Answer: THE ROLE OF GATT The most important trade-liberalization activity in the post-World War II period has been

through the General Agreement on Tariffs and Trade (GATT), which began in 1947 with 23 members and now has more than 100 members- GATT has given the world a basic set of rules under which trade negotiations take place and a mechanism for monitoring the implementation of these rules. Most-Favored-Nation Clause To belong to GATT, nations must adhere to the most-favored-nation (MFN) clause. MFN means that if a country, such as the United States, grants a tariff reduction to one country-for example, a cut from 20 percent to 10 percent on wool sweaters from Australia-the United States would grant the same concession to all other countries of the world. The MFN applies to quotas and licenses as well. Although MFN was initially intended to be unconditional, countries have always made exceptions to it.32 The most important exceptions are as follows: 1. Manufactured products from developing countries have been given preferential treatment over products from industrial countries. 2. Concessions granted to members within a trading alliance, such as the European Community (EC), have not been extended to countries outside the alliance. 3. Nations that arbitrarily discriminate against products from a given country are not necessarily given MFN treatment by the country whose products are discriminated against. 4. Nonsignatory countries are not always treated in the same way as those that grant concessions. 5. Countries sometimes stipulate exceptions based on their existing laws at the time of signing a GATT agreement. 6. Exceptions are made in times of war or international tensions. The first exception provides that most industrial countries grant tariff preferences to developing countries under the Generalized System of Preferences (GSP). Under the second exception, the United States and Israel agreed in 1985 to remove all tariffs on each other's products without giving the same benefits to other countries. Under the third exception, the United States does not grant MFN treatment to a number of countries in the former communist bloc. Under the fourth exception, only countries signing GATT's Government Procurement Code (nondiscrimination against imports in government procurement) are granted automatic permission to bid on public works contracts open to foreign bids. Under the fifth exception, Switzerland excludes agricul tural trade. Finally, under the last exception, the United Kingdom suspended MFN treatment to Argentina as a result of the two countries' being at war in the South Atlantic. GATT-Sponsored Rounds GATT's most important activity has been the sponsoring of "rounds" or sessions named for the place where the

round begins, which have led to a number of multilateral reductions in tariffs and nontariff barriers for its membership. The process of granting reductions is across the board: In other words, countries may agree to lower all tariff rates by a given percent, but not necessarily the same percent by all countries, over some specified period of time. Given the thousands of products traded, it would be nearly impossible to negotiate each product separately and even more difficult to negotiate each product separately with each country separately. Nevertheless, each country brings to the negotiations certain products that it considers exceptions to its own across-the-board reductions. That a series of negotiations have resulted in vast tariff reductions indicates not only that countries are committed to work jointly toward freer trade but also that tariffs are the easiest trade barrier to tackle. The Tokyo Round, for example, resulted in an overall reduction in tariffs, including a reduction between the United States and the EC by 35 percent each way, and a reduction of 40 percent by Japan on U.S. imports into Japan. In spite of these tariff reductions, the primary thrust of the negotiations involved grappling with the increasingly important and complex nontariff barriers, especially in five specific areas: industrial standards, government procurement, subsidies and countervailing duties, licensing, and customs valuation. In each of these five areas, conference members agreed on a code of conduct for GATT nations.33 The Agreement on Industrial Standards provides for treating imports on the same basis as domestically produced goods. Similarly, the Agreement on Government Procurement calls for treating bids by foreign firms on a nondiscriminatory basis for most large contracts. The Agreement or Code of Conduct on Subsidies and Countervailing Duties recognizes domestic subsidies as appropriate policy tools whose implementation, however, should avoid any adverse impact on other countries. Export subsidies are prohibited, the only exception being agricultural products. This agreement also spells out procedures regarding the possibility of using countervailing duties against a second country if the first country believes its domestic firms are being harmed by the second country's subsidy. The Licensing Code commits members to simplify their licensing procedures significantly and to treat both foreign and domestic firms in a nondiscriminatory manner. The Customs Valuation Code calls for either c.i.f. or f.o.b. valuation (invoice value with or without transportation and insurance included) and bans certain types of valuation methods, such as basing valuation on the selling price of a product in the importing country. The specific procedures were discussed earlier in the chapter in the section on customs valuation. GATT as Monitor There is general agreement that tariff-reduction agreements are difficult to enforce. There are simply too many subtle means that countries use to circumvent the intent of negotiations. Furthermore, there is one important area on which participants have been unable to agree: the use of temporary safeguards against severe domestic disruptions caused by expanding imports. GATT still allows safeguard measures that can reverse the injurious effects of increases in imports that, in turn, result from trade-liberalization moves. In such a situation the injured nation may cancel a previously negotiated action that liberalized trade as long as the country feels that this move is necessary to prevent further injury, particularly in the form of increased unemployment in the

affected industry. In practice, very few safeguards have been imposed under the new GATT rules. However, there have been a number of "voluntary" limitations on exports, such as the example of Japanese limits on auto exports to the United States discussed in the opening case. A voluntary restraint can circumvent GATT agreements because neither the importing country nor the exporting country complains to the GATT Council in Geneva (the organization's ruling body), and GATT can do nothing without a complaint. What can GATT do if there are complaints? First, it investigates to determine whether the allegations are valid. If the complaints are valid, then countries may pressure the offending party to change its policies. In extreme cases, other GATT members could rescind MFN treatment from the violating country; however, such a measure has not become necessary. The mutual commitment to cooperate has been sufficient to gain widespread compliance with GATT directives. For example, the United States eliminated custom-user fees after the GATT Council investigated complaints from Canada and the EC; and Japan lifted quotas on eight processed-food products, which had raised complaints in the United States. GATT Limitations The Office of the U.S. Trade Representative estimated that only about two-thirds of the 1989 world trade of $3730 billion was covered by GATT regulations; i.e., one-third of trade is in products that countries make exceptions to their across-the-board reductions in restrictions. About half the noncov-ered trade consists of services, such as financial services, which remain highly protected in many countries. Two other areas of importance are agricultural products and textiles and apparels. The Uruguay Round began in 1986 and disbanded without an agreement by its target date at the end of 1990. Although by 1992 the negotiations were underway again, the experience of the four years of GATT Uruguay Round negotiations exemplifies the growing difficulty of reducing trade restrictions through globally oriented trade agreements. At the core of the problem are the facts that the less-sensitive concessions have already been made and that attention has moved toward services and away from products. Other problems include the fact that talks become more cumbersome as more countries become signatories of GATT and the growing expectation on the part of industrial countries that LDCs should also make trade concessions. For example, the United States has urged Europe to remove barriers to the freer flow of agricultural products; and Europeans have urged the United States to remove its dumping legislation, its safeguards against imports that might violate U.S. patent protection, and its textile-import limitations. These are all areas of such high domestic sensitivity that politicians seem unlikely to yield to international pressures during negotiations. The area of services is so complex that there is as yet little agreement even on how to commence negotiations. Trade in many services involves the potential movement of people internationally, such as in construction and the professions. One immediately encounters immigration issues and difficult licensing requirements and opinions over qualifications.