The General Agreement on Tariffs and Trade (GATT) was established in 1945 as a provisional agreement pending the creation of an International Trade Organization (ITO). The ITO draft charter, which was the result of trade negotiations at the Havana Conference of 1948, never came into being due to the failure of the U.S. Congress to approve it. Other countries also declined to proceed with the ITO without the participation of the United States. Thus, the GATT continued to fill the vacuum as a de facto trade organization, with codes of conduct for international trade but with almost no basic constitution designed to regulate its international activities and procedures. The GATT, in theory, was not an “organization,” and participating nations were called “Contracting Parties” and not members (Hoekman and Kostecki,1995; Jackson, 1992).
Since its inception, the GATT has used certain policies to reduce trade barriers between contracting parties (CPs):
- Nondiscrimination: All CPs must be treated in the same way with respect to import- export duties and charges. According to the most favored nation treatment, each contracting party (CP) must grant to every other CP the most favorable tariff treatment (most-favored nation, or MFN) that it grants to any country with respect to imports and exports of products. Certain exceptions, however, are allowed, such as free-trade areas, customs unions, and other preferential arrangements in favor of developing nations. Once imports have cleared customs, a CP is required to treat foreign imports the same way it treats similar domestic products (the national treatment standard).
- Trade liberalization: The GATT has been an important forum for trade negotiations. It has sponsored periodic conferences among CPs to reduce trade barriers (see International Perspective 2.1). The Uruguay Round (1986-1993) gave rise to the establishment of a permanent trade organization (World Trade Organization or WTO). The most recent round (Doha Round) hopes to reach agreement on other trade distortions such as agricultural subsidies and trade barriers imposed by developing countries on imports of manufactured goods.
- Settlement of trade disputes: The GATT/WTO has played an important role in resolving trade disputes between CPs. In certain cases where a party did not follow GATT’s recommendations, it ruled for trade retaliation that is proportional to the loss or damage sustained. It is fair to state that the existence of the GATT/WTO has been a deterrent to damaging trade wars between nations.
- Trade in goods: The GATT rules apply to all products both imported and exported, although most of the rules are relevant to imports. It was designed primarily to regulate tariffs and related barriers to imports such as quotas, internal taxes, discriminatory regulations, subsidies, dumping, discriminatory customs procedures, and other nontariff barriers. The Uruguay Round (1986-1994) resulted in a new general agreement on trade in services, trade-related aspects of intellectual property (TRIPs), and trade-related investment measures (TRIMs). Thus, CPs have moved beyond the original purpose of the GATT to achieve unrestricted trade in goods, to reduce barriers to trade in services, investment, and to protect intellectual property (Collins and Bosworth, 1994).
The Uruguay Round and WTO
In 1982, the United States initiated a proposal to launch a new round of GATT talks. The major reasons behind the U.S. initiative were (1) to counter domestic pressures for protectionism precipitated by the strong dollar and a rising trade deficit; (2) to improve market access for U.S. products by reducing existing tariff and nontariff barriers to trade; (3) to reverse the erosion of confidence in the multilateral trading system; (4) to extend GATT coverage to important areas such as services, intellectual property, and investment; and (5) to bring developing nations more effectively into the international trading system.
Despite the initial reluctance of many developing nations, the effort culminated in the conclusion of a successful trade negotiation (the Uruguay Round) in 1994. The results of the Uruguay Round can be summarized as follows.
Significant progress was made toward reducing trade barriers in the areas of agriculture and textiles that had long been resistant to reform. Tariff reductions of about 40 percent were achieved. The agreement also opened access to a broad range of government contracts (Government Procurement Agreement). It also provided for the liberalization of the textiles and apparel sector by the end of 2004. Textiles quotas have been removed except for occasional safeguards used to protect a sudden increase in imports.
The Uruguay Round added new rules relating to unfair trade practices (dumping, subsidies) and the use of import safeguards.
The agreement broadened the coverage of the GATT to include areas such as trade in services (General Agreement on Trade in Services, GATS), trade-related aspects of intellectual property (TRIPs), and trade-related investment measures (TRIMS). The GATS establishes rules to liberalize trade in services, which in 2012 was estimated to be almost $4.3 trillion (WTO, 2013). The TRIPs agreement establishes new trade disciplines with regard to the protection and enforcement of intellectual property rights. TRIMs provides for the elimination
of trade-distorting investment requirements such as local content, limitation of ownership, and exports of certain shares of domestic production.
In the area of institutional reform, the Uruguay Round strengthened the multilateral dispute settlement mechanism and established a new and permanent international institution, the World Trade Organization, responsible for governing the conduct of trade relations among its members. The new dispute settlement procedure instituted an appeals procedure, expedited decision making, and encouraged compliance with GATT decisions. Members of the WTO are required to comply with the GATT rules as well as various agreements (rounds) negotiated under GATT auspices.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.