Law

International Trade Law

Introduction to the General Agreement on Tariffs and
Trade
Role Name Affiliation
Principal Investigator Dr. Ranbir Singh Vice Chancellor, National
Law University, Delhi
Co-P.I Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi
Paper Coordinator Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Writer/Author Ms. Geetanjali Sharma University of Cambridge
Content Reviewer Prof. A. Jayagovind National Law University,
Delhi
Language Editor Dr. Saloni Khanderia-Yadav National Law University,
Delhi

DESCRIPTION OF MODULE

Items Description of Module

Subject Name Law
Paper Name International Trade Law
Module Name/Title Introduction to the General Agreement on Tariffs and Trade
Module Id 2
Pre-requisites  The historical background of the two world wars and
the prevailing economic conditions.
 A brief understanding of the scope of present day
WTO.
 The economic principles of international trade.

Objectives To understand the following:

 Justifications of the international trade system;

 The origins and scope of GATT;
 The provisional application of GATT;
 The guiding principles of GATT;
 Subsequent negotiating rounds and expansion of the
GATT agenda;
 Evaluation and impact of the GATT on the current
international trade regime.

Keywords GATT, Protocol of Provisional Application, Tokyo Round,

Kennedy Round, terms of trade, nature of GATT etc.
 E-TEXT

Topics & Sub-Topics covered

1. Genesis of GATT

1.1 Bretton Woods Conference

1.2. Provisional application of GATT

2. Guiding principles of GATT

3. Expansion of the GATT agenda
3.1 Kennedy Round (1964-67)
3.2 Tokyo Round (1973-79)
4. Justifications for the world trading regime

4.1 The terms-of-trade school

4.2 Political incentivization

4.3 Existing bilateral and discriminatory trade policies

5. Evaluation of GATT and its impact on modern trade rules

6. Conclusion
TEXT
1. Genesis of GATT

1.1. Bretton Woods Conference

The General Agreement on Tariffs and Trade (hereinafter referred to as the ―GATT‖)
began in 1947 with 23 members and a forerunner to the present day World Trade
Organization (hereinafter referred to as the ―WTO‖) which has 160 members, comprising
approximately 96.4 percent of world trade, with the potential to increase to 99.95
percent.1

The GATT should be traced back to the United Nations Conference on Trade and
Development, with the former being set up primarily to remedy the failings of World War
I‘s Versailles Treaty and to support the creation of a new international monetary system
that would facilitate postwar reconstruction, economic stability, and peace. The Bretton
Woods Conference produced two of the most important international economic
institutions of the postwar period: the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (the World Bank).

The Bretton Woods Conference, while establishing the IMF and WB, also recognized the
need for an international institution which would address growing trade concerns. It was
also intended to be a forum for the negotiation of reciprocal reduction of tariffs on trade
in goods between wartime allies, at the behest of the United States of America.

Failed attempts to set

up ITO
Bretton Woods Modern Day WTO
(Provisional
Conference (1944) (1995-till date)
application of GATT)
(1947-1994)

1 Accession in perspective, Handbook on Accession to the WTO, Chapter 1 at

http://www.wto.org/english/thewto_e/acc_e/cbt_course_e/c1s1p1_e.htm (last visited on 10th July
2014)
 1.2. Provisional application of GATT

The above intention for the establishment of a multilateral trade institution was fortified
by way of a resolution adopted by the newly established United Nations Economic and
Social Council in 1946 calling for the drafting of charter for the International Trade
Organization. 2 This resolution was followed by the establishment of a Preparatory
Committee in February 1946, which met in October 1946, to work on a charter for an
international organisation for trade on the basis of a proposal made by the United States.
Subsequently, the work was shifted from London to Geneva where it worked from April
to October 1947.

