General Agreement On Tariffs And Trade

REVIEWED BY WILL KENTON Updated Jun 28, 2018

What is the General Agreement On Tariffs And Trade
The General Agreement on Tariffs and Trade (GATT) was created after World War II to aid global
economic recovery through reconstructing and liberalizing global trade. GATT's main objective was to
reduce barriers to international trade through the reduction of tariffs, quotas and subsidies. It has since
been superseded by the creation of the World Trade Organization (WTO).

BREAKING DOWN General Agreement On Tariffs And Trade

The General Agreement on Tariffs and Trade (GATT) was formed in 1947 with a treaty signed by 23
countries, and signed into international law on January 1, 1948. GATT remained one of the focal features
of international trade agreements until it was replaced by the creation of the World Trade Organization
on January 1, 1995. By this time, 125 nations were signatories to its agreements, which covered about
90% of global trade.

The aim behind GATT was to form rules to end or restrict the most costly and undesirable features of
the pre-war protectionist period, namely quantitative trade barriers such as trade controls and quotas.
The agreement also provided a system to arbitrate commercial disputes between nations, and the
framework enabled a number of multilateral negotiations for the reduction of tariff barriers. GATT was
regarded as a significant success in the post-war years.

Key Achievement of GATT

One of the key achievements of GATT was that of trade without discrimination. Every signatory member
of GATT was to be treated as equal to any other. This is known as the most-favored nation principle (and
it has been carried through into the WTO). A practical outcome of this was that once a country had
negotiated a tariff cut with some other countries (usually its most important trading partners), this same
cut would automatically apply to all GATT signatories. Escape clauses did exist, whereby countries could
negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts.

Most nations adopted the most-favored nation principle in setting tariffs, which largely replaced quotas.
Tariffs (preferable to quotas but still a trade barrier) were in turn cut steadily in rounds of successive
negotiations. The average tariff rate fell from around 22% when GATT was first signed in Geneva in
1947, to around 5% by the end of the Uruguay Round (concluded 1993). The Uruguay Round also
negotiated the creation of the WTO, a formal organization that has absorbed and extended GATT.

The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries,
whose overall purpose was to promote international trade by reducing or eliminating trade barriers
such as tariffs or quotas. According to its preamble, its purpose was the "substantial reduction of tariffs
and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous
basis."
The GATT was first discussed during the United Nations Conference on Trade and Employment and was
the outcome of the failure of negotiating governments to create the International Trade Organization
(ITO). It was signed by 23 nations in Geneva on 30 October 1947, and took effect on 1 January 1948. It
remained in effect until the signature by 123 nations in Marrakesh on 14 April 1994, of the Uruguay
Round Agreements which established the World Trade Organization (WTO) on 1 January 1995. The WTO
is a successor to the GATT, and the original GATT text (GATT 1947) is still in effect under the WTO
framework, subject to the modifications of GATT 1994.[1][2] Nations that were not party in 1995 to the
GATT need to meet the minimum conditions spelled out in specific documents before they can accede;
in September 2019, had succeeded 36 nations to the list.[3]

The GATT, and its successor the WTO, have successfully reduced tariffs. The average tariff levels for the
major GATT participants were about 22% in 1947, but were 5% after the Uruguay Round in 1999.[4]
Experts attribute part of these tariff changes to GATT and the WTO.

Effects on trade liberalization

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The average tariff levels for the major GATT participants were about 22 percent in 1947.[4] As a result of
the first negotiating rounds, tariffs were reduced in the GATT core of the United States, United Kingdom,
Canada, and Australia, relative to other contracting parties and non-GATT participants.[4] By the
Kennedy round (1962–67), the average tariff levels of GATT participants were about 15%.[4] After the
Uruguay Round, tariffs were under 5%.[4]

In addition to facilitating applied tariff reductions, the early GATT's contribution to trade liberalization
"include binding the negotiated tariff reductions for an extended period (made more permanent in
1955), establishing the generality of nondiscrimination through most-favored nation (MFN) treatment
and national treatment status, ensuring increased transparency of trade policy measures, and providing
a forum for future negotiations and for the peaceful resolution of bilateral disputes. All of these
elements contributed to the rationalization of trade policy and the reduction of trade barriers and policy
uncertainty."[4]

According to Dartmouth economic historian Douglas Irwin,[7]

The prosperity of the world economy over the past half century owes a great deal to the growth of
world trade which, in turn, is partly the result of farsighted officials who created the GATT. They
established a set of procedures giving stability to the trade-policy environment and thereby facilitating
the rapid growth of world trade. With the long run in view, the original GATT conferees helped put the
world economy on a sound foundation and thereby improved the livelihood of hundreds of millions of
people around the world.

Founding members of GATT

On 1 January 1948, GATT entered into force. The 23 founding members were: Australia, Belgium, Brazil,
Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg,
Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, United Kingdom
and the United States.

OBJECTIVES OF GATT
The General Agreement on Tariff and Trade was a multilateral treaty that laid down rules for conducting
international trade. The preamble to the GATT can be linked to its objectives.

1. To raise the standard of living of the people,

2. To ensure full employment and a large and steadily growing volume of real income and effective
demand.

3. To tap the use of the resources of the world fully.

4. To expand overall production capacity and international trade.

PRINCIPLES OF GATT

For the realization of the above mentioned objectives, GATT adopted the following principles.

Non Discrimination,
Protection through tariffs,
A stable basis of trade, and;
Consultation
1. Non Discrimination

The international trade should be conducted on the basis of nondiscrimination. No member country
shall discriminate between the members of GATT in the conduct of international trade. On this basis, the
principle “Most favored Nation” (MFN) was enunciated. This means that “each nation shall be treated as
good as the most favored nation”. All contracting parties should regard others as most favorable while
applying and administering import and export duties and charges. As far as quantitative restrictions are
concerned, they should be administered without favor.

Exceptions to the principle of non-discrimination: However, certain exceptions to this basic rule are to
be allowed. There is no objection to form free trade areas or custom unions. Such integration should
facilitate consistent trade between the constituent territories. They should not raise barriers to the
trade of other parties. GATT allows its members to follow measures to counter dumping and export
subsidies. However, such measures should be applied only to offending countries.

2. Protection through tariffs only

GATT rules prohibit quantitative restrictions. Domestic industries should be protected only through
customs tariffs. Restrictions on trade should be limited to the less rigid tariffs.

Exceptions: exceptions to this principle is given to the countries which suffer from unfavorable balance
of payments position. Developing countries also enjoy this exception. Import restrictions may be applied
to agricultural and fishery products if their domestic production is subject to equally restrictive
production.

3. A stable basis of trade

GATT seeks to provide a stable and predictable basis for trade. It binds the tariff levels negotiated
among the contracting countries. Binding of tariffs prevents the unilateral increase in tariffs, But still
there is a provision for renegotiation of bound tariffs. A return to higher tariffs is discouraged by the
requirement that any increase is to be compensated for.

4. Consultation

The member countries should consult one another on trade matters and problems. The members who
feel aggrieved that their rights under GATT are withheld can call for a fair settlement. Panels of
independent experts have been formed under the GATT council. Panel members are drawn from
countries which have no direct interest in the disputes under investigation. They look into the trade
disputes among members. The panel procedure aims at mutually satisfactory settlement among
members.