General Agreement on

Tariffs and Trade

General Agreement on Tariffs and
Trade (GATT)
• Outcome of the failure of negotiating governments
to create the International Trade Organization (ITO)
• Negotiated during the UN Conference on Trade and
Employment
• Formed in 1947 and transformed to World Trade
Organization (WTO) in 1995
General Agreement on Tariffs and
Trade (GATT)
• Part of economic recovery after World War II,
Bretton Woods Conference suggested an
organization to regulate trade
• Parallel to the Governments negotiating the ITO, 15
negotiating states began negotiating for the GATT
as a way to attain early tariff reductions
• The ITO failed in 1950 and then GATT agreement
was introduced
 GATT's main objective
• Reduction of barriers to international trade
• Achieved through reduction of tariff barriers,
quantitative restrictions and subsidies on trade
through a series of agreements
• It was an agreement, not an organization
• A small secretariat occupied what is today the
Centre William Rappard in Geneva, Switzerland
 Inception
• Efforts to negotiate international trade agreements
began in 1927 at the League of Nations but were
unsuccessful.
• Forerunner organization to GATT, ITO, was first
proposed in February 1945 by the United Nations
Economic and Social Council (UNESCO).
• Owing to the United States failing to implement the
ITO, GATT was the only organization left.
 Inception
• On 1 January, 1948 the agreement was signed by
23 countries: Australia, Belgium, Brazil, Burma,
Canada, Ceylon, Chile, China, Cuba, the
Czechoslovak Republic, France, India, Lebanon,
Luxembourg, Netherlands, New Zealand, Norway,
Pakistan, Southern Rhodesia, Syria, South Africa,
the United Kingdom, and the United States.
• According to GATT's own estimates, the
negotiations created 123 agreements that covered
45,000 tariff items that related to approximately
one-half of world trade or $10 billion in trade.
• The General Agreement on Tariffs and Trade (GATT)
was first signed in 1947.
• Was designed
• To provide an international forum
• That encouraged free trade between member states
• By regulating and reducing tariffs on traded goods
• Providing a common mechanism for resolving trade
disputes.
 TRADE BARRIERS
Tariff and Non-Tariff Barriers
• While free-trade maximizes world welfare, most
nations impose some trade restrictions that benefit
special groups in the nation. The most important type
of trade restriction historically is the tariff.
• This is a tax or duty on the imports or exports.
• When a small nation imposes an import tariff, the
domestic price of the importable commodity rises by
the full amount of the tariff for individuals in nation. As
a result, domestic production of the importable
commodity expands while domestic consumption and
imports fall. However, the nation as a whole faces the
unchanged world price since the nation itself collects
the tariff.
 Tariffs
• Tariffs can be ad-Valorem, specific, or compound.
• Ad-Valorem tariff is expressed as a fixed percentage
of the value of the traded commodity.
• Specific tariff is expressed as a fixed sum per
physical unit of the traded commodity.
• A compound tariff is a combination of an Ad
Valorem and a specific tariff.
Trade Restrictions /Trade Barriers
• An import tariff is a duty on the imported commodity,
while an export tariff is a duty on the exported
commodity.
• Export tariffs are prohibited by the U.S. Constitution but
are often applied by developing countries on their
traditional exports (such as Ghana on it’s cocoa and
Brazil on it’s coffee) to get better prices and revenues.
• Developing nations rely heavy on export tariff to raise
revenues because of their ease of collection.
• On the other hand, industrial countries invariably impose
tariffs or other trade restrictions to protect some(usually
labor-intensive)industry, while using mostly income taxes
to raise revenues.
 Trade Barriers (Contd)
• According to Stolper-Samuelson theorem , an
increase in the relative price of a commodity (for
example, as a result of a tariff ) raises the return or
earnings of the factor used intensively in it’s
production.
For example, if a capital-abundant nation imposes an
import tariff on the labor intensive commodity, wages in
the nation will rise.
• However, since the nation’s benefit comes at the
expense of other nations, latter are likely to
retaliate, so that in the end all nations usually lose.
 Trade Barriers (Contd)
• Two arguments are that protection is needed to reduce
domestic unemployment and a deficit balance of
payments.
• A more valid argument for protection is the infant-
industry argument.
• However, what trade protection can do, direct subsidies
and taxes can do better in overcoming purely domestic
distortions. The same is true for industries important for
national defense. The closest we come to a valid
economic argument for protection is the optimal tariff
(which, however, invites retaliation).
• Trade protection in the United States is usually given to
low wage workers and to large, well organized
industries producing consumer products.
 Non-Tariff Barriers
• International trade also hampered by numerous
• Technical, administrative, and other regulations.
• These include safety regulations for automobile and
electrical equipment, health regulations for the
hygienic
• Production and packaging of imported food
products, and labeling requirements showing origin
and contents.
 Non Tariff Barrier [Subsidies]
• National government sometimes grant subsidies to
domestic producers to help improve their trade
position.
• Such devices are indirect form of protection
provided to domestic businesses, whether they
may be import competing producers or exporters.
• Two types of subsidies can be distinguished: a
domestic subsidy , which is sometimes granted to
producers of import-competing goods, and an
export subsidy, which goes to producers of goods
that are to be sold overseas.
 Other Non Tariff Barriers
• Government Procurement Policies: Because
government agencies are large buyers of goods and
services, they are attractive customers for foreign
suppliers. Most governments however, favor
domestic suppliers over foreign ones in the
procurement materials and products. E.g,
Government often extend preferences to domestic
suppliers in the form of buy-national policies
campaigns.
 Impact of trade barriers
• Advanced industrial nations committed themselves
after World War II to removing barriers to the free
flow of goods, services,and capital between nations
• This goal was enshrined in the General Agreement
on Trade and Tariffs [GATT]
• Under the umbrella of GATT, eight rounds of
negotiations among member states(now
numbering 146) have worked to lower barriers to
the free flow of goods and services
 Impact of trade barriers
• The most recent round of negotiations, known as
the Uruguay Round, was completed in
Dec,1993.The Uruguay round further reduced trade
barriers; extended GATT to cover services as well as
manufactured goods; provided enhanced
protection for patents, trademarks, and copyrights;
and established the World Trade Organization
(WTO)to police the international trading system
 Impact of trade barriers
• In the late 2001, the WTO launched a new round of
talks [Doha,Qatar] aimed at further liberalizing the
global trade and investment framework.
• The agenda included cutting tariffs on industrial
goods, services,and agricultural products; phasing
out subsidies to agricultural producers; reducing
barriers to cross border investments; and limiting
the antidumping laws.
• The rich nations spend around $300 billion a year in
subsidies to support their farm sectors. The worlds
poorer nations have the most to gain from any
reductions in agricultural tariffs and subsidies.
 GATT Objectives & Principles

