The General Agreement on Tariffs and Trade (GATT) | Economics

In this article we will discuss about:- 1. Introduction to GATT 2. GATT and Its Objectives 3. The GATT Conferences or Rounds of World Trade Negotiations 4. Role of GATT in the Uruguay Round 5. Role of GATT in the Dunkel Draft 6. GATT and Developing Countries 7. Defects.

Introduction to GATT:

The General Agreement on Tariffs and Trade (GATT) is a multilateral trade treaty among countries to regulate international trade and tariffs in accordance with specific rules, norms or code of conduct. The world witnessed a regime of rigorous and extensive trade barriers during 1930’s and the period of Second World War. The United States and its allies in Western Europe thought of creating conditions for liberal trade after the War.

There was a proposal to create International Trade Organisation (ITO) to secure a reduction in tariffs and barriers to trade. At the UN Conference on Trade and Employment held in Havana in 1948, 53 countries adopted a Charter to create ITO. But the Havana Charter could not be ratified by the US Congress and the proposal was abandoned.

Simultaneously the negotiations were going on among 23 countries to relax trade and tariff restrictions at Geneva in 1947. Apart from agreeing upon certain trade concessions, these countries evolved a multilateral treaty which incorporated in advance the commercial policy clauses of the Havana Charter.

This treaty was signed on October 30, 1947 and became effective on 1st January 1948. This treaty is known as the General Agreement on Tariffs and Trade (GATT). Since 1947, there have been eight rounds of negotiations among the member countries of the GATT for the promotion of free trade. The Uruguay Round of GATT negotiations culminated in the creation of World Trade Organisation (WTO) which came into existence on January 1, 1995. It has now fully replaced GATT.

GATT and Its Objectives:

GATT was originally conceived as interim or temporary arrangement until ITO could be constituted. Since the ITO proposal later had to be given up. GATT emerged as the singular permanent international arrangement having specific widely accepted rules of behaviour concerning international trade and tariffs. In December 1993, GATT membership had gone upto 117.

The members of GATT were called as the contracting parties. The GATT was a binding contract among the countries which together accounted for over 90 percent of the world merchandise trade. Apart from 117 contracting parties, there were thirty one such countries which applied the GATT rules de facto. The member countries met from time to time to discuss matters of common interest and enact provisions related to tariff and non-tariff barriers for ensuring free and larger multilateral international trade.

Any country could join the GATT provided the existing contracting parties approved of its admission by a two-thirds majority. All the benefits from the provisions of the GATT automatically become available to a country as soon as it assumed the membership of GATT.

The country seeking GATT membership was expected to offer tariff and trade concessions to the existing members prior to its admission. Any member country could withdraw from the GATT after giving due notice. In such an eventuality, the other countries had the right to withdraw the concessions earlier given to the departing country by them.

The GATT session used to be held annually to take important decisions. In between sessions GATT Council supervised the work of various committees, working groups and panels of experts. Its headquarters were located at Geneva.

Each contracting party of the GATT used to have one vote. A unanimous vote was required to effect amendment in entrenched Articles of the GATT. These included Articles I II and XXX. The Article I was concerned with the most favoured nation treatment, the Article II was related to all tariff concessions negotiated by the contracting parties.

The Article XXX dealt with the procedure for making amendments. In case of all other Articles, the amendments required a two-thirds majority. The decision about the admission of new members too required a two-thirds majority. All other decisions could be made by the simple majority vote.

The rules of GATT, apart from making provision for reduction of trade barriers and enlargement of world trade, called for consultation with other contracting parties to waive trade obligations, to provide for settlement of trade disputes, and even to permit retaliatory action.

In brief, the GATT simultaneously acted as the legislator of the ‘rules of the game’; served as a forum for trade negotiations among the member countries and; acted as an international court to settle trade disputes among different member countries.

Objectives:

The GATT agreement was based upon the fundamental principles mentioned below:

(i) The international trade should be carried on the basis of non-discrimination, reciprocity and transparency.

(ii) The protection to the domestic industries should be given only by means of tariffs and by no other means.

