HISTORY OF GATT

&
THE WTO SYSTEM

A BRIEF HISTORY OF THE GATT

Beggar-thy-neighbour tariff policies of 1930s

=> WWII
Bretton Woods Conference at the end of the WWII, finance
ministers from the Allied nations gathered to discuss creation
of a new monetary system that would support postwar
reconstruction, economic stability, and peace.
=> IBRD & IMF
=> need for a third institution, ITO.
1940s: Representatives met to design a postwar trading
system that would parallel the international monetary system.

Draft a Charter for ITO,

Negotiate the substance of an ITO agreement (rules governing
governing international trade and reductions in tariffs.

1947: 23 Members
Today: 153 Members

GATT TRADE ROUNDS

Year

Place /
Name

Subjects Covered

Countries

1947

Geneva

Tariffs

23

1949

Annecy

Tariffs

13

1951

Torquay

Tariffs

38

1956

Geneva

Tariffs

26

1960 1961 Dillon

Round

Tariffs

26

1964 1967 Kennedy

Round

Tariffs and Anti-Dumping

Measures

62

1973 1979 Tokyo

Round

Tariffs, Non-tariff Measures,

Framework Agreements

102

1986 1994 Uruguay

Round

Tariffs, Non-tariff Measures,

123
Rules, Services, Intellectual
Property, Dispute Settlement,
Textiles, Agriculture, Creation of
WTO

TIMELINE OF GATT & WTO -1

1944: At the Bretton Woods Conference, which created

the IBRD and IMF, there is talk of a third organisation,
the ITO.

1947: As support for another international organisation

wanes in the U. S. Congress, the General Agreement on
Tariffs and Trade is created. The Gatt Treaty Creates a
set of rules to govern trade among 23 member countries
rather than a formal institution.

1950: Formal U.S. Withdrawal from the ITO concept as

the U.S. Administration abandons efforts to seek
congressional ratification of the ITO

TIMELINE OF GATT & WTO -2

1951 1986: Periodic negotiating rounds occur, with

occasional discussions of reforms of GATT. In 1980s,
serious problems with dispute resolutions arise.

The Uruguay Round, a new round of trade negotiations,

is launched. This culminates in 1994 Treaty that
establishes the WTO.

1995: The WTO is created at the end of the Uruguay

Round, replacing GATT.

2009: The GATT consists of 153 members, accounting

for approximately 97% of world trade.

SUCCESS OF GATT

Regular meetings of GATT members are known as

negotiating rounds

Primarily focus on further reductions in the in the maximum

tariffs that countries could impose on imports from other
GATT members

Tariffs on manufactured products fell from a tradeweighted average of roughly 35% before the creation of
GATT in 1947, to about 6.4% at the start of the Uruguay
round in 1986.

The volume of trade among GATT members surged: In

2000 the volume of trade among WTO members stood
at 25 times its 1950 volume.

UNSOLVED PROBLEMS OF GATT -1

By the 1980s several problems had surfaced:

The dispute resolution mechanism of GATT was not

effectively functioning. Longstanding disagreements
among members regarding issues like government
subsidies, regulations for FDI

A number of commodities (agricultural products and

textiles) were widely exempt from GATT disciplines.

Certain forms of administered trade protection (antidumping duties, VERs, counterveiling duties) were
restricting trade and distorting trade patterns in many
important sectors.

UNSOLVED PROBLEMS OF GATT -2

Trade in services was expanding rapidly and GATT had

no rules regarding trade in services.

Countries producing intellectual property were becoming

increasingly frustrated by the lack of intellectual property
protection in many developing nations.

Rules regarding trade related investment measures (eg.

Domestic purchase requirements for plants built from
FDI) were hotly disputed

TOKYO ROUND
A first attempt for reforming the system,
Progressive reduction of tariffs, average tariff on
industrial products became 4.7%,
Discussion of fundamental problems: Agricultural
product trade, Safeguards (emergency import
measures),
A series of agreements and arrangements on nontariff trade barriers => Small number of GATT
members subscribed to them,
Several Codes on Plurilateral Commitments (Eg.
Government Procurement, Civil Aircraft, Diary
Products).

