Provisions of the GATT | International Trade | Economics

For the achievement of the principles and objectives of the GATT, the following provisions had been made: 1. The ‘Most Favoured Nation’ Clause 2. Quantitative Restrictions on Imports 3. Tariff Negotiations and Tariff Reduction 4. Subsidies and Counter-Veiling Duties 5. Complaints and Waivers 6. Settlement of Disputes.

Provision # 1. The ‘Most Favoured Nation’ Clause:

The most significant provision of the GATT agreement was that of the Most Favoured Nation (MFN) clause. The essence of this clause was that each contracting party of the agreement would treat all other contracting parties as the most favoured nation. It meant that the whole arrangement under the GATT agreement was based upon twin principles of non­discrimination and reciprocity.

Article I of the GATT agreement provided that “any advantage, or favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be-accorded immediately and unconditionally to the like product originating in or destined for the territories of all contracting parties.”

The MFN clause implied that the tariff preferences resulting from bilateral trade negotiations between two member countries had to be extended on a non-discriminatory and reciprocal basis to all the other member countries. In essence, this clause discouraged the member countries from granting any new trade concessions unless those were multilaterally agreed.

The GATT agreement also made provision of Escape Clauses. The LDC’s, under certain circumstances, were assured the right to discriminate. For instance, they could adopt appropriate measures to counter dumping and export subsidies but only against the offending countries. The developed Western countries were allowed to extend special concessions in trade to their former colonies.

Provision # 2. Quantitative Restrictions on Imports:

The contracting parties were prohibited from imposing the quantitative restrictions on imports such as import quotas and import licences, under Article XI of the GATT agreement.

The exceptions were, however allowed in certain defined circumstances:

(i) The countries could take recourse to them, if otherwise the balance of payments adjustments were difficult. In this connection, it was specified that the import quota fixation should be limited to the extent necessary to check a serious fall in the foreign exchange reserves. Even in such a situation, the import quota fixation should be done after due consultation with the IMF.

(ii) The LDC’s could take resort to import quota restriction for protecting domestic industries when the use of tariff was not possible or applicable. But even that could be attempted only under the procedure laid down by the GATT.

(iii) In the case of agriculture and fisheries, quota restriction could be applied provided the domestic production were subject to equally restrictive controls.

(iv) When a foreign country was exporting products at artificially low (dumped) prices or at the subsidised prices, the affected country was allowed by the GATT to take suitable protective action including the restriction of imports through quota.

(v) In the event of a sudden increase in imports, a member country was allowed to take resort to temporary safeguard of import quota restriction for protecting domestic industry.

(vi) The import quota restrictions could be adopted by a country, if the imports were likely to harm the domestic production control and price support programmes.

(vii) The countries were allowed to form customs union or free trade areas under Article XXIV of the GATT agreement provided their aim was to promote trade among the constituent countries and not to raise trade barriers against other contracting parties.

In any case if there were a resort to quantitative restrictions on imports, it should be non­discriminatory. The GATT had emphasized upon the need of continuous consultation among the contracting parties on the nature of the BOP problems, alternative corrective measures and the possible effects of quantitative restrictions upon the economies of other contracting parties.

Those countries which continued to apply the quantitative restrictions were required to notify the GATT. If those restrictions caused harm to the interests of another country, the latter could ask for consultation with the country imposing restrictions under the GATT. If the consultations failed to bear results, the complaining country could invoke the provisions of Article XVIII of the GATT, under which the latter was authorised to suspend concessions or other obligations towards the offending country.

Provision # 3. Tariff Negotiations and Tariff Reduction:

Since the GATT prohibited all non-tariff restrictions on trade, the countries were permitted to resort to import tariffs as a means of protecting the domestic industries. But at the same time the GATT recognised that tariffs were the major impediments in the smooth and orderly growth of world trade.

The GATT contained an entrenched clause that sought to stabilise member countries’ tariffs. The Article II of the GATT specified that all concessions granted by contracting parties, as a consequence of negotiations under the GATT, must be entered in a ‘Schedule of Concessions’.

A concession might assume the form of a reduction in the rate of import tariff or an agreement to bind, i.e., not to hike the existing rate of duty. Once a concession was included in the schedule of concession, it could not be withdrawn except under certain specified circumstances, it meant that provisions of schedule of concessions, binding clause and tariff negotiations created a strong in-built bias towards the lowering down of rates of import tariff in the GATT.

It encouraged frequent negotiations among the contracting parties to reduce in a substantial measure the rates of import tariffs. The negotiations for tariff reduction were to be conducted on a reciprocal and mutually advantageous basis, keeping in consideration the varying needs of the contracting parties. The GATT allowed the use of some measure of tariff protection to the LDC’s in view of their special needs of industrial development and also for obtaining revenues.

The negotiation procedure concerning tariff reduction under the GATT was bilateral-multilateral. It was bilateral as two contracting parties entered into negotiations for tariff reduction on a selective commodity-to-commodity basis. The tariff reductions agreed between any two negotiating parties were to be made applicable to all the contracting parties under the ‘Most Favoured Nation’ clause. This was the multilateral aspect of tariff negotiations.

The bilateral-multilateral technique of negotiations had some drawbacks. First, the principle of reciprocity was injurious to the interests of the LDC’s. These countries producing mainly primary products had a weak bargaining power relative to the developed countries in bilateral negotiations. As a consequence, the terms of trade turned unfavourable for them. Second, that negotiations technique created uncertainty and instability in the tariff structures of many a country.

Third, that negotiations procedure was not equitable for those countries which already had a low-tariff structure. They had very little to offer in exchange of concessions offered by the other contracting party. Thus the former was likely to have a low bargaining power compared with the latter.

Fourth, this technique of tariff-reduction negotiations was very slow. The achievement in tariff reduction had remained very small and not encouraging since the enactment of the GATT. That resulted in the abandonment of bilateral commodity by commodity negotiations and emphasis shifted to only multilateral tariff reduction.

Provision # 4. Subsidies and Counter-Veiling Duties:

It was recognised by the GATT that the subsidies were alternative to tariffs. The Tokyo Round of the GATT in 1970’s considered it necessary to specify the code of conduct related to subsidies. The industrial countries agreed to a complete ban on export subsidies in the case of manufactured products.

The LDC’s were, however, exempted from this stipulation. The member countries were required to avoid subsidies on the export of primary products in principle. In case they provided subsidies on such products, that should be done in such a manner that the country employing them did not acquire a more than equitable share in the world export of the concerned products.

In case the subsidies resulted in harm to the interests of importing countries, the agreement authorized them to take resort to counter-veiling duties. As regards other subsidies such as the production subsidies, the members were allowed to use them provided they notify other parties of any subsidy that is likely to cause the exports of the latter to fall and imports to rise.

The former should also be prepared, on request to enter into consultation with the latter about the possibility of reduction or limiting such subsidies. In case any country was found to take recourse to dumping, i.e., the export price of a product was lower than its domestic price, the affected country was allowed to impose the counter-veiling or anti­dumping duties to the extent that the dumping got neutralised.

However, the country resorting to counter-veiling or anti-dumping duties should not impose duties at a higher rate than was required to offset the margin of dumping and the affected industry in the importing country should not acquire thereby a net additional protection.

Provision # 5. Complaints and Waivers:

Article XXII of the GATT made provision for dealing with any complaints from a contracting party related to the operation of the Agreement. The complainant party could request for consultation with the other contracting party, when the former felt that an action of the latter nullified or impaired the benefits accruing to that country under the Agreement. If no satisfactory solution was found, the matter could be referred to a group of experts to assist the two contracting parties.

The complaints had been concerning the discriminatory incidence of internal taxes, anti-dumping duties and special restrictions on imports. In this regard it had been noted with satisfaction that the number of complaints had fallen during the recent years.

Article XXV of the GATT laid down the procedure for granting waiver to some contracting parties from the application of the provisions of the GATT. Ordinarily the waivers were not granted unless those were approved by two-thirds of the voting contracting parties.

Some instances of the grant of waivers included the waivers to the European Coal and Steel Company (ECSC) at the eleventh session of the GATT in 1952 about the trade in products under ECSC treaty, to Britain in respect of Commonwealth Trade Preferences and, to the United States in respect of her Agricultural Adjustment Act.

Provision # 6. Settlement of Disputes:

The GATT had provided for the machinery for the settlement of any disputes among the contracting parties. Initially the contracting parties were involved into bilateral negotiations for resolving the matter. In case of failure, the matter could be referred to a panel of experts drawn from countries having no direct interest in the matter. This panel or committee, after a careful study, used to make a recommendation or ruling to be observed by the offending party.

In case the offending member either did not comply with the ruling or did not act upon the recommendation of the panel, the aggrieved party was authorized to retaliate by withdrawing some or all concessions offered to the offending country. Thus dispute settlement procedure of the GATT rested upon direct consultations, conciliation and third party adjudication. GATT had generally proved successful in resolving disputes among the contracting parties.