(iii) The most favored nation (MFN) principle should be followed by all the members. The members should enter into consultations for the avoidance of damage to the interests of the members.

(iv) The multilateral negotiations should be carried to reduce tariff and non-tariff barriers to trade.

The framework of these principles specified objectives of the GATT as below:

(i) To encourage full employment and large and steadily growing volume of real income and effective demand;

(ii) To ensure the full use of world resources;

(iii) To bring about the expansion of world production and exchange;

(iv) To bring about a steady improvement in the living standards of people in member countries; and

(v) To settle the disputes through consultation within the framework of GATT.

For the achievement of these objectives, the preamble of the GATT agreement requires the members to enter “into reciprocal and mutually advantageous arrangement directed to the substantial reduction of tariffs and other barriers to trade and the elimination of discriminating treatment in international commerce.”

The GATT Conferences or Rounds of World Trade Negotiations:

Since 1947, there have been eight conferences or the ‘Rounds’ of global trade negotiations under the GATT.

The First GATT Conference or round of negotiations was held at Geneva in April 1947. This round of negotiations included 123 sets of bilateral negotiations and the results of this conference included- (i) complete elimination of certain duties and preferences, (ii) scaling down of duty preferences, (iii) the binding of duties at the existing levels; and (iv) the binding of duty free treatment.

The Second GATT Conference was held in 1949 at Annecy (France). By that time 10 more countries had joined the GATT raising the number of contracting parties to 33. In this round of trade negotiations 147 sets of bilateral negotiations converting about 500 items were completed.

The Third GATT Conference was held in 1950-51 at Torquay (England). Six new countries had joined the agreement by then. This meet could not make much headway. Out of about 400 bilateral trade negotiations, only 147 could be completed. The United States did not come forward with any more tariff concessions, as it insisted that it had already done much.

The Fourth GATT Conference was held in 1955-56 at Geneva (Switzerland). At this conference although the United States granted concessions in respect of her imports to the tune of 900 million dollars and secured concessions on exports amounting to 400 million dollars, yet it was not a success. No country was satisfied and several contracting parties had withdrawn from the negotiations.

The Fifth GATT Conference was held in 1960-61 again at Geneva. At this conference, the LDC’s pointed out that the limit to which they could extend concessions on the basis of the principle of reciprocity has been already crossed and they were no more in a position to follow that principle. They also pointed out that the developed countries had avoided negotiations on products which were of vital interest to them (the LDC’s). The latter wanted to have some unilateral tariff concessions from the developed countries.

The Sixth GATT Conference (1963-67), known as the Kennedy Round, was held at Geneva. 54 countries participated in this round of trade negotiations. The results of Kennedy Round included the tariff reduction by the advanced countries like the U.S.A, the EEC countries, Japan and Canada on an average to the extent of 35 percent.

The incidence of tariff reduction was not uniform in case of different groups of commodities. The maximum tariff cut had occurred in case of chemicals, paper etc. and it was the smallest in case of such products as fuels, iron and steel, textiles and tropical products. In addition, the deliberations were held on non-tariff barriers, agriculture and tariff reduction on the exportable products of the LDC’s.

No doubt, the Kennedy Round of the GATT negotiations could make a significant contribution in effecting substantial tariff cuts, yet the achievement was still short of objective. The non- tariff barriers could not be dismantled. However, there was greater awareness among the advanced countries about the trade needs of the LDC’s. On the whole, the Kennedy Round registered a remarkable advance.

The Seventh GATT Conference known as the Tokyo Round (1973-79) was held at Tokyo. This conference deliberated upon the issues including tariff reduction, removal or reduction of non-tariff barriers, coordinated scaling down of all trade barriers in selected sectors, trade liberalization in agriculture, multilateral system of safeguards, the tropical products and special interests of the LDC’s.

Some of the more important results flowing from the Tokyo Round were as below:

(i) Tariff Reduction:

The tariff reduction agreed by the leading countries such as the USA, the EEC and Japan, on an average, was of the magnitude of 31 percent, 27 percent and 28 percent respectively. The negotiated tariff reduction by the contracting parties was to be phased over 8 year commencing from 1980.