The Geneva 1947 Meeting was an important step in the creation of GATT and the world
trading order. Prof. John H. Jackson describes the 1947 Geneva Meeting as an elaborate
conference divided in three parts dealing with the following areas3:

i. The first dealt with the preparation of a charter for an international trade institution i.e.
the International Trade Organization (ITO);

ii. The second dealt with the negotiation of a multilateral agreement to reduce tariffs on
a reciprocal basis;

iii. The third dealt with the drafting of ‗general clauses‘ of obligations relating to the
tariff obligations.

The second and third items of the agenda eventually constituted the GATT, which was
developed to include a variety of provisions curtailing the imposition of trade-impeding
measures by various nations. While these clauses were negotiated and completed by 1948,
the negotiations on the ITO charter proved more difficult, and towards the end of the
1947 Geneva Meeting it was determined that the ITO charter would realistically not be
implemented along with the GATT.

There were two reasons for the same:

i. First, with the possibility of the trade concessions being known before the
implementation of GATT, there was a strong possibility of disruption of world trade
patterns;

2UN ECOSOC Res. 13, UN Doc. E/22 (1946).

3John Jackson, The World Trade Organization: Constitution and Jurisprudence (Royal Institute of International
Affairs, 1998), p. 15-16 in Peter Van den Bossche & Werner Zdouc, The Law and Policy of the World Trade
Organization (Cambride University Press, 2013), p. 76 (hereinafter referred to as “Van den Bossche &
Zdouc”).
 ii. Second, the US negotiators were working under the authority of the 1945 Act which
expired in mid 1948, and there was thus a vested interest in implementing the GATT
as early as possible.4

However, the implementation of GATT and the ITO charter in two distinct stages led to
the provisional application of GATT. While discussing the need to pass domestic
legislation for the implementation of both GATT and the ITO charter, it was felt by
certain countries that the political capital needed to ratify the GATT first may jeopardize
the political capital that may be required to pass the ITO charter in the later years. Thus,
in order to resolve this problem, on 30 October 1947, eight of the 23 countries that had
negotiated the GATT 1947 decided to apply the GATT provisionally and signed the
‗Protocol of Provisional Application of the General Agreement on Tariffs and Trade‘
(PPA), and eventually the other fifteen countries also agreed to the same.

The twenty-three countries engaging in the Geneva negotiations that led to the signing of
the GATT in 1947 were Australia, Belgium, Brazil, Burma (Myanmar), Canada, Ceylon
(Sri Lanka), Chile, China, Cuba, Czechoslovakia (Czech Republic and Slovakia), France,
India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, South
Africa, Southern Rhodesia (Zimbabwe), Syria, United Kingdom, and United States.

Part I of the GATT 1947 contained the MFN obligation and the obligation regarding tariff
concessions, and Part III contained procedural provisions. The PPA resulted in the
nascent international trade order developing some features, which may be described in the
following manner:

i. As per the terms of the PPA, parties undertook to apply Parts I and III of the GATT
1947 in full, and Part II ‗to the fullest extent not inconsistent with existing
legislation‘5, as Part II contained the maximum number of substantive provisions and
would have necessitated the maximum involvement of the domestic legislature.

ii. The PPA also allowed for the creation of ‗existing legislation exception‘ or
‗grandfather rights‘ due to its feature that a GATT Contracting Party was entitled to
maintain any provision of its legislation which was inconsistent with a Part II
obligation.

At the time, it provided for the establishment of ITO as well as certain rules and
procedures for international trade. The aim was to create the ITO at a UN Conference on
Trade and Employment in Havana, Cuba in 1947. The Havana conference began on 21
November 1947, less than a month after GATT was signed. The ITO Charter was
concerned was completed in March 1948 in Havana. However, due to the lack of
congressional approval in the United States which President Truman eventually
abandoned in 1951, the ITO charter never entered into force.6 The ITO quickly became an

4 Id, p. 17-18 in Van den Bossche & Zdouc, supra n. 1, p. 77.

5 GATT BISD, Volume IV, p. 77 in Van den Bossche & Zdouc, supra n. 1, p. 77.
6 Van den Bossche & Zdouc, supra n. 1, p. 78.
 unattractive venture once the US, which was a leading trading nation, abandoned its
intention in pursuing it. The reasons behind implementing the GATT separately, divorced
from the ITO charter, highlighted the influence of the political forces which had been
instrumental in creating the global trading order.

