GATT General Agreement on Tariff and Trade

A Brief History of GATT The WTO's predecessor, the GATT, was established on a provisional basis after the Second World War in the wake of other new multilateral institutions dedicated to international economic cooperation - notably the "Bretton Woods" institutions now known as the World Bank and the International Monetary Fund. The original 23 GATT countries were among over 50 which agreed a draft Charter for an International Trade Organization (ITO) - a new specialised agency of the United Nations. The Charter was intended to provide not only world trade disciplines but also contained rules relating to employment, commodity agreements, restrictive business practices, international investment and services. In an effort to give an early boost to trade liberalization after the Second World War - and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s - tariff negotiations were opened among the 23 founding GATT "contracting parties" in 1946. This first round of negotiations resulted in 45,000 tariff concessions affecting $10 billion - or about one-fifth - of world trade. It was also agreed that the value of these concessions should be protected by early - and largely "provisional" - acceptance of some of the trade rules in the draft ITO Charter. The tariff concessions and rules together became known as the General Agreement on Tariffs and Trade and entered into force in January 1948. Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment in Havana in March 1948 ratification in national legislatures proved impossible in some cases. When the United States' government announced, in 1950, that it would not seek congressional ratification of the Havana Charter, the ITO was effectively dead. Despite its provisional nature, the GATT remained the only multilateral instrument governing international trade from 1948 until the establishment of the WTO. Although, in its 47 years, the basic legal text of the GATT remained much as it was in 1948, there were additions in the form of "plurilateral" voluntary membership, agreements and continual efforts to reduce tariffs. Much of this was achieved through a series of "trade rounds". WHAT IS GATT? GATT was the result of an international conference held at Geneva in 1947 to consider a draft charter for the International Trade Organization (ITO). The US initiated negotiations with 22 other countries that led to commitments to regulate 45,000 tariff rates.

Technically, GATT was viewed as an agreement under the provisions of US Reciprocal Trade Act of 1934, and hence did not require approval of Congress. It was considered a provisional agreement that would be replaced once the ITO became operational to take over its functions. So GATT began its provisional existence on January 1, 1948, when 23 contracting parties signed the agreement. However, US Congress refused in 1950 to ratify the treaty establishing the ITO.

Major Provisions of GATT

(i) GATT obligates each country to accord nondiscriminative, most favored nation (MFN) treatment to all other contracting parties with respect to tariffs. Tariff (ii) MFN treatment does not mean free trade or national treatment. Imports from contracting parties are subject to tariffs or quotas. MFN treatment means that no other countries with some exceptions receive better treatment or lower tariffs. (i) Existing tariff preferences such as those between British Commonwealth. Exceptions MFN to (ii) GATT/WTO allows the formation of customs union, which causes a significant erosion of the MFN principle. (iii) An escape clause allows any contracting party to withdraw or modify tariff concessions, if it threatens a serious injury to domestic producers. 2. Quantitative Restrictions GATT in general prohibits the use of quantitative restrictions on imports and exports. (i) agriculture - when government needs to remove surplus of agricultural and fisheries products. Important to US (ii) balance of payments - to safeguard balance of payments. If a country's foreign exchange reserve is low. Exceptions (iii) Developing countries - LDCs may use import quotas to encourage infant industries. (iv) National Security- Strategic controls on certain exports. Patents, Copyrights, Public Morals 3. Developing Countries Special Provisions to promote the Trade of Developing Countries. In 1965, the contracting parties added Part IV (Trade and Development) to GATT.

(i) Developed economies will give high priority to reduction/elimination of tariffs on products of LDCs. (ii) refrain from introducing tariffs and NTBs to such imports. (iii) refrain from imposing internal taxes to discourage consumption of primary products from LDCs (iv) not expect reciprocal commitments from LDCs. Provisions to eliminate concealed protection such as customs valuation. For example, American Selling Price valuation. By ASP, an ad valorem tariff is imposed on the domestic price. procedural matters: each member is entitled to one vote, decisions are made by majority vote. 2/3 majority is required to waive obligations. settlements of disputes.