(ii) Non-Tariff Barriers:

The Tokyo Round laid down a code of conduct for nations to follow in respect of non-tariff barriers. This code included- (a) agreement on a code about the government procurements, (b) uniformity in the application of duties in counter-veiling and anti-dumping cases, and (c) a generalized system of preferences to the manufactured, semi-manufactured and selected other exports of the LDC’s countries. However, many products such as textiles, shoes, consumer electronics, steel and several other products that were of very vital interest for the LDC’s remained excluded.

(iii) Removal of Technical Barriers:

An agreement was reached through Tokyo Round about the removal of unnecessary trade barriers existing in the form of technical standards. The provision in the agreement was made concerning complaints related to the violation of the code of technical standard by the contracting parties and redressal thereof.

(iv) Import Licensing Procedures:

The Tokyo Round resulted in an agreement concerning the simplification of import licensing procedures. It provided for automatic grant of approval of the application on the inflow of goods, simplification of licensing procedure in case of quota and other import restrictions. It also provided for creating institutions and procedures for consultation and settlement of disputes between the contracting parties.

(v) Customs Valuation:

An agreement was arrived among the nations providing for a fair, natural and uniform system for the valuation of goods for customs purposes.

It is true that the Tokyo Round extended the scope of GATT regulations to the non-tariff barriers. But the total outcome was designed to meet the interests of the United States, the EEC and other advanced nations. There was not much for the developing countries.

In making the assessment of gains from the Tokyo Round, Salvatore remarked, “It has been estimated that the total static gains from trade liberalization under the Tokyo Round amounted to about $ 1.7 billion annually. With the dynamic gains arising from the economies of scale and greater all-round efficiency and innovations, the figure might rise to as high as $ 8 billion per year”.

Role of GATT in the Uruguay Round:

The Trade Ministers of the GATT nations met at Punta del Este, Uruguay in Sept. 1986. The decisions taken by them paved the way for the Uruguay Round of multilateral trade negotiations which were launched in October 1986 in Geneva. Three prominent bodies were involved in the conduct of these negotiations. They included the Trade Negotiations Committee (TNC) to oversee the entire Round, the Group of Negotiations on Goods (GNG) to deal with negotiations related to commodities and the Group of Negotiations on Services.

The negotiations at the Uruguay Round were quite comprehensive. This Eighth Round of GATT negotiation was originally thought to last for four years, but the complex issues involved in it led to the conclusion of negotiations at 15th December, 1993. Finally the member countries could hammer out an international agreement by the stipulated deadline.

Issues at the Uruguay Round:

The GATT nations were engaged in serious negotiations at the Uruguay Round concerning the following main issues:

(i) Tariff Reduction:

In the sphere of tariff reduction, the object was to bring about further relaxation of tariff barriers. In the Mid-Term Review of the negotiations, a target for an average reduction of tariff by about 30 percent was set.

(ii) Non-Tariff Barriers:

At the commencement of the Uruguay Round, it was recognised that about 50 percent of the world trade was affected by the non-tariff trade barriers. As these were applied discriminatively against the specific countries, there was the fear that they would defeat multilateralism and lead to bilateralism.

In addition, they could result in retaliation, decline in the flow of world trade and specialisation, misallocation of world resources, slowdown of structural adjustments and growth in developing countries and a trade war injurious for all the countries of the world. The Uruguay Round of trade negotiations was to discourage the GATT nations from resorting to non-tariff trade barriers.

(iii) Trade in Services:

GATT has emphasised essentially on the trade in goods. There were little regulations related to trade in services. The relative importance of trade in services has considerably increased in the postwar period. In the latter half of 1980’s, the trade in services accounted for more than 50 percent of the value- added in industrial countries and constituted over 20 percent of international trade.

The exclusion of services from the GATT negotiations was therefore regarded as a major weakness of the existing system. That made this issue as of prime importance in the Uruguay Round of talks among the trading parties.