The GATT is a key institution that has shaped the current international trade regime, and
is responsible for many rules present in the WTO covered agreements. The practices of
the GATT are still considerably relevant in guiding the practices of the WTO, as affirmed
by Article XVI:1 of the WTO Agreement which states that ―..the WTO shall be guided by
the decisions, procedures and customary practices followed by the Contracting Parties to
GATT 1947 and the bodies established in the framework of GATT 1947‖.

2. Guiding principles of GATT

The objective of GATT was to establish an orderly framework for the reduction of trade
barriers which would lead to the expansion of international trade. The GATT in this
regard contained certain underlying principles which guided its application listed as
follows:

i. Non-discrimination: the Most Favored Nation (MFN) principle

The MFN principle stated that each contracting party to the GATT was required to
provide all other contracting parties with the same conditions of trade as the most
favourable terms it extended, i.e., each contracting party was required to treat all
contracting parties in the same way that it treats its "most favored nation".

ii. Reciprocity

The principle of reciprocity mandated that the benefits of any bilateral agreements
between contracting parties, regarding tariff reductions and market access, must be
extended simultaneously to all other contracting parties. The principle of reciprocity is
closely associated with the MFN principle.

iii. Tariff reduction

The reciprocal reduction of tariffs was a strong principle reflected in the GATT.
Protectionism at the time mainly consisted of tariffs, and negotiations were also naturally
focused on the same. The text of the 1947 GATT lays out the obligations of the
contracting parties in this regard.

The GATT treaty did not provide for a formal institution, but a small GATT Secretariat,
with a limited institutional apparatus, which was eventually headquartered in Geneva to
administer various problems and complaints that might arise among members. The nature
 of GATT 1947 was that it was viewed as an agreement aimed at addressing most trade
concerns of its members, although it was a long way off from becoming an international
institution for trade. There were very few institutional features in the GATT 1947. 7
However, during its subsequent rounds of negotiations, the GATT ventured into rule-
making on Non-Tariff Barriers which lent it a more institutional and expansive character,
and ultimately it became a de facto institution.

3. Expansion of the GATT agenda

The GATT agenda was also subsequently expanded as a result of further negotiations
between the parties during the so-called trade rounds. There were multiple trade rounds
from 1947-1994, which are listed below:

Year Place/name Subjects covered Countries

1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960-1961 Geneva Tariffs 26
Dillon Round
1964-1967 Geneva Tariffs and anti-dumping 62
Kennedy Round measures
1973-1979 Geneva Tariffs, non-tariff measures, 102
Tokyo Round ―framework‖ agreements
1986-1994 Geneva Tariffs, non-tariff measures, 123
Uruguay Round rules, services, intellectual
property, dispute settlement,
textiles, agriculture, creation of
WTO, etc
*Source WTO website at ‗The GATT Years: From Havana to Marrakesh‘ at
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm (last visited on 10th
July 2014)

It is estimated that tariffs on manufactured products fell from a trade-weighted average of

roughly 35 percent before the creation of GATT in 1947 to about 6.4 percent at the start
of the Uruguay Round in 1986.8 Over the same time period, the volume of trade among

7See Article XXV of GATT 1947, entitled „Joint Action by the Contracting Parties‟.
8Hoekman, Bernard, and Michel Kostecki, The Political Economy of the World Trading System (Oxford
University Press 1995) in Meredith A. Crowley, An introduction to the WTO and GATT, Federal Reserve
Bank of Chicago (2003) available at:
 GATT members also surged. Among the various negotiation rounds, the Kennedy and the
Tokyo rounds expanded the scope of GATT significantly by venturing into rule-making
on Non-Tariff Barriers.