Other provisions

GATT AND MEMBERSHIP GATT was singed in 1947 and came into force in 1947. The 128 countries that had signed GATT by 1994 On 1 January 1995, the WTO replaced GATT, which had been in existence since 1947, as the organization overseeing the multilateral trading system. The governments that had signed GATT were officially known as GATT contracting parties. Upon signing the new WTO agreements (which include the updated GATT, known as GATT 1994), they officially became known as WTO members. India became the member on 8th July, 1948 Objectives of GATT 1. To expand international trade by liberalizing trade to bring about all-round economic prosperity. 2. Reduction of trade barriers between countries and prevention of discrimination in world trade. 3. Raising standard of living, ensuring full employment and growing volume of international trade. 4. Developing full use of the resources of the world and expansion of production and international trade. 5. Charging lowest tariff on imports of countries which are signatories of GATT.

6. To provide a forum to its member countries for settlement of trade related disputes. Principles of GATT 1. Non-discrimination (MFN Principle): World Trade should be carried on non-discriminatory basis. This principle requires that no member country shall discriminate between the members of GATT in the conduct of international trade. The members of GATT agreed to apply the principle of Most Favoured Nation (MFN) to all import and export transactions. 2. Prohibition of Quantitative Restrictions GATT seeks to prohibit quantitative restrictions as far as possible and limit restrictions on trade. Non-tariff barriers like import licensing, quotas and other forms of restrictions were to be eliminated. 3. Consultation: By providing a forum for continuous consultation, disagreements through consultation. List of GATT Conference Rounds Held 1. 2. 3. 4. 5. 6. 7. 8. The Geneva Tariff Conference (1947) The Annecy Tariff Conference (1949) The Torquay Tariff Conference (1950-51) The Geneva Tariff Conference (1956) The Geneva Tariff Conference (1960-61) The Kennedy Round (1964-67) The Tokyo Round(1973-79) The Uruguay Round (1986-94) GATT seeks to resolve

Annecy Round - 1949 The second round took place in 1949 in Annecy, France. 13 countries took part in the round. The main focus of the talks was more tariff reductions, around 5000 in total. Torquay Round - 1951 The third round occurred in Torquay, England in 1950. Thirty-eight countries took part in the round. 8,700 tariff concessions were made totaling the remaining amount of tariffs to of the tariffs which were in effect in 1948. The contemporaneous rejection by the U.S. of the Havana Charter signified the establishment of the GATT as a governing world body. Geneva Round - 1955-1956

The fourth round returned to Geneva in 1955 and lasted until May 1956. Twenty-six countries took part in the round. $2.5 billion in tariffs were eliminated or reduced. Dillon Round - 1960-1962 The fifth round occurred once more in Geneva and lasted from 1960-1962. The talks were named after U.S. Treasury Secretary and former Under Secretary of State, Douglas Dillon, who first proposed the talks. Twenty-six countries took part in the round. Along with reducing over $4.9 billion in tariffs, it also yielded discussion relating to the creation of the European Economic Community (EEC). Kennedy Round - 1964-1967 Kennedy Round took place from 1964-1967. Tokyo Round - 1973-1979 Reduced tariffs and established new regulations aimed at controlling the proliferation of non-tariff barriers and voluntary export restrictions. 102 countries took part in the round. Concessions were made on $190 billion worth. Uruguay Round - 1986-1994 The Uruguay Round began in 1986. It was the most ambitious round to date, hoping to expand the competence of the GATT to important new areas such as services, capital, intellectual property, textiles, and agriculture. 123 countries took part in the round. Agriculture was essentially exempted from previous agreements as it was given special status in the areas of import quotas and export subsidies, with only mild caveats. However, by the time of the Uruguay round, many countries considered the exception of agriculture to be sufficiently glaring that they refused to sign a new deal without some movement on agricultural products. These fourteen countries came to be known as the "Cairns Group", and included mostly small and medium sized agricultural exporters such as Australia, Brazil, Canada, Indonesia, and New Zealand. The Agreement on Agriculture of the Uruguay Round continues to be the most substantial trade liberalization agreement in agricultural products in the history of trade negotiations. The goals of the agreement were to improve market access for agricultural products, reduce domestic support of agriculture in the form of price-distorting subsidies and quotas, eliminate over time export subsidies on agricultural products and to harmonize to the extent possible sanitary and phytosanitary measures between member countries. The major highlights of the Uruguay Round were: 1. Expansion in the sphere of activities: The traditional concerns of GATT were limited to international trade in goods. This round expanded the scope of GATT to services, technology, investment and information.

