Report on GATT

Department Of Management Sciences

International Business

Report

on

Submitted to: Madam Afsheen IshtiaqSubmitted by: Azeem Bhatti

BBA-8

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Report on GATT

GATT (General Agreement on Tariffs and Trade)

Background

World War–II lasted from 1939 to 1945. This left many countries in Europe and Asia

totally battered. Their economies were shattered; there was tremendous stain on political

and social systems resulting in wide spread extermination and migration of people.

Intentional peace was ruffled. Something had to be done to put these war-ravaged

economies back in shape. Simultaneously, the various colonies in Asia and Africa were

acquiring political freedom. And there was urgent pressure on them for rapid economic

development and political stabilization. In this background the United Nations

Organization (UNO) was born on the collective wisdom of the world.

UNO came to encompass the concerns for development in economic, commercial,

scientific, social and cultural sphere of the member nations. It formed various forums and

agencies. One such forum under the UNO was the General Agreement on Tariffs and

Trade (GATT) which was established in 1947.

GATT which emerged from the “ashes of the Havana Charter” was formed in 1947 and

lasted until 1994, when it was replaced by the World Trade Organization in 1995

Havana Charter was the charter of the defunct International Trade Organization (ITO).

It was signed by 53 countries on March 24, 1948. It allowed for international cooperation

and rules against anti-competitive business practices. The charter ultimately failed

because the Congress of the United States rejected it. Elements of it would later become

part of the General Agreement on Tariffs and Trade (GATT).

At the same time 23 nations agreed to continue extensive tariff negotiations for trade

concessions at Geneva, which were incorporated in a General Agreement of Tariffs and

Trade. This was signed on 30th October 1947 and came into force form 1st January 1948

when other nations had also signed it.

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Report on GATT

Toward the end of World War II, representatives of the US and its Allied Forces

attempted to work out the arrangements for the post war era. As a result of these

negotiations, after World War II three important international measures were undertaken

by the US and its Allies to liberalize trade and payment.

International Monetary Fund (IMF)

International Monetary Fund (IMF) was established to facilitate international

payments. The IMF is the International Monetary Fund, headquartered in

Washington, D.C. It's a global organization made up of 185 member countries,

founded in 1944 with the purpose to oversee global financial health and provide

assistance when needed to its members. Today, the IMf states its goals as "to promote

international monetary cooperation, exchange stability, and orderly exchange

arrangements; to foster economic growth and high levels of employment; and to

provide temporary financial assistance to countries to help ease balance of payments

adjustment." Criticism of the IMF is a cornerstone of the anti-globalization

movement.

IBRD Bank for Reconstruction and Development

After the War, European countries and Japan had to rebuild their production

plants; this meant that these countries required a large amount of foreign capital. To

encourage free flow of private capital, International Bank for Reconstruction and

Development (IBRD, now the World Bank) was also established.

To facilitate free trade, ITO was to be born.

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. 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

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Report on GATT

So, in brief General Agreement on Tariffs and Trade (GATT)

Outcome of the failure of negotiating governments to create the International

Trade Organization (ITO)

Negotiated during the UN Conference on Trade and Employment

Formed in 1947 and transformed to World Trade Organization (WTO) in 1995.

What was the main objective of GATT?

The GATT's main objective was the reduction of barriers to international trade. This was

achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on

trade through a series of agreements. The functions of the GATT were taken over by the

World Trade Organization which was established during the final round of negotiations

in early 1990s.

So; GATT's main objective

Reduction of barriers to international trade

Achieved through reduction of tariff barriers, quantitative restrictions and

subsidies on trade through a series of agreements.

Major requirements of GATT

1. Tariff: GATT obligates each country to accord no discriminative, most favored

nation (MFN) treatment to all other contracting parties with respect to tariffs.

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.

Exceptions:

o Existing tariff preferences such as those between British Commonwealth.

o GATT/WTO allows the formation of customs union, which causes a

significant erosion of the MFN principle.

o 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.

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Exceptions:

o Agriculture - when government needs to remove surplus of agricultural

and fisheries products. Important to US

o Balance of payments - to safeguard balance of payments. If a country's

foreign exchange reserve is low.

o Developing countries - LDCs may use import quotas to encourage infant

industries.

o National Security- Strategic controls on certain exports.

o Patents, Copyrights, Public Morals

3. Special Provisions to promote the Trade of Developing Countries. In 1965, the

contracting parties added Part IV (Trade and Development) to GATT.

o GATT gives high priority to reduction/elimination of tariffs on products of

LDCs.

o refrain from introducing tariffs and NTBs to such imports.

o refrain from imposing internal taxes to discourage consumption of primary

products from LDCs

o not expect reciprocal commitments from LDCs.