3.1. Kennedy Round (1964-67)

During the Kennedy Round from 1964-67, which was named after President John F
Kennedy of the US, the Ministers agreed on three negotiating objectives for the round9:

i. Measures for the expansion of trade of developing counties as a means of furthering

their economic development;
ii. Reduction or elimination of tariffs and other barriers to trade;
iii. Measures for access to markets for agricultural and other primary products.

In the end, the result was an average 35% reduction in tariffs, except for textiles,
chemicals, steel and other sensitive products; plus a 15% to 18% reduction in tariffs for
agricultural and food products. In addition, the negotiations on chemicals led to a
provisional agreement on the abolition of the American Selling Price (ASP).10

3.2. Tokyo Round (1973-79)

During the Tokyo Round from 1973-79, 102 countries participated in negotiations. Both
from the point of view of participation and the breadth of the negotiating agenda, this was
the biggest round up to that time. The Tokyo Round was launched on 14 September 1973
at a Ministerial meeting in Tokyo, but the negotiations were conducted largely in
Geneva.11

The Ministerial declaration for the Tokyo Round aimed at the following:

i. Tariff negotiations using the formula method,

ii. Reducing or eliminating non-tariff measures,
iii. Examining the possibility of reducing or eliminating all barriers in selected sectors,
iv. Examining the adequacy of the multilateral safeguard system,
v. Negotiations in agriculture, taking into account the special characteristics and
problems in this sector, and
vi. Treating tropical products as a special and priority sector.

The developing countries were drawn into the negotiating process much more than during
the Kennedy round, as the Tokyo Round held significant potential for influencing trading

https://www.chicagofed.org/digital_assets/publications/economic_perspectives/2003/4qeppart4.pdf
(last visited 10th July 2014).
9 Kennedy Round, http://worldtradereview.com/webpage.asp?wID=437 (last visited on 10th July 2014).

10 Id.

11 The GATT Years: From Havana to Marrakesh at

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm (last visited on 10th July 2014).
 relations between the global North-South. The Tokyo Round expanded the scope of the
GATT 1947 and led to the formulation of rules on Non-Tariff Barriers (NTBs). It led to
discussions among members on how to adequately address trade concerns apart from
reduction of tariffs. The rules agreed upon during the Tokyo Round were usually
accepted only by a relatively small number of parties (mainly industrialized nations) –
often called ―codes‖- and dealt with many substantive areas of rule-making which were
later finalized as Agreements in the Uruguay Round. The following codes were
concluded in the Tokyo Round:

i. Subsidies and countervailing measures - interpreting Articles VI, XVI and XXIII of
GATT 1947
ii. Technical barriers to trade (Standards Code)
iii. Import licensing procedures
iv. Government procurement
v. Customs valuation - interpreting Article VII of GATT 1947
vi. Anti-dumping- interpreting Article VI of GATT 1947 and replacing the Kennedy
Round Anti-Dumping Code
vii. Bovine Meat Arrangement
viii. International Dairy Arrangement
ix. Trade in Civil Aircraft

The Tokyo Round achieved an average one-third cut in customs duties in the world‘s nine
major industrial markets, bringing the average tariff on industrial products down to
4.7%. 12 It was an encouraging beginning, but it had mixed results. It fell short of
delivering an agreement on safeguards or emergency import measures. Several codes
were eventually amended in the Uruguay Round and turned into multilateral
commitments accepted by all WTO members. Only four remained ―plurilateral‖ — those
on government procurement, bovine meat, civil aircraft and dairy products. In 1997 WTO
members agreed to terminate the bovine meat and dairy agreements, leaving only two.13

It is important to mention that a significant achievement of the Tokyo Round was the
finalization of the Differential and more favourable treatment reciprocity and fuller
participation of developing countries, more commonly referred to as the Enabling Clause.
This decision by signatories to the GATT during the Tokyo Round in 1979 allows
derogations to the MFN treatment in favor of developing countries. In particular,
paragraph 2(c) permits preferential arrangements among developing countries in goods
trade. The Enabling Clause has continued to apply as part of GATT 1994 under the WTO.
As the negotiating round which resulted in the finalization of many important agreements
concerning Non-Tariff Barriers, the Tokyo Round is an important milestone in the
expansion of the GATT agenda from mere tariff reduction to other areas of international
trade.