2. Liberalization of trade in agriculture and textile goods: Agriculture and Textile sectors were highly protected but this round brought about liberalization of these sectors. Import barriers on agricultural goods was reduced. 3. Reduction in agriculture subsidies: Export subsidies to farmers to be cut by13.3%in developing countries and by 20% in developed countries. 4. Reduction in tariff: The tariffs were to be cut by 24% in developing countries and by 36% in developed countries. Tariffs in sectors like steel, pharmaceutical, wood and wood products were totally eliminated. 5. Opening trade in services: The traditional concerns of GATT were limited to international trade in goods but this round extended the scope of GATT to trade in services. 6. Establishment of WTO: One of the major achievements of This round is making the rules and regulations more transparent. The results of this round were to be implemented by newly set up WTO, which later replaced GATT. 7. Dispute Settlement: Settlement of disputes under GATT was a long and time consuming process. This round made it mandatory to settle disputes within eighteen months and the verdict would be binding on all parties concerned. 8. To draft a code to deal with copyright violation and other forms of intellectual property rights. Importance of GATT 1. GATT resulted in free global trade among member countries. 2. Increased the volume of world trade by 12%. 3. Developing countries share in world trade increased by 31%. 4. World income and standard of living increased. 5. Countries became specialized in trade and production. 6. Developed countries were obliged to reduce duty on industrial goods by about 40%.

7. Developed countries scraped duty on imports of pharmaceuticals, construction equipment, medical equipment, steel, furniture, farm equipment. Shortcomings of GATT 1. Bilateral agreements still exist which are preferred to GATT by the parties concerned. 2. Developed countries enjoyed an upper hand in all affairs of GATT. 3. Negotiations among member countries were dominated by developed countries. 4. Patenting of certain goods created adverse effect on developing countries.

Achievements and Problems of GATT/WTO

GATT has enjoyed a membership of over 100 countries and generated about 85-90% of world trade. (i) trade liberalization in industrial products (Kennedy Round) Achievements (ii) Adopted codes on NTBs (Tokyo Round) (iii) No world wars since 1948 (Choi: Increased trade promotes world peace) (iv) replaced by WTO on January 1, 1995. Problems (i) GATT failed to liberalize trade in agricultural products to any significant degree. This was one of the major goals of the Uruguay Round. (ii) has experienced partial success in regulating trade practices adopted by member countries in response to BP difficulties. For example, in 1971 the US imposed a 10% surcharge on its imports, thereby doubling its average duties. (iii) steady erosion of MFN principle by the EU, and to a less extent by the NAFTA. Article XXIV permits member countries to form a CU or FTA. The EU adopted VILs to keep out agricultural products, lowered duties to many

African and Mediterranean countries, which are not extended to other GATT contracting parties. (iv) has condoned managed trade for textiles, largely because of pressure from the US, and automobiles (VERs) GATT was an executive agreement under the Protocol of Provisional Application. It was only a gentlemen's agreement with no teeth, no enforcement power to discipline parties that violate the rules. Moreover, contracting parties are not obligated to observe rules that are inconsistent with their domestic laws at the time of entry into GATT. Many countries sidestep or bypass the rules by narrowly defining commodities for tariff purposes. (v) WTO has not done anything to eliminate pirate activities in Africa. (vi) WTO has not been able to regulate currency manipulation as a protective instrument to restrict imports. How is the WTO different from GATT? The World Trade Organization is not a simple extension of GATT; on the contrary, it completely replaces its predecessor and has a very different character. Among the principal differences are the following: The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small associated secretariat, which had its origins in the attempt to establish an International Trade Organization in the 1940s. The WTO is a permanent institution with its own secretariat. The GATT was applied on a "provisional basis" even if, after more than forty years, governments chose to treat it as a permanent commitment. The WTO commitments are full and permanent. The GATT rules applied to trade in merchandise goods. In addition to goods, the WTO covers trade in services and trade-related aspects of intellectual property. While GATT was a multilateral instrument, by the 1980s many new agreements had been added of a plurilateral, and therefore selective, nature. The agreements, which constitute the WTO, are almost all multilateral and, thus, involve commitments for the entire membership.

The WTO dispute settlement system is faster, more automatic, and thus much less susceptible to blockages, than the old GATT system. The implementation of WTO dispute findings will also be more easily assured. The "GATT 1947" will continue to exist until the end of 1995, thereby allowing all GATT member countries to accede to the WTO and permitting an overlap of activity in areas like dispute settlement. Moreover, GATT lives on as "GATT 1994", the amended and up-dated version of GATT 1947, which is an integral part of the WTO Agreement and which continues to provide the key disciplines affecting international trade in goods.