URUGUAY ROUND
Launched in 1986 to address the problems of GATT
Major reforms introduced:

WTO established,

A new dispute resolution mechanism built up,

GATTs authority expanded to new areas, agreements

regarding trade in textiles, agriculture, services, and
intellectual property,

New set of rules regarding administered protection

came into effect.

FUNDAMENTAL PRINCIPLES OF THE GATT/WTO

SYSTEM

RECIPROCITY: A practice that occurs in GATT

negotiating rounds, whereby one country offers to
reduce a barrier to trade and a second country
reciprocates by offering to reduce one of its own
trade barriers.

The practice of swapping tariff concessions, facilitates

the reduction of trade barriers.

NONDISCRIMINATION: (Equal treatment) If one

GATT member offers a benefit or a tariff concession
to another GATT member, it must offer the same
tariff reduction to all GATT members.

NONDISCRIMINATION -1

Most Favoured Nation Treatment: Grant someone a

special favour, then have to do the same for all other
WTO members. Each member treats all the other
members as most favoured trading partners.

National Treatment: Imported or locally-produced goods

should be treated equally at least after the foreign
goods have entered the market.

Freer Trade: Lowering trade barriers, gradually and

through negotiation. Trade barriers concerned include
customs duties and measures such as import bans or
quotas, red tape, and exchange rate policies.

NONDISCRIMINATION -2

Predictability through binding and transparency:

Once lowered, promising not to raise trade barriers gives
businesses a clearer view of their future opportunities. With
stability and predictability, investment is encouraged, jobs are
created, and consumers can fully enjoy the benefits of
competition (variety, and lower prices).

Percentages of Tariffs Bound Before and After the 1986

1994 Talks
Before

After

Developed Countries

78

99

Developing Countries

21

73

Transition Economies

73

98

A QUESTION

Why is reciprocity important in reducing barriers to

trade? Dont countries benefit by unilaterally
reducing their tariffs because lower tariffs lead to
lower domestic prices?

Theories of International Economics tell us that, it

depends on the size of the country:

If the country is small, captures all the benefits from

trade => no need for reciprocity

IMPACT OF A TARIFF ON A SMALL COUNTRY

Import tariffs=Tax
Raise the price that
consumers pay for a
good,
Provide tax revenue to
the government
Potential to create
inefficiencies in
consumption and
production decisions,
Very small country will
benefit by unilaterally
lowering its tariffs,

Because very small

countries are unable to
affect the world prices

IMPACT OF A TARIFF ON A LARGE COUNTRY

Reciprocity becomes important when large countries are changing

their trading policies,

If a tariff is imposed

Because import demand will comprise largeshare of world wide demand, prices
are affected
Quantity of Imports demanded will decrease
Wold Price falls
Terms of Trade Improves
Cost of tariff is pushed on to foreign producers
Country is better off

Consumers pay higher prices, but govt collect revenue, and import
competing producers earn higher revenue

The use of tariff policy by the large country

Beggar-thy-neighbour

policy
Importing Country better off
Exporting Country worse off
Inefficiencies in the world trading system

Level of production becomes too high in importing country, and

level of production becomes too low in exporting country

T-O-T DRIVEN PRISONERS DILEMMA

Two situations:

Two parties can improve

their situations by acting
cooperatively,
However, indivudual
incentives they face lead
them to act noncooperatively.

The problem facing the

countries at the end of WWII
was that they knew they
would collectively be better
off under free trade. Though
each country benefited from
its own import tariff, it also
suffered at the hand of its
trading partners import
tariffs.

GATT MECHANISM

A mechanism was needed by which countries could

jointly commit to tariff reductions that would reduce the
losses due to production and consumption distortions,
and through gains in efficiency, make all countries,
better off.