4. Other Provisions

o 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.

o 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.

Their principles were to resolve or prevent war through the United Nations and to

eliminate the economic causes of war by establishing three international economic

institutions.

Part of economic recovery after World War II, Bretton Woods Conference suggested an

organization to regulate trade

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Bretton Woods System is a system of monetary management established the rules for

commercial and financial relations among the world's major industrial states in the mid

20th century. The Bretton Woods system was the first example of a fully negotiated

monetary order intended to govern monetary relations among independent nation-states.

The main aspects of General Agreement on Tariff

GATT,1947

Because the ITO was stillborn the provisional agreement for the ITO, the General

Agreement on Tariffs and Trade (GATT) became the agreement and the organization for

establishing and enforcing, through dispute settlement, the international trade rules. In

1995 this agreement on trade in goods became the World Trade Organization.

The GATT was very successful in lowering tariffs, the then existing major barrier to free

trade.

The first five rounds of multilateral trade negotiation succeeded in lowering tariff barriers

substantially. This shifted protectionism to non tariff barriers. (NTB)

The GATT accomplished these goals through:

– Multilateral negotiations

– Dispute settlement

However the dispute settlement mechanism was very weak in that a losing party could

simply block the adoption of an adverse decision.

TRADE BARRIERS

Tariffs

Tariffs can be ad-Valorem, specific, or compound.

Ad-Valorem tariff is expressed as a fixed percentage of the value of the

traded commodity.

Specific tariff is expressed as a fixed sum per physical unit of the traded

commodity.

A compound tariff is a combination of an Ad Valorem and a specific

tariff.

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Trade Restrictions /Trade Barriers

An import tariff is a duty on the imported commodity, while an export tariff is a

duty on the exported commodity.

Export tariffs are prohibited by the U.S. Constitution but are often applied by

developing countries on their traditional exports (such as Ghana on it’s cocoa

and Brazil on it’s coffee) to get better prices and revenues.

Developing nations rely heavy on export tariff to raise revenues because of their

ease of collection.

On the other hand, industrial countries invariably impose tariffs or other trade

restrictions to protect some (usually labor-intensive) industry, while using mostly

income taxes to raise revenues.

According to Stolper-Samuelson theorem, an increase in the relative price of a

commodity (for example, as a result of a tariff) raises the return or earnings of the

factor used intensively in its production.

For example, if a capital-abundant nation imposes an import tariff on the labor

intensive commodity, wages in the nation will rise.

However, since the nation’s benefit comes at the expense of other nations, latter is

likely to retaliate, so that in the end all nations usually lose.

Two arguments are that protection is needed to reduce domestic unemployment

and a deficit balance of payments.

A more valid argument for protection is the infant-industry argument.

However, what trade protection can do, direct subsidies and taxes can do better in

overcoming purely domestic distortions. The same is true for industries important

for national defense. The closest we come to a valid economic argument for

protection is the optimal tariff (which, however, invites retaliation).

Trade protection in the United States is usually given to low-wage workers and to

large, well organized industries producing consumer products.

Non-Tariff Barriers

International trade also hampered by numerous

Technical, administrative, and other regulations.

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These include safety regulations for automobile and electrical equipment,

health regulations for the hygienic

Production and packaging of imported food products, and labeling

requirements showing origin and contents.

National government sometimes grants subsidies to domestic producers to help

improve their trade position. Such devices are indirect form of protection

provided to domestic businesses, whether they may be import competing

producers or exporters.

Two types of subsidies can be distinguished: a domestic subsidy, which is

sometimes granted to producers of import-competing goods, and an export

subsidy, which goes to producers of goods that are to be sold overseas.

Government Procurement Policies: Because government agencies are large

buyers of goods and services, they are attractive customers for foreign suppliers.

Most governments however, favor domestic suppliers over foreign ones in the

procurement materials and products. E.g., Government often extends preferences

to domestic suppliers in the form of buy-national policies campaigns.