(iv) Intellectual Property Rights:

A major issue at this Round was one of the Trade Related Intellectual Property Rights (TRIPS). The U.S.A. has been since long insisting upon proper safeguards to the intellectual property rights of the researches in the advanced countries on the international plane. The Eighth Round of the GATT addressed itself to this matter related to patents, copyrights etc.

(v) Foreign Investments:

The Uruguay Round of trade negotiations was meant to evolve proper rules for the governments to follow about flows of investment among the different countries.

(vi) Agriculture:

Agriculture had remained generally excluded from the GATT jurisdiction in the earlier rounds. Most of the countries, both developed and less-developed, had jealously shielded their agriculture from foreign competition through tariffs, quota, subsidies, health regulations etc. The elaborate protective domestic agriculture support programmes were considered too restrictive and responsible for high costs to consumers. In addition, these were found to interfere with the international specialisation of resources and were likely to cause serious trade disputes.

The less developed countries, faced with acute food shortage, had to maintain the regime of agricultural support programmes through subsidies and the public distribution system. The advanced nations, having large food surpluses were also found to be retaining the agricultural support programmes.

For instance, the EC had been expending on farm subsidies 23 billion dollars a years, the U.S.A. 25 billion dollars and Japan 15 billion dollars. The Uruguay Round concerned itself with the reduction in farm subsidies and freer trade in farm products.

(vii) Textiles:

The Uruguay Round of Trade negotiations were also concerned with trade in textiles and clothing. In this sphere, the object was to seek integration of this sector into the GATT and the eventual elimination of the Multi-Fibre Arrangement (MFA) and other restrictions on textile and clothing as these were found inconsistent with the GATT.

(viii) Settlement of Disputes:

The GATT dispute settlement mechanism was found to be very slow and cumbersome. It was, therefore, necessary to review the dispute settlement system of the GATT and to make it more effective and expeditious.

Role of GATT in the Dunkel Draft:

The Uruguay Round of trade negotiations, which had started in September 1986, continued to drag on. Exasperated by complex, tough and protracted wrangling over different issues involved in the negotiations, Arthur Dunkel, the Director- General of the GATT since 1980, finalized a nearly 500 page draft called as Dunkel Draft, on his own and circulated it among the member countries in December 1991 on a take-it or leave-it basis.

The draft dealt with all the issues under discussion in the Uruguay Round including services, intellectual property rights, sui generis protection in the field of biotechnology, farm subsidies, free trade in food grains, buffer stocks and public distribution system, textiles and clothing, foreign investment, research and development, tariff and non-tariff restrictions and settlement of disputes. He wanted, in this way, to save the Uruguay Round from collapse. However, in the process, he was found to be siding firmly with the developed countries and, as a corollary, tilting against the less-developed world.

He wanted to set up the agreement by April 1992 but the row over farm subsidies between the U.S.A. and the European Community (EC) prevented any agreement. The wrangling continued between the EC, the U.S.A. and Japan until the United States enforced deadline of December 15, 1993, when the final agreement was reached after effecting several modifications in the Dunkel Draft.

Although some of the proposals of the Dunkel Draft are likely to have adverse repercussions for India in the long run, the short term adverse effects are limited. The acceptance of these proposals, it is estimated would cause an expansion of global trade by almost 213 billion dollars. India may also be benefitted to the extent of about 4.6 billion dollars.

Some of the negative aspects of the proposals will get diluted subsequently when the provisions of the agreement are implemented. It is advisable for India to avoid isolation and seek redressal of its grievances through multilateral or bilateral negotiations.

GATT and Developing Countries:

A large majority of the contracting parties of the GATT was in the category of the developing countries. But those countries had throughout a peripheral importance. Almost entire wrangling at the different rounds of GATT negotiations was meant for serving the trade and other interests of a few developed countries.

