DR VN BRIMS

Salient Features of GATT

International Business
Sangeetha Esakky Pandy 10/7/2011

General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. The GATTs main purpose was to reduce barriers to international trade. This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of different agreements. The GATT was an agreement, not an organization. Originally, the GATT was supposed to become a full international organization like the World Bank or IMF called the International Trade Organization. However, the agreement was not ratified, so the GATT remained simply an agreement. The functions of the GATT have been replaced by the World Trade Organization. What is the purpose of GATT? According to the Preamble of GATT, the objectives of the contracting parties include, Raising standards of living Ensuring full employment A large and steadily growing volume of real income and effective demand Developing the full use of the resources of the world 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 specialized 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". [Trade rounds - the package route to progress: The biggest leaps forward in international trade liberalization have come through multilateral trade negotiations, or "trade rounds", under the auspices of GATT - the Uruguay Round was the latest and most extensive.] The original focus of GATT was on the "tariffication" of existing non-tariff trade barriers and on reducing tariff levels on a multilateral MFN basis. This focus was gradually overtaken by other issues which took on increasing importance as the process of multilateral liberalization matured over the eight Rounds of GATT negotiations that have occurred since 1947. But the first five Rounds, undertaken between 1947 and 1961, were devoted almost exclusively to reducing the level of tariffs, and tariff reduction has continued to be an important objective up through the most recently completed (Uruguay) Round. The success with which countries have been able to negotiate reciprocal tariff reductions under GATT has been remarkable, first for the depth of the tariff reductions achieved through this process (world tariffs have been reduced by 90 percent, from an average ad valorem rate of 40 percent in 1947 to 4 percent in 1994) but also for the extended period of time over which the process has occurred. However, accompanying the success in reducing baseline tariff levels has been the rising importance of various kinds of exceptions and the increasing prominence of enforcement difficulties. Among the most important and potentially troublesome exceptions have been the following: Exceptions from MFN treatment associated with the formation of regional trading blocs; exceptions for "special protection" associated with safeguards actions; and exceptions for antidumping and countervailing duty actions. These exceptions have played an important role in shaping the pattern of protection under GATT. The increasing prominence of enforcement difficulties has been crystallized with the controversy surrounding the United States use of "Section 301" procedures.

Features:
Regionalism: Exceptions to the MFN principle afforded to pairs or groups of countries who wish to liberalize on a reciprocal basis more quickly than the pace set by multilateral negotiations, and who are willing to completely eliminate tariffs on "substantially all" of their trade, have allowed the formation of a number of free trade areas and customs unions. The most visible episodes of regional bloc formation falling within this exception include: (i) the formation of the original European Community with the Treaty of Rome in 1957; the subsequent enlargement to its present twelve-member size, and the further elimination of its remaining internal barriers to become the European Union of today; and (ii) the signing of the U.S.-Canada free trade agreement and its extension to include Mexico. These regional initiatives raise a number of important questions regarding their interpretation and role in the broader efforts to liberalize trade on a multilateral basis. Managed trade: The rise in special protection that has accompanied the gradual reduction in baseline tariffs has served to alter the rate of expansion of imports and 17 exports from what might have occurred absent such intervention. This form of protection, which has been little constrained by the safeguards provisions in GATT, is epitomized by the growing use of Voluntary Export Restraints (VERs), Voluntary Import Expansions (VIEs), Orderly Market Arrangements (OMAs), and tariffs that are designed to suit the needs of a particular sector. The prominent use of these instruments has given rise to the term "managed trade" to describe an environment in which relatively low levels of baseline protection are combined with the use of special protection to dampen underlying changes in trade flows and trade balances. An important question is whether the use of special protection and the forms that it has taken can be understood within the context of the broader trade agreements within which it arose. Unfair trade laws: Whereas safeguard actions carry with them no implication of wrongdoing, antidumping and countervailing duty procedures are intended to be used against "unfair" trading practices of foreign exporters and their governments, respectively. Antidumping duties can be imposed when foreign firms are found to be "dumping", that is, exporting at a price below either the home-market selling price or the cost of production. Countervailing duties can be imposed to offset foreign government subsidies. The increasing frequency with which these so-called "unfair trade" laws have been invoked, and the belief shared by many that the multilateral rules governing their use are ineffectual, brings into question the purpose to which these laws are being put and the effects that they have on trade. Aggressive unilateralism: Finally, a growing frustration on the part of the United States that the dispute settlement procedures of GATT were not sufficient to enforce its rights within the agreement, and that policies in important areas of trade and investment which fell outside any agreement were left completely undisciplined, led to the inclusion of Section 301 in the 1974 Trade Act and to its subsequent amendments. Section 301 provides the authority and procedures for the President to enforce unilaterally the perceived U.S. rights under international trade agreements where such agreements exist, and to respond to certain
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"unfair" foreign practices where agreements do not exist. 18 Associated with the rise of this so-called "aggressive unilateralism" are important questions relating to the role served by multilateral dispute settlement procedures and the consequences of adopting alternative enforcement methods.

Conclusion:
Given its provisional nature and limited field of action, the success of GATT in promoting and securing the liberalization of much of world trade over 47 years is incontestable. Continual reductions in tariffs alone helped spur very high rates of world trade growth around 8 per cent a year on average - during the 1950s and 1960s. And the momentum of trade liberalization helped ensure that trade growth consistently out-paced production growth throughout the GATT era. The rush of new members during the Uruguay Round demonstrated that the multilateral trading system, as then represented by GATT, was recognized as an anchor for development and an instrument of economic and trade reform. Apart from the deterioration in the trade policy environment, it also became apparent by the early 1980s that the General Agreement was no longer as relevant to the realities of world trade as it had been in the 1940s. For a start, world trade had become far more complex and important than 40 years before: the globalization of the world economy was underway, international investment was exploding and trade in services - not covered by the rules of GATT - was of major interest to more and more countries and, at the same time, closely tied to further increases in world merchandise trade. In other respects, the GATT had been found wanting: for instance, with respect to agriculture where loopholes in the multilateral system were heavily exploited - and efforts at liberalizing agricultural trade met with little success and in the textiles and clothing sector where an exception to the normal disciplines of GATT was negotiated in the form of the Multi-fibre Arrangement. Even the institutional structure of GATT and its dispute settlement system were giving cause for concern.