Impact of trade barriers

Advanced industrial nations committed themselves after World War II to

removing barriers to the free flow of goods, services, and capital between nations

This goal was enshrined in the General Agreement on Trade and Tariffs [GATT]

Under the umbrella of GATT, eight rounds of negotiations among member

states(now numbering 146) have worked to lower barriers to the free flow of

goods and services

The most recent round of negotiations, known as the Uruguay Round, was

completed in Dec,1993.The Uruguay round further reduced trade barriers;

extended GATT to cover services as well as manufactured goods; provided

enhanced protection for patents, trademarks, and copyrights; and established the

World Trade Organization (WTO)to police the international trading system

In the late 2001, the WTO launched a new round of talks [Doha, Qatar] aimed at

further liberalizing the global trade and investment framework.

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The agenda included cutting tariffs on industrial goods, services, and agricultural

products; phasing out subsidies to agricultural producers; reducing barriers to

cross border investments; and limiting the antidumping laws.

The rich nations spend around $300 billion a year in subsidies to support their

farm sectors. The world’s poorer nations have the most to gain from any

reductions in agricultural tariffs and subsidies.

While free-trade maximizes world welfare, most nations impose some trade

restrictions that benefit special groups in the nation. The most important type of

trade restriction historically is the tariff.

This is a tax or duty on the imports or exports.

When a small nation imposes an import tariff, the domestic price of the

importable commodity rises by the full amount of the tariff for individuals in

nation. As a result, domestic production of the importable commodity expands

while domestic consumption and imports fall. However, the nation as a whole

faces the unchanged world price since the nation itself collects the tariff.

Continual reductions in tariffs helped spur very high rates of world trade growth

during the 1950s and 1960s — around 8% a year on average.

Trade growth consistently out-paced production growth.

The rush of new members during the Uruguay Round demonstrated recognition of

multilateral trading system as the anchor for development and an instrument of

economic and trade reform.

But…….

GATT’s success in reducing tariffs to a low level, with a series of economic

recessions 1970-80’s drove governments to devise other forms of protection for

sectors facing increased foreign competition

High rates of unemployment and constant factory closures led governments in

Western Europe and North America to seek bilateral market-sharing arrangements

with competitors and to embark on a subsidies race to maintain their holds on

agricultural trade

Both these changes undermined GATT’s credibility and effectiveness.

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The problem was not just a deteriorating trade policy environment.

By the early 1980s the General Agreement was clearly no longer as relevant to the

realities of world trade as it had been in the 1940s

World trade had become far more complex and important than 40 years before

The globalization of the world economy was underway

Trade in services — not covered by GATT rules

Ever increasing international investments

Factors convinced GATT members that a new effort to reinforce and extend the

multilateral system should be attempted.

GATT Rounds

1. GATT participant occasionally negotiated new trade agreements that all countries

would enter into

2. Each set of agreements was called a round

3. In general, each agreement bound members to reduce certain tariffs. Usually this

would include many special-case treatments of individual products, with

exceptions or modifications for each country.

First Round:Geneva April 1947

In the first round of talks held in Geneva in 1947, 23 countries, which had formed GATT,

exchanged tariff allowance on 45,000 products worth 10 billion US dollars of trade per

annum. This affected 10% of total Global Trade.

Second Round: Annecy Round - 1950

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 total

Third Round Torquay Round - 1951

The third round occurred in Torquay, England in 1951. 38 countries took part in the

round. 8,700 tariff concessions were made totaling the remaining amount of tariffs to

three-fourths of the tariffs which were in effect in 1948.

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Fourth Round Geneva Round - 1955-1956

The fourth rounds returned to Geneva in 1955 and lasted until May 1956. 26 countries

took part in the round. $2.5 billion in tariffs were eliminated or reduced.

Fifth Round Geneva (Dillion) Round - 1960-1962

The fifth round occurred once more in Geneva and lasted from 1960 to 1962. The talks

were named after U.S. Treasury Secretary and former Under Secretary of State. 26

countries took part in the round. Along with reducing over $4.9 billion on 4400 items in

tariffs, it also yielded discussion relating to the creation of the European Economic

Community (EEC).

Sixth Round Kennedy Round - 1964-1967

This round had the participation of 62 countries and negotiated tariff reductions of

approximately $ 40 billion, covering about four-fifths of the world trade. The Kennedy

round was the sixth session of General Agreement on Tariffs and Trade (GATT) trade

negotiations held in 1964-1967 in Geneva, Switzerland. The Kennedy Round had four

major goals: to slash tariffs by half with a minimum of exceptions, to break down farm

trade restrictions, to strip away non tariff regulations, and to aid developing nations.