The less developed countries were confronted with a number of problems related to international trade. Those included the need for some measure of protection to their agriculture and industries from foreign competition, instability in the international prices of primary products, decline in their share in world trade, worsening terms of trade vis-a-vis developed countries, persistently widening BOP deficits and increasing burden of external debt. The developed countries, always preoccupied with extracting their own pound of flesh at GATT negotiations, had adopted an attitude of callous disregard of the problems of the poor countries.

Prior to the Kennedy Round (1963-67), there was little gain for less developed countries from the GATT except that they were allowed to use some measure of quantitative trade restrictions to adjust the BOP deficits. The tariff reduction by the developed countries also brought, to a limited extent, some benefit for them.

On paper clause XVIII of the GATT had made provision for such special benefits as:

(i) Permission to impose quantitative restrictions for safeguarding their external financial position and for building up of adequate foreign exchange reserves for executing their development programmes;

(ii) Permission to provide concessions to home industries for promoting their development;

(iii) Introduction of trade and other measures for the establishment of an industry; and

(iv) Permission to employ quantitative and other restrictions to improve their balance of payments position.

The major hurdle for the developing countries in obtaining trade concessions was on account of the principle of reciprocity. The developing countries were unable to provide equivalent tax concessions to the developed countries. Consequently, they could not secure desired concessions from the developed countries.

During the period before the Kennedy Round, tariffs on aggregate imports of manufactured goods by developed countries averaged 11 percent. But these were 17 percent on those from the less developed countries. In addition, no initiative had been taken by them about the relaxation of trade barriers on agricultural and tropical products of the less developed countries.

The recognition of special problems of less developed countries concerning trade, tariff and payments led to the appointment of committee of experts that submitted its report in 1958. This Report was called as the Haberler Report. This report stressed upon the reduction of tariffs and taxation on industrial and primary products of the less developed countries.

Some of the steps adopted under GATT to benefit the less developed countries in the subsequent years included the acceptance of the principle of non-reciprocity for LDC’s in the matters of reduction or removal of tariff and other trade barriers and introduction of Generalized System of Preferences in 1970.

The Tokyo Round (1973-79) made some advance in this respect. It paved the way for trade concessions in the export of raw, semi-processed and processed tropical products by the developed countries. However, textiles and clothing, one of the principal exports of the LDC’s like India, remained subjected to restrictive provisions of the Multi-Fibre Agreement (MFA).

Although GATT attempted to extend preferential or special treatment to the less developed countries, yet the escape clause and safeguard rules of the GATT amounted to the denial of trade benefits to them.

Right from the beginning, the GATT remained a hand-made for the advanced countries and the LDC’s had been discriminated. Even the agreement forged in December 1993 had several negative aspects such as the retention of MFA in case of textiles and clothing, inclusion of trade in services under GATT provisions, Trade-Related Intellectual Property Rights, statutory obligations of opening up of domestic market for imports from abroad, restriction of export subsidies, reduction in tariffs, substitution of quantitative trade restrictions by tariffs.

The ink of that agreement had not yet dried when the developed countries initiated the maneuvers to secure permission for unilateral trade restrictions against the less developed countries on the basis of extraneous non-trade considerations such as human rights, environmental protection and child labour. If the developed countries succeed in their machinations, it will amount to the nullification of multilateralism of the GATT and WTO and acceptance of unilateralism and economic authoritarianism of the developed countries.

Defects of GATT:

Although the GATT was evolved to promote free multilateral trade in the world and to specify norms of trade behaviour applicable to all the contracting parties, yet the actual functioning of the GATT exposed several of its defects or deficiencies:

(i) No Enforcement Authority:

The GATT, no doubt, advocated multilateral system of international exchange based upon the principle of reciprocity. It had attempted to prescribe an international code of conduct in the sphere of trade. But there was no enforcement authority to oversee the compliance of GATT regulations by contracting parties and to settle their trade disputes. The United States had opposed the institution of an International Trade Organisation right from the days of Havana Charter. The agreement forged in

December 1993 has made provision for the creation of a World Trade Organisation (WTO). If this organisation operates on a non-discriminatory basis and restrains the contracting parties from resorting to unilateral trade restrictions, the GATT aims and objectives would be properly fulfilled.

