Report on GATT

Department Of Management Sciences

International Business

Report

on

Submitted to: Madam Afsheen Ishtiaq

Submitted by: Azeem Bhatti
BBA-8

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 Report on GATT

GATT (General Agreement on Tariffs and Trade)

Background

World War–II lasted from 1939 to 1945. This left many countries in Europe and Asia
totally battered. Their economies were shattered; there was tremendous stain on political
and social systems resulting in wide spread extermination and migration of people.
Intentional peace was ruffled. Something had to be done to put these war-ravaged
economies back in shape. Simultaneously, the various colonies in Asia and Africa were
acquiring political freedom. And there was urgent pressure on them for rapid economic
development and political stabilization. In this background the United Nations
Organization (UNO) was born on the collective wisdom of the world.

UNO came to encompass the concerns for development in economic, commercial,

scientific, social and cultural sphere of the member nations. It formed various forums and
agencies. One such forum under the UNO was the General Agreement on Tariffs and
Trade (GATT) which was established in 1947.

GATT which emerged from the “ashes of the Havana Charter” was formed in 1947 and
lasted until 1994, when it was replaced by the World Trade Organization in 1995

Havana Charter was the charter of the defunct International Trade Organization (ITO).
It was signed by 53 countries on March 24, 1948. It allowed for international cooperation
and rules against anti-competitive business practices. The charter ultimately failed
because the Congress of the United States rejected it. Elements of it would later become
part of the General Agreement on Tariffs and Trade (GATT).
At the same time 23 nations agreed to continue extensive tariff negotiations for trade
concessions at Geneva, which were incorporated in a General Agreement of Tariffs and
Trade. This was signed on 30th October 1947 and came into force form 1st January 1948
when other nations had also signed it.

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Toward the end of World War II, representatives of the US and its Allied Forces
attempted to work out the arrangements for the post war era. As a result of these
negotiations, after World War II three important international measures were undertaken
by the US and its Allies to liberalize trade and payment.

• International Monetary Fund (IMF)

International Monetary Fund (IMF) was established to facilitate international

payments. The IMF is the International Monetary Fund, headquartered in
Washington, D.C. It's a global organization made up of 185 member countries,
founded in 1944 with the purpose to oversee global financial health and provide
assistance when needed to its members. Today, the IMf states its goals as "to promote
international monetary cooperation, exchange stability, and orderly exchange
arrangements; to foster economic growth and high levels of employment; and to
provide temporary financial assistance to countries to help ease balance of payments
adjustment." Criticism of the IMF is a cornerstone of the anti-globalization
movement.

• IBRD Bank for Reconstruction and Development

After the War, European countries and Japan had to rebuild their production
plants; this meant that these countries required a large amount of foreign capital. To
encourage free flow of private capital, International Bank for Reconstruction and
Development (IBRD, now the World Bank) was also established.

• To facilitate free trade, ITO was to be born.

GATT was the result of an international conference held at Geneva in 1947 to consider a
draft charter for the International Trade Organization (ITO). The US initiated
negotiations with 22 other countries that led to commitments to regulate 45,000 tariff
rates. So GATT began its provisional existence on January 1, 1948, when 23 contracting
parties signed the agreement. However, US Congress refused in 1950 to ratify the treaty
establishing the ITO

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So, in brief 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.
What was the main objective of GATT?
The GATT's main objective was the reduction of barriers to international trade. This was
achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on
trade through a series of agreements. The functions of the GATT were taken over by the
World Trade Organization which was established during the final round of negotiations
in early 1990s.
So; 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.

Major requirements of GATT

1. Tariff: GATT obligates each country to accord no discriminative, most favored

nation (MFN) treatment to all other contracting parties with respect to tariffs.
MFN treatment does not mean free trade or national treatment. Imports from
contracting parties are subject to tariffs or quotas. MFN treatment means that no
other countries with some exceptions receive better treatment or lower tariffs.
Exceptions:
o Existing tariff preferences such as those between British Commonwealth.
o GATT/WTO allows the formation of customs union, which causes a
significant erosion of the MFN principle.
o An escape clause allows any contracting party to withdraw or modify
tariff concessions, if it threatens a serious injury to domestic producers.
2. Quantitative Restrictions: GATT in general prohibits the use of quantitative
restrictions on imports and exports.

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Exceptions:

o Agriculture - when government needs to remove surplus of agricultural

and fisheries products. Important to US
o Balance of payments - to safeguard balance of payments. If a country's
foreign exchange reserve is low.
o Developing countries - LDCs may use import quotas to encourage infant
industries.
o National Security- Strategic controls on certain exports.
o Patents, Copyrights, Public Morals
3. Special Provisions to promote the Trade of Developing Countries. In 1965, the
contracting parties added Part IV (Trade and Development) to GATT.
o GATT gives high priority to reduction/elimination of tariffs on products of
LDCs.
o refrain from introducing tariffs and NTBs to such imports.
o refrain from imposing internal taxes to discourage consumption of primary
products from LDCs
o not expect reciprocal commitments from LDCs.
4. Other Provisions
o provisions to eliminate concealed protection such as customs valuation.
For example, American Selling Price valuation. By ASP, an ad valorem
tariff is imposed on the domestic price.
o procedural matters: each member is entitled to one vote, decisions are
made by majority vote. 2/3 majority is required to waive obligations.
settlements of disputes.

Their principles were to resolve or prevent war through the United Nations and to
eliminate the economic causes of war by establishing three international economic
institutions.
Part of economic recovery after World War II, Bretton Woods Conference suggested an
organization to regulate trade

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Bretton Woods System is a system of monetary management established the rules for
commercial and financial relations among the world's major industrial states in the mid
20th century. The Bretton Woods system was the first example of a fully negotiated
monetary order intended to govern monetary relations among independent nation-states.

The main aspects of General Agreement on Tariff

GATT,1947
Because the ITO was stillborn the provisional agreement for the ITO, the General
Agreement on Tariffs and Trade (GATT) became the agreement and the organization for
establishing and enforcing, through dispute settlement, the international trade rules. In
1995 this agreement on trade in goods became the World Trade Organization.
The GATT was very successful in lowering tariffs, the then existing major barrier to free
trade.
The first five rounds of multilateral trade negotiation succeeded in lowering tariff barriers
substantially. This shifted protectionism to non tariff barriers. (NTB)
The GATT accomplished these goals through:
– Multilateral negotiations
– Dispute settlement
However the dispute settlement mechanism was very weak in that a losing party could
simply block the adoption of an adverse decision.

TRADE BARRIERS
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.

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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.
 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 its 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 is
likely to retaliate, so that in the end all nations usually lose.
 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.

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 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.
 National government sometimes grants 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.
 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 extends 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
 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
 In the late 2001, the WTO launched a new round of talks [Doha, Qatar] aimed at
further liberalizing the global trade and investment framework.

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 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 world’s poorer nations have the most to gain from any
reductions in agricultural tariffs and subsidies.
 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.
 Continual reductions in tariffs helped spur very high rates of world trade growth
during the 1950s and 1960s — around 8% a year on average.
 Trade growth consistently out-paced production growth.
 The rush of new members during the Uruguay Round demonstrated recognition of
multilateral trading system as the anchor for development and an instrument of
economic and trade reform.
But…….
 GATT’s success in reducing tariffs to a low level, with a series of economic
recessions 1970-80’s drove governments to devise other forms of protection for
sectors facing increased foreign competition

 High rates of unemployment and constant factory closures led governments in

Western Europe and North America to seek bilateral market-sharing arrangements
with competitors and to embark on a subsidies race to maintain their holds on
agricultural trade

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 Both these changes undermined GATT’s credibility and effectiveness.

 The problem was not just a deteriorating trade policy environment.
By the early 1980s the General Agreement was clearly no longer as relevant to the
realities of world trade as it had been in the 1940s
 World trade had become far more complex and important than 40 years before
 The globalization of the world economy was underway
 Trade in services — not covered by GATT rules
 Ever increasing international investments
 Factors convinced GATT members that a new effort to reinforce and extend the
multilateral system should be attempted.
GATT Rounds
1. GATT participant occasionally negotiated new trade agreements that all countries
would enter into
2. Each set of agreements was called a round
3. In general, each agreement bound members to reduce certain tariffs. Usually this
would include many special-case treatments of individual products, with
exceptions or modifications for each country.

First Round:Geneva April 1947

In the first round of talks held in Geneva in 1947, 23 countries, which had formed GATT,
exchanged tariff allowance on 45,000 products worth 10 billion US dollars of trade per
annum. This affected 10% of total Global Trade.

Second Round: Annecy Round - 1950

The second round took place in 1949 in Annecy, France. 13 countries took part in the
round. The main focus of the talks was more tariff reductions, around 5000 total

Third Round Torquay Round - 1951

The third round occurred in Torquay, England in 1951. 38 countries took part in the
round. 8,700 tariff concessions were made totaling the remaining amount of tariffs to
three-fourths of the tariffs which were in effect in 1948.

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Fourth Round Geneva Round - 1955-1956

The fourth rounds returned to Geneva in 1955 and lasted until May 1956. 26 countries
took part in the round. $2.5 billion in tariffs were eliminated or reduced.

Fifth Round Geneva (Dillion) Round - 1960-1962

The fifth round occurred once more in Geneva and lasted from 1960 to 1962. The talks
were named after U.S. Treasury Secretary and former Under Secretary of State. 26
countries took part in the round. Along with reducing over $4.9 billion on 4400 items in
tariffs, it also yielded discussion relating to the creation of the European Economic
Community (EEC).

Sixth Round Kennedy Round - 1964-1967

This round had the participation of 62 countries and negotiated tariff reductions of
approximately $ 40 billion, covering about four-fifths of the world trade. The Kennedy
round was the sixth session of General Agreement on Tariffs and Trade (GATT) trade
negotiations held in 1964-1967 in Geneva, Switzerland. The Kennedy Round had four
major goals: to slash tariffs by half with a minimum of exceptions, to break down farm
trade restrictions, to strip away non tariff regulations, and to aid developing nations.
Participation greatly increased over previous rounds
Seventh Round Tokyo Round - 1973-1979
Reduced tariffs and established new regulations aimed at controlling the proliferation of
non-tariff barriers and voluntary export restrictions. 102 countries countries took part in
the round. Concessions were made on $190 billion worth.

Eighth Round Uruguay Round - 1986-1993

The Uruguay Round began in 1986. It was the most ambitious round to date, hoping to
expand the competence of the GATT to important new areas such as services, capital,
intellectual property, textiles, and agriculture. 123 countries took part in the round.

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THE GENERAL AGREEMENT ON TARIFFS AND TRADE

("GATT 1947")
PART I
Article I: General Most-Favored-Nation Treatment
Article II: Schedules of Concessions
PART II
Article III*: National Treatment on Internal Taxation and Regulation
Article IV: Special Provisions relating to Cinematograph Films
Article V: Freedom of Transit
Article VI: Anti-dumping and Countervailing
Article VII: Valuation for Customs Purposes
Article VIII: Fees and Formalities connected with Importation and Exportation
Article IX: Marks of Origin
Article X: Publication and Administration of Trade Regulations
Article XI*: General Elimination of Quantitative Restrictions
Article XII*: Restrictions to Safeguard the Balance of Payments
Article XIII*: Non-discriminatory Administration of Quantitative Restrictions
Article XIV*: Exceptions to the Rule of Non-discrimination
Article XV: Exchange Arrangements
Article XVI*: Subsidies
Article XVII: State Trading Enterprises
Article XVIII*: Governmental Assistance to Economic Development
Article XIX: Emergency Action on Imports of Particular Products
Article XX: General Exceptions
Article XXI: Security Exceptions
Article XXII: Consultation
Article XXIII: Nullification or Impairment
PART III
Article XXIV: Territorial Application - Frontier Traffic - Customs Unions and
Free-trade Areas
Article XXV: Joint Action by the Contracting Parties

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Article XXVI: Acceptance, Entry into Force and Registration

Article XXVII: Withholding or Withdrawal of Concessions
Article XXVIII*: Modification of Schedules