Practice of reciprocal tariff reductions provided the

necessary mechanism for countries to commit to freer
trade

In all countries, the reallocation of labour and capital

away from protected import competing firms and toward
export sectors would generate real efficiency gains =>
Export Oriented Growth Strategy !

POWER OF NON DISCRIMINATION

Convenience and practicality,

Setting the same tariff policy on imports from all countries ensures
that resources are allocated to their most productive use,

On the import side, nondiscrimination ensures that countries

purchase imports from the lowest-cost source country, (trade
diversion is prevented)

Prevents re-reouting in order to circumvent high tariffs, in which

exporter ships its goods to a third country repackages it, and then
ships it to a final destination where it will qualify for the third
countrys preferential tariff, sometimes substantial transformation
becomes necessary that leads the firm to move a stage of
production to the third country,

On export side, nondiscrimination protects exporting countries from

bilateral opportunism. If one country were later to offer a lower
tariff rate to a third country, this could erode the value of the original
tariff concession to the first trading partner.

EXCEPTIONS TO GATTS NONDISCRIMINATION

PRINCIPLE

Regional Trade Agreements

Free

Trade Agreements
Customs Unions

Administered Protection
Special

Tariffs that can be used for particular purposes

Safeguards,
Anti-Damping Duties
Countervailing Duties

REGIONAL TRADE AGREEMENTS

Free Trade Area: Members maintain their original

external tariff with the rest of the world, but engage
in free trade with one another.

Customs Union: All members set the same external

tariff for imports from non-members and eliminate
the tariffs from members.
When

GATT members form a CU, CET can be no

higher than a weighted average of the tariffs of the
members countries before the CU was formed.

TRADE CREATION VS. TRADE DIVERSION

Is it controversial that GATT members form a regional

trade agreement?

Trade Creation vs Trade Diversion

Reduction of tariffs among RTA members leads to trade

creation,

But may also create a diversion of trade away from a

non RTA country to a RTA member,

If the non RTA country is the lowest cost producer, there may
be no worldwide efficiency gains

Argument: Since the Tariff Preference (the difference

btw. the tariff for RTA members and others), is very
small it cannot impose huge trade diversion.
Tariff preference associated with anti-damping duties
create substantial trade deflection effect (exports are
diverted to countries with lower import tariffs)

ADMINISTERED TRADE PROTECTION

Administered Protection refers to trade restrictions that

provide protection from imports above and beyond the
protection afforded by the tariffs that were negotiated as
part of GATT.

Deviation from GATTs principle of nondiscrimination:

Permits;

Anti-Damping Duties,
Countervailing Duties,
Safeguard Measures, and
Tariffs to assist with BoP problems. VERs are no longer allowed.

PRO ARGUMENTS:

Temporary Tariff that are usually discriminatory was

allowed for a variety of reasons:
Administered

Protection improves worldwide welfare.

Protection may make some countries better off, some
worse off, but if we add up gains and losses, the sum
total is positive,

Administered

Protection improves the welfare of

politically powerful importing countries, and, especially,
their import competing sectors. Some group profits from
the use of administered protection. Eventhough
protection may reduce worldwide welfare, those who
benefit are politically powerful enough to see that it
remains within the agreement.

SAFEGUARDS

A safeguard measure is a temporary tariff or quota that

is used to protect a domestic industry from fair foreign
competition,

In 1940s, US govt insisted that a safeguard provision be

part of every trade treaty that it signed,

To encourage countries to make greater concessions,

GATT included two provisions under which countries
could reintroduce protective trade policies,
Article XIX Safeguard Provision, Countries remained free to
temporarily raise a tariff above the maximum level or
introduce a temporary quantitative restriction
Article XXVIII: allows to permanantly raise tariffs

SAFEGUARDS - RULES

Measures should be nondiscriminatory,

Eg. US Global Steel Safeguard raised the import tariff on

steel for many countries, but granted exemptions for steel
imports from many of free trade partners, such as Canada,
Mexico,.. => Violation of GATT rules!