• The World Bank recommended the establishment

of an International Trade Organization (ITO).
Instead of ITO, General Agreement on Tariff and
Trade (GATT) was formed in 1948.
 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.
• To raise the standard of living of the people,
• To ensure full employment and a large and steadily
growing volume of real income and effective
demand.
• To tap the use of the resources of the world fully.
• 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
 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.
 Non Discrimination
• 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.
 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.
 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.
 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.
WTO - World Trade Organisation
• WTO – World Trade Organisation, was established in
1995 as the heir organisation to the GATT (General
Agreement on Trade and Tariff).
• GATT was founded in 1948 with 23 nations as the
global (international) trade organisation to serve all
multilateral trade agreements by giving fair chances
to all nations in the international exchange for
trading prospects.
• WTO is required to build a rule-based trading
government in which countries cannot place
unreasonable constraints on trade.
• In addition, its mission is to increase stock and trade
of services, to assure maximum utilisation of world
resources and to preserve the environment. The
WTO deals include trade in commodities as well as
services to promote international trade (bilateral
and multilateral) through the elimination of the tax
as well as non-tariff obstacles and implementing
greater marketplace access to all member nations.
• As an influential member of WTO, India is at the
lead of building fair global laws, statutes and shields
and supporting the concerns of the developing
system. India has fulfilled its promises towards the
liberalisation of trade, made in the WTO, by
eliminating quantitative limitations on imports and
decreasing tariff charges.
 Objectives of WTO
• To set and execute rules for international trade
• To present a panel for negotiating and controlling
additional trade liberalization
• To solve trade conflicts
• To improve the clarity of decision-making methods
 Members
• On 1st January 1995, 123 nations signed the
agreement to replace the General Agreement on
Trade and Tariff (GATT).
• At present, there are 164 member countries of
WTO.
• 164 Members as on 29th July 2016.
• Afghanistan is the 164th member of WTO.
• All members are obliged to follow laws and policies
framed under WTO rules.
 Functions of WTO:

• Facilitate international trade

• It facilitates international trade through the
removal of tariff and non-tariff barriers.
• It provides greater market access to all member
countries.
 Functions of WTO:

• Formulation of rules
• It establishes a rule-based trading regime, in which
nations cannot place arbitrary restrictions on trade.

• Protecting the interest of developing countries

• It frames fair global rules, regulations.

• It safeguards and advocates the interests of the

developing world.
 Functions of WTO:

• Optimum utilisation of world resources

• It is also responsible to increase production and trade of
services.
• It ensures optimum utilisation of world resources.