Republic of the Philippines

ISABELA STATE UNIVERSITY

Cauayan Campus

SCHOOL OF ARTS AND SCIENCES

Lesson 2. Multilateral Trade System: The creation of GATT and the WTO as an Institution
Introduction:
The international trade offers significant contributions in making the global economy stable and
successful through the Multilateral Trade System. This unfolds the emerging importance of the various
rules governing international trade and its impact to the government members of the World Trade
Organization (WTO). Looking into this, it provides vast background in the development process of trade
from the various negotiations or rounds happened in the history of trading until such time that the WTO
came into its existence.
Learning Outcomes:
1. Analyse the concept of Multilateral Trade System and its components.
2. Identify the roles and functions of the WTO as an institution governing international trade.
3. Understand the creation of GATT and how it was succeeded by the WTO.
4. Analyse how trade liberalization paved the way towards free international flow of trade.
5. Familiarize oneself in the Uruguay Round in the development of trade.
Contents
The multilateral trade system is an international political system. International trade institutions
stand in the centre of this system. This highlights the creation of the General Agreement on Tariffs and
Trades (GATT) on 1947 which then succeeded by the WTO in 1994.
In a nutshell, what makes GATT different from the WTO is, GATT is a treaty while WTO is an
international organization. WTO is same legal status with that of UN, IMF and World Bank. But WTO is
relatively small compared to other International Organizations. WTO comprises 164 countries (as of July,
2016)
Functions of WTO:
1. Providing a forum for trade negotiations among its member governments
2. Administering the trade agreements that governments conclude
3. Providing a mechanism through which governments can resolve trade disputes
Although WTO is the institutional centre of the world trade system, GATT has not disappeared.
It still provides many of the rules governing international trade relations.
The creation of the WTO, therefore, represented an organizational change and it did not produce a
wholly new set of international trade rules. The rules that provide the foundation of the multilateral trade
system are those that were initially established in 1947 and that have been gradually revised and amended
ever since.
The multilateral trade system can be broken down into three (3) individual components:
1. Intergovernmental bargaining process
2. A set of rules and principles governing international trade relations
3. A dispute settlement machine
 WTO focuses on Trade liberalization (elimination of government policies that make it difficult for
the goods and services produced in one country to be sold in another).
Trade liberalization highlighted the tariffs (taxes that governments impose on foreign goods coming
into the country) and nontariff barriers (health and safety regulations and government purchasing
practices)
Trade liberalization was achieved after series of rounds (9 rounds to be exact), one of which is the
Uruguay Round. Each round brought WTO countries to negotiate an agreement covering a specific set of
trade-related issues.
Uruguay Round
Negotiations under this round included tariff reduction, create brand new rules to govern
international trade in services, and protect intellectual property.
It was on the 8th round (the Uruguay) when GATT was succeeded by the WTO. The first six rounds
of GATT focused on tariff.
 Uruguay round was the most exceptional because for the first time, the negotiations focused most
heavily on problems other than tariff.
During Uruguay round, they created international rules in three (3) new areas:

1. Rules to protect intellectual property

According to the World Intellectual Property Organization (one of the United Nations'
specialized agencies), intellectual property "refers to creations of the mind: inventions, literary,
and artistic works, as well as symbols, names, images, and designs used in commerce." This
includes such things as the Nike "swoosh," a Hollywood movie, and computer software.
Intellectual property is protected through patents and copyrights that give the creator
the exclusive right to profit from his or her invention or artistic work. It became apparent
during the 1980s that many governments, particularly in developing countries, were making
little effort to protect intellectual property created by foreign firms. As a result, firms and
individuals were making counterfeit versions of Microsoft software, American movies, Nike
and Adidas sneakers, Calvin Klein and Guess jeans, pharmaceutical products, and other items.
The ease with which anyone could purchase counterfeit or pirated products at much reduced
prices throughout the developing world indicated that largely Western creators were losing
billions of dollars. Moreover, such piracy, many argued, reducedthe incentive to invent new
products. In negotiating Trade- Related Intellectual Property Rights (TRIPs),
governments created multilateral rules that now require all governments to protect intellectual
property to prevent such piracy.

2. Create brand new rules to govern international trade in services

A service is an economic activity that does not involve manufacturing, farming, or resource
extraction (financial services like banking, insurance, shipping and tourism, accounting, consulting,
and telecommunications).
Service sector accounts for 60% of the economic activity in the advanced industrialized
countries. While 22% of world trade.
Through the General Agreement on Trade and Services (GATS), it removed small
number of barriers which aimed for further liberalization.

Trivia: The GATT text alone which spells out basic rules governing international trade in
goods, is more than 50 pages long.

FOUR PRINCIPLES EMBODIED IN THE FOUNDATION FOR THE MULTILATERAL

TRADE SYSTEM:
1. Market-based liberalism. Broadest principle which provides rationale to the
system. This emphasizes that trade liberalization is a desirable objective because
trade raises the standard of living for all countries. (Once trading is flowing
freely, it can greatly benefit all countries) This idea is based on economic theories
of international trade.
Ponder to this thought:

“…if a good costs less to buy in a foreign market than it does to produce at
home, a country is better off if it imports the good than if it produces the
good itself”

For better understanding and example of this principle, see and check the “absolute
advantage” and “comparative advantage” of Thomas Oatley (page 22-23)

The principle provides a compelling justification for international trade and for trade
liberalization. As result, eliminating barriers to international trade increases the welfare of
the world as a whole and of every country that participates in this trade.