Safeguards should only be used when imports increase

unexpectedly, or as a result of unforeseen
developments,

If a country imposed a safeguard on a product its trading

partners that were hurt by the safeguard could retaliate
with their own tariff increases on other products =>
Uruguay Round Reforms: No retaliation for the first
three years.
Safeguards may provide an incentive for protected firms
to innovate quickly, if the cost of new technology is
falling

ANTI-DAMPING DUTIES

Anti-Damping Duty is a tariff that an importing country

imposes on imports of a product that have been dumped
into its domestic market by some exporting countrys
firms

Evidence that foreign firms sold their products at less than

normal value and this has injured the domestic industry.

Anti-Damping Code: Allows countries to violate

nondiscrimination rule and impose an additional tariff on
imports from a firm that is dumping. Allows price
undertakings,
Predatory Dumping
Sporadic Dumping
Persistent Dumping

COUNTERVAILING DUTIES

Tariffs used to offset the effects of a foreign

governments subsidy, are similar to anti-dumping
duties,

In markets that are imperfectly competitive, a

foreign governments subsidy can reduce the
welfare of an importing country,

Consumers in importing country benefit from the

subsidy, but the losses to the firms in the importing
country outweigh the benefits to the consumers.

POST II. W.W. INTERNATIONAL FACTORS

U.S. led institutional multilateralism,

Bretton Woods,
Establishment of Twin Institutions, and GATT.

Marshall Plan: imposed economic policies on

developing countries,

Cold War and U.S., Western European Cooperation

against USSR,

MARSHALL PLAN

On June 5, 1947, speaking to the

graduating class at Harvard
University, Secretary of State
George C. Marshall laid the
foundation, in the aftermath of
World War II, for a U.S. program of
assistance to the countries of
Europe. At a time when great cities
lay in ruins and national economies
were devastated, Marshall called
on America to "do whatever it is
able to do to assist in the return of
normal economic health in the
world, without which there can be
no political stability and no assured
peace."

MARSHALL PLAN
The official mission statement: To give
a boost to the Europe economy, to
promote European production, to
bolster European currency, and to
facilitate international trade, especially
with the United States, whose
economic interest required Europe to
become wealthy enough to import
U.S. goods.
Unofficial goal: The containment of
growing Soviet influence in Europe,
evident especially in the growing
strength of communist parties in
Czechoslovakia, France, and Italy.

MARSHALL PLAN

The first substantial aid went to Greece and Turkey

in January 1947, which were seen as being on the
front lines of the battle against communist
expansion and were already being aided under the
Truman Doctrine.

MARSHALL PLAN

In 1949, in response to a
request from Turkish officials
for American technical
assistance and training, an
American expert discusses
newly donated agricultural
equipment with Turkish farmers
at the Ankara Agricultural
School. (Courtesy of the George C.
Marshall Research Library, Lexington,
Virginia)

MARSHALL PLAN

Conditions laid down to make use of the plan:

Public entrepreneurship should be constricted

Private entrepreneurship should be encouraged
Heavy industry (iron-steel, heavy chemical etc.) should
not be established in Turkey.
Industrialization must be based on processed
agricultural products, construction materials, leather,
forest products etc.
Increased tractor usage and highway construction.

POST WW IMPLEMENTED POLICIES

(1947 1950)

1948 Economic Congress:

Businessmen, and Professors gathered to determine

necessary conditions for rapid development,
From Etatism towards a more international economy,

Foreign Aid through Marshall Plan, and prospects

of trade and foreign investment,

Integration to the International Economic System,

Turkey became member to, ILO in 1945, IBRD and IMF

in 1947, and IFC (1956) and IDA (1960), GATT and
OECD (1961), BIS (1964)