Participation greatly increased over previous rounds

Seventh Round 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 countries took part in

the round. Concessions were made on $190 billion worth.

Eighth Round Uruguay Round - 1986-1993

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.

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THE GENERAL AGREEMENT ON TARIFFS AND TRADE

("GATT 1947")

PART I

Article I: General Most-Favored-Nation Treatment

Article II: Schedules of Concessions

PART II

Article III*: National Treatment on Internal Taxation and Regulation

Article IV: Special Provisions relating to Cinematograph Films

Article V: Freedom of Transit

Article VI: Anti-dumping and Countervailing

Article VII: Valuation for Customs Purposes

Article VIII: Fees and Formalities connected with Importation and Exportation

Article IX: Marks of Origin

Article X: Publication and Administration of Trade Regulations

Article XI*: General Elimination of Quantitative Restrictions

Article XII*: Restrictions to Safeguard the Balance of Payments

Article XIII*: Non-discriminatory Administration of Quantitative Restrictions

Article XIV*: Exceptions to the Rule of Non-discrimination

Article XV: Exchange Arrangements

Article XVI*: Subsidies

Article XVII: State Trading Enterprises

Article XVIII*: Governmental Assistance to Economic Development

Article XIX: Emergency Action on Imports of Particular Products

Article XX: General Exceptions

Article XXI: Security Exceptions

Article XXII: Consultation

Article XXIII: Nullification or Impairment

PART III

Article XXIV: Territorial Application - Frontier Traffic - Customs Unions and

Free-trade Areas

Article XXV: Joint Action by the Contracting Parties

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Article XXVI: Acceptance, Entry into Force and Registration

Article XXVII: Withholding or Withdrawal of Concessions

Article XXVIII*: Modification of Schedules

Article XXVIII bis: Tariff Negotiations

Article XXIX: The Relation of this Agreement to the Havana Charter

Article XXX: Amendments

Article XXXI: Withdrawal

Article XXXII: Contracting Parties

Article XXXIII: Accession

Article XXXIV: Annexes

Article XXXV: Non-application of the Agreement between Particular

Contracting Parties

PART IV: TRADE AND DEVELOPMENT

GATT 1947

Article XXXVI: Principles and Objectives

Article XXXVII: Commitments

Article XXXVIII: Joint Action

ANNEX A: List of Territories referred to in Paragraph 2 (a) of Article I

ANNEX B: List of Territories of the French Union referred to in Paragraph 2 (b) of

Article I

ANNEX C: List of Territories referred to in Paragraph 2 (b) of Article I as respects the

Customs Union of Belgium, Luxemburg and the Netherlands

ANNEX D: List of Territories referred to in Paragraph 2 (b) of Article I as respects the

United States of America

ANNEX E: List of Territories covered by Preferential Arrangements between Chile and

Neighboring Countries referred to in Paragraph 2 (d) of Article I

ANNEX F: List of Territories covered by Preferential Arrangements between Lebanon

and Syria and Neighboring Countries referred to in Paragraph 2 (d) of Article I

ANNEX G: Dates establishing Maximum Margins of Preference referred to in Paragraph

4 of Article I

ANNEX H: Percentage Shares of Total External Trade to be used for the Purpose of

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Making the Determination referred to in Article XXVI

ANNEX I: Notes and Supplementary Provisions

Problems of GATT:

1. Failed to ease up trade in agricultural products to any significant degree. This was

one of the major goals of the Uruguay Round.

2. Has overlook managed trade for textiles, largely because of pressure from the US,

and automobiles.

3. 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.

4. 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.

5. Non-Tariff Barriers!

What is the difference between GATT & WTO?

The major differences between the two are:

1. The GATT had no status whereas the WTO has a legal status. It has been created by

international agreement approved by governments and legislatures of member states.

2. The GATT clash settlement system was lagging and not binding on the parties to the

clash. The WTO clash settlement mechanism is faster and binding on all parties.

3. GATT was a forum where the member countries met once in a decade to discuss and

solve world trade problems. The WTO, on the other hand, is a properly established rule

based World Trade Organization where decisions on agreement are time bound.

4. The GATT rules applied to trade in goods. Trade in services was included in the

Uruguay Round but no agreement was arrived at. The WTO covers both trade in goods

and trade in services.

5. The GATT had a small secretariat managed by a Director General. But the WTO has a

large secretariat and a huge organizational setup

GATT has enjoyed a membership of over 100 countries and generated about 85-90% of

world trade.

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