2. Principle of nondiscrimination. This prohibits governments from using trade

policies to provide special advantages to some countries at the expense of
others.

This principle takes a specific form called Most Favored Nation (MFN). This simply
requires each WTO member to treat all other members as well as it treats its most-favored
trading partner.

Example: If US lowered the tariff to the imported goods of Brazil, then it must also give
the same way to other WTO members.

This principle thus assures that all countries have access to foreign markets on equal
terms. No country shall suffer discrimination, and no other countries benefit from special
advantages.

However, it gives specific exception for this principle. Under Generalized System of
Preferences (GSP) which was enacted in the late 1960s, advanced industrialized countries can
allow imports from developing countries to enter their markets at lower tariffs than imports from
other advanced industrialized countries. The U.S. government has used this exemption to allow
certain products from developing countries to enter the American market at a lower tariff rate
than is imposed on the same good imported from Western Europe. Governments are also allowed
to discriminate if they join a free trade area or customs union. In the North American Free Trade
Agreement (NAFTA), for example, goods produced in Mexico enter the United States duty-free,
while the United States imposes tariffs on the same goods imported from other countries. These
exceptions aside, nondiscrimination is a fundamental principle of the multilateral trade system.

3. Principle of Reciprocity. Reciprocity was incorporated into the GATT in an

attempt to ensure that the concessions that each government makes in multilateral
trade negotiations are roughly the same size as the concessions it
 gains from its trading partners. For example, if the United States offers to reduce its
tariffs on steel imported from Brazil, Brazil must offer to reduce tariffs on goods it
imports from the United States, such as computers, rather than offer a reduction on
something that the United States does not produce. Moreover, these reciprocal tariff
reductions should result in an approximately equal number of exports for the two
countries. If the American tariff reduction is expected to raise Brazilian steel exports
to the United States by $10 million, then the reciprocal Brazilian tariff reductions
should result in about a $10 million expansion of American exports to Brazil.

4. Principle of Domestic Safeguard. Domestic safeguards are escape clauses that

permit governments to temporarily suspend tariff reductions they have made within
the WTO when continued compliance would result in serious damages to a domestic
industry. For example, the world price of steel fell sharply during the late 1990s and
early 2000s, resulting in a surge of steel imports into the United States. This import
surge hurt American steel producers who began to lose domestic market share to
foreign producers. The safe• guards incorporated in the WTO allowed the United
States to raise tariffs on imported steel temporarily in order to protect American steel
producers from these imports. Governments cannot resort to such safeguards,
however, without first investigating carefully to determine whether the problems that
a domestic industry faces are in fact temporary and the consequence of a sudden
import surge. In other words, even though the multilateral trade system allows
governments to opt out of their commitments for short periods, it also limits their
ability to do so.

3. Dispute Settlement Mechanism

It is a quasi-judicial tribunal that is used to resolve trade disputes between WTO member
governments. Dispute arises when one government believes that another is failing to live up the
obligations it has accepted as member of the WTO (such disputes can involve the violation of
the rules like nondiscrimination or the use of domestic safeguards).
In February 2000, for example, Japan turned to the dispute settlement mechanism to challenge a
U.S. decision to invoke the domestic safeguards rule in order to raise tariffs on Japanese steel
imports. In such cases, the injured party can initiate a WTO process that evaluates the legal merits of
the complaint. If the panel of trade experts concludes that the country is violating one of its WTO
obligations, that government must alter its policy to conform to WTO rules or compensate the
government that is harmed by the policies. The dispute settlement mechanism thus provides a kind
of court that helps WTO members resolve trade disputes.
Conclusion
In short, the multilateral trade system is a political system. The WTO provides a set of
international rules that govern countries' trade policies. These rules establish what
governments can and cannot do to influence the flow of goods into and out of their countries.
Within this multilateral framework, governments amend existing rules and create new rules through
a process of intergovernmental bargaining. Throughout the postwar period, this bargaining process
has progressively reduced tariffs on manufactured goods and created new multilateral rules to
govern other aspects of international trade. The system also contains a dispute settlement
mechanism that helps governments resolve trade disputes and make sure that all members
comply with the international rules they have created.
Teaching and Learning Activity
Activity 2
Explain briefly the significant impact and ambitious goal of the Uruguay Round Agreement under GATT
in terms of trade and tariffs in the global market/economy before?
How did GATT lead to creation of the WTO? Explain and justify your answer.
Recommended learning materials and resources for supplementary reading.
Preeg H., E. (N.) The Uruguay Round Negotiations and the Creation of the WTO. The Oxford
Handbook on The World Trade Organization Retrieved from
https://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199586103.001.0001/oxfordhb-
9780199586103-e-7
World Trade Organization (N.) Legal texts: the WTO agreements. Retrieved from
https://www.wto.org/english/docs_e/legal_e/ursum_e.htm
References
John Ravenhill (ed.), Global Political Economy (Oxford, 5th edition, 2016)

Thomas Oatley, International Political Economy: Interest and Institutions in the Global Economy
(Pearson/Longman, 5th edition, 2016)
Wilkinson, B., General Agreement on Tariffs and Trade (GATT) (2021). In The Canadian Encyclopedia.
Retrieved from https://www.thecanadianencyclopedia.ca/en/article/general- agreement-on-tariffs-and-
trade
WTO. (n.d.). WTO | Dispute settlement gateway. World Trade Organization. Retrieved October 2, 2021,
from https://www.wto.org/english/tratop_e/dispu_e/dispu_body_e.htm