12 Id.
13 Id.
4. Justifications for the world trading regime

Beggar Thy Competitive High tariffs

Neighbour devaluation

Discriminatory
trading blocks

The creation of institutionalized rules for international trade was not an easy matter. As
Paul Krugman observed in 1997, if economists ruled the world, there would be no need
for a World Trade Organization.14 Present-day WTO is the result of a long and arduous
process of negotiations, all of which began with GATT. Apart from understanding the
historical beginnings of the GATT however, it is necessary to examine the economic and
political justifications of GATT. These justifications have their basis in multiple schools
of thought, which are listed below15:

4.1. The terms-of-trade school:

This school of thought focuses on economic incentives.16 The proponents of this school
argue that large countries, which are capable of influencing world prices are focused on
increasing their terms of trade by reducing import prices, and thus improve national
welfare. However, by applying this principle, it also possible that if all nations impose
such an optimal tariff, most gains of trade are neutralized and all countries may be worse
off compared to a situation without tariffs.17

14 Paul Krugman, What Should Trade Negotiators Negotiate About?, 35 J. Econ. Literature 113, 113 (1997) in
Joost Pauwelyn, The Transformation Of World Trade, 104 Mich. L. Rev. 1 (October 2005) (hereinafter referred
to as “Pauwelyn”).
15 Id.
16 See Kyle Bagwell & Robert W. Staiger, The Economics of the World Trading System (2002) in Pauwelyn, supra

n. 14.
17 Harry G. Johnson, Optimum Tariffs and Retaliation, 21 Rev. Econ. Stud. 142 (1954) at 144, in Pauwelyn,

supra n. 14.
 In response to the above, the proponents of this school of thought argue that through the
exchange of reciprocal ―concessions‖, countries steered away from so-called beggar-thy-
neighbor policies making everyone worse off, and instead, reciprocal commitments to
liberalize trade, forces countries to take account of the harm they cause to others. In this
vein, GATT was justified as a winning idea.

4.2. Political incentivization:

This school of thought focuses on political incentives to restrict trade,18 and relies on
public choice and constitutional theories to explain the creation of GATT. They argue
that due to collective action problems, the supporters of free trade, such as consumers,
have less incentive to lobby for changes, and as a result, protectionist groups may wield
more political power. As a result, governments may face pressure to introduce ―trade-
restrictive‖ policies and international coordination could be solution to the
disproportionate impact of protectionist groups.19

4.3. Existing bilateral and discriminatory trade policies:

This school of thought focuses on the discriminatory nature of pre-GATT trade relations
determined by colonial preferences and bilateral trade agreements. For instance, between
1934 and 1945 the United States, negotiated and accepted thirty-two reciprocal trade
agreements.20 This view emerged to deal with the establishment of GATT as a response
to existing bilateral and ―discriminatory‖ trade policies.
Proponents of this school of thought point out that the world system is focused on non-
discrimination as opposed to economic efficiency and the protection of producer as
opposed to consumer welfare.21

5. Evaluation of GATT and its impact on modern trade rules

In many ways, GATT constituted a departure from earlier attempts at trade cooperation.
While it bore scant resemblance to the institutionalized rule-making that is delivered by
the WTO, it was a political bargain that transformed international trading relations.
Despite its political nature however, the GATT was the single most important institution
that has led to the development of the WTO today.