(ii) Quantitative Trade Restrictions:

The GATT had certainly ensured the scaling down of tariff structure but the quantitative trade restrictions remained for a long time outside the GATT ambit. Consequently, the developed countries had used with impunity the quantitative trade restrictions such as import quotas, export subsidies, voluntary export restraints, health and safety regulation etc.

Even though the December 1993 agreement of GATT disapproved the adoption of quantitative trade restrictions and the substitution of tariffs in their place, it did not prohibit the contracting parties from taking recourse to them.

(iii) Difficulty in the Formulation of General Rules:

There was much diversity in the membership of GATT. The contracting parties had varied economic and political motives. They were also at different stages of development. The diversities existing among them created difficult problems in framing and implementing uniform general rules of conduct concerning trade, tariffs and payments.

(iv) Principles of Reciprocity and Non­-Discrimination:

The GATT had been stressing upon the principles of reciprocity and non­discrimination. The reciprocity meant that two contracting parties must provide equivalent benefits or concessions to each other. It also implied that they could adopt equivalent trade restrictions too. The principle of non-discrimination, at the same time, emphasised upon the uniform policy for all the contracting parties. There seems to be an in­built bias and contradiction on account of these two principles.

(v) Neglect of Agriculture:

Although trading in agriculture products was a matter of prime importance for the less developed countries, yet it remained for long outside the GATT purview. The contracting parties continued to follow the farm support policies resulting in food surpluses that could be exported only with the help of export subsidies. It was only at Kennedy and Tokyo Rounds that the agreements could be arrived at about some categories of primary products.

The issue of farm subsidies by European Union (EU) had brought the Uruguay negotiations almost on the verge of collapse in 1992. Even in December 1993 agreement, there was the provision only of some scaling down of the export subsidies on farm products. The developed countries oppose trade liberalisation vehemently where it even slightly hurts their exports. However, in the spheres in which they have trade advantages, they remain indifferent to the needs and problems of the less developed countries.

(vi) Commodity to Commodity Based Negotiations:

The practice of commodity-to- commodity based negotiations invariably benefitted the countries having stronger bargaining power vis-a-vis others. In addition, this approach was responsible for the prolonged deliberations at the various rounds of GATT negotiations.

(vii) Little Benefits for the LDC’s:

Although the majority of the members of the GATT were in the category of the LDC’s, yet GATT had provided little benefit to these countries. The GATT failed to assure just terms of trade for them. They could not secure easy and liberal access to the markets of developed countries. Even at present, there are about 100 MFA types of restrictive trade arrangements in the world.

The commodity-to-commodity based approach has proved to be detrimental to the interests of these countries. This approach creates difficulty in their future planning of production and exports. The GATT did not permit any compensation to the less developed countries on account of injury to their economies caused by the actions of developed countries and such countries

(viii) Non-Representative Body:

It is true that the membership of the GATT had progressively expanded over the years. But for a long time, the East European countries of erstwhile Soviet block and China remained outside the GATT. It was therefore criticized as a non-representative body. During the recent years, even these countries have shown interest in joining the WTO. With their inclusion, the ranks of developing countries have got further strengthened and there may perhaps be better recognition of their interests and problems.

(ix) The ‘Escape’ and ‘Safeguard’ Clauses:

The Article XIX of the WTO incorporated safeguards and escape clauses. It authorised the contracting parties to adopt protective measures in case of need such as severe balance of payments problems and prevention of the flow of subsidised imports or in the event of dumping. Though these clauses were supposed to be temporary measures but in practice had become almost permanent feature of the international trading system.

(x) Free Trade Area or Customs Union:

Under the Article XXIV of the GATT, the member countries could organise themselves into free trade areas or customs unions. The strong regional trading block such as European Union (EU), North American Free Trade Association (NAFTA), Association of South East Asian Nations (ASEAN) and Asian Pacific Economic Co-operation (APEC) have emerged. They have created serious distortions in the world trade. They have undermined the basic GATT principles of non-discrimination and reciprocity and weakened the GATT.