanent ITO Charter, the text of the GATT contains very little “institutional” structure. This lack of detail within the agreement has created increasing difficulties as the GATT membership and rules governing trade between so many of the world’s nations have grown. The GATT has function as an international organization for many years even though it has never been formalized as such.

ECOSOC established an Interim Commission for the ITO that is referred to as ICITO. Unfortunately, when time came for the members to ratify the ITO Charter, the Congress of the United States refused and the ITO never became a reality.

The GATT survived, but remained intact only due to the Protocol of Provisional Application of the General Agreement on Tariffs and Trade which was concluded in 1947 and which came into force in 1948.

The GATT completed 8 rounds of multilateral trade negotiations (MTNs). The Uruguay Round (the 8th round) concluded with the signing of the Final Action April 15, 1994, in Morocco and produced the World Trade Organization (WTO) and it annexes.

The contracting party’s means:

i. When you see: CONTRACTING PARTIES in capital letters it is referring to the members acting jointly.

ii. When you see: contracting parties in lower case letters, it is referring to individual member states.

iii. When you see the words: Contacting Parties, they will be in press releases or in published works concerning the GATT.

The Basic Principles of the GATT:

1. Most-Favored-Nation (MFN) Treatment:

This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article 1 of the GATT 1947. It states that each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them, i.e., each contracting party is required to treat all contracting parties in the same way that it treats its “most-favoured nation”.

2. Reciprocity:

GATT advocates the principles of “rights” and “obligations”. Each contracting party has a right, e.g. access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis. In a way, this is closely associated with the MFN principle.

3. Transparency:

Fundamental to a transparent system of trade is the need to harmonize the system of import protection, so that barriers on trade can be reduced through the process of negotiations. The GATT therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only”.

In addition, the GATT and now the WTO, required many notifications from contracting parties on their agricultural and trade policies so that these can be examined by other parties to ensure that they are GATT/WTO compatible.

4. Tariff Binding and Reduction:

When GATT was established, tariffs were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction. The text of the 1947, GATT lays out the obligations on the contracting parties in this regard.

Difference between WTO and GATT

The short answer is no. The WTO is the GATT plus a lot more. There have been eight rounds of trade negotiations since 1947. The first five rounds were of relatively short duration and dealt mainly with tariff reductions. The sixth, the Kermedy Round (1963-67), achieved deeper and wider tariff cuts, especially in industrial tariffs, and brought developing country concerns to the fore.

The seventh, the Tokyo Round, which lasted six years (1973 – 1979), cut tariffs substantially but also introduced a series of codes on non-tariff barriers (NTBs). The WTO was the result of the eighth round of negotiations, known as the Uruguay Round (1986-93).

The main differences between the GATT and the WTO are described by the WTO as follows:

i. The GATT was provisional. Its contracting parties never ratified the General Agreement, and it contained no provisions for the creation of an organisation.

ii. The WTO and its agreements are permanent. As an international organisation, the WTO has a sound legal basis because all members have ratified the WTO Agreements, and the agreements themselves describe how the WTO is to function.

iii. The WTO has “members.” GATT had “contracting parties,” underscoring the fact that officially the GATT was a legal text.

iv. The GATT dealt with trade in goods. The WTO deals with trade in services and intellectual property as well.

v. The WTO dispute settlement system is faster and more automatic than the old GATT system. Its rulings cannot be blocked.

vii. The WTO has introduced a trade policy review mechanism that increases the transparency of members’ trade policies and practices.