18 Gene M. Grossman & Elhanan Helpman, Interest Groups and Trade Policy 111 (2002); J. Michael Finger,
Protectionist Rules and Internationalist Discretion in the Making of National Trade Policy, in New Institutional
Arrangements for the World Economy 310 (Hans-Jürgen Vosgerau ed., 1989) in Pauwelyn, supra n. 14.
19 John O. McGinnis & Mark L. Movsesian, The World Trade Constitution, 114 Harv. L. Rev. 511, 526-30

(2000) in Pauwelyn, supra n. 14.

20 John H. Jackson, World Trade and the Law of GATT: A Legal Analysis of the General Agreement on Tariffs and

Trade 37 (1969) in Pauwelyn, supra n. 14.

21 See Henrik Horn & Petros C. Mavroidis, Economic and Legal Aspects of the Most-Favored Nation Clause, 17

Eur. J. Pol. Econ. 233, 234-36 (2001).

 However, the GATT as such was not an extremely successful or effective institution. Prof.
Joost Pauwelyn labels the GATT a ―gentleman‘s club‖ as opposed to a strict legal regime.
In support of the same, he offers the following reasons22:

i. A strong distrust on the part of GATT negotiators for lawyers and rigid legal
methods which may not enable flexible responses to real trade problems, as
evinced by the absence of a strong enforcement mechanism;

ii. The objective of the GATT, in the minds of GATT negotiators, was settling trade
disputes, and not enriching or clarifying trade law;

iii. The prevalence of ―embedded liberalism‖ i.e. ―a common belief amongst the
technocratic elites of the original twenty-three GATT contracting parties--after all,
a limited set of like-minded, capitalist countries--that trade liberalization
increases welfare and requires international coordination and discipline, albeit
with sufficient room left for domestic politics to redistribute income and sustain
the safety-nets of the welfare state at home.‖

iv. Low levels of discipline and law as evidenced by the following:

a) The GATT included broadly defined substantive exceptions - Article XII

permitted trade restrictions to safeguard a country's balance of payments,
Article XVIII allowed for governmental assistance to economic
development, and Articles XX and XXI provided for a broad range of
general exceptions ranging from public morals and health to the
protection of national security, historic treasures, and natural exhaustible
resources.

b) GATT also permitted trade restrictions without the need to base them on
specific non-protectionist concerns. Article XIX introduced so-called
safeguard measures that permit the reinstatement of trade restrictions
when countries are faced with a sudden influx of imports causing serious
injury to their domestic industry. Article VI permitted extra tariffs to
offset so-called dumping i.e. exports sold at less than the normal value of
the products concerned.

c) The ―existing legislation clause‖ in the GATT's Protocol of Provisional

Application, in force until the creation of the WTO in 1995,
grandfathered pre-1947 legislation under Part II of GATT.

In conclusion, Prof. Pauwelyn argues that the GATT represents an interesting exhibition
of bidirectional law and politics, where a predominantly political institution gradually
gets influenced and becomes a legal institution in the future.

22 Pauwelyn, supra n. 14.

6. Conclusion

Prof. Pauwelyn‘s view of GATT as a ―gentleman‘s club‖ as opposed to a legal regime is

an accurate one. The GATT has indeed proved useful for setting out a kind of a roadmap
of the kind of trade rules that countries could agree to have in place, but the modes of
governance of the GATT and WTO are poles apart. The GATT sought to provide a
platform by way of which trade concerns could be aired, and perhaps addressed, but did
not necessarily envision a situation in which the entire international trade regime would
be subject to its control, to some extent.

This is clearly evidenced by its lack of strict rules, the non-binding nature of those rules,
and the somewhat narrow agenda. Even its provisional application and dispute settlement
mechanism attest to its character of a set of trade rules, rather than a multilateral trade
institution. However, despite its failings, the GATT has had a decisive effect on the
present international trade regime, which is revealed more clearly in the Uruguay Round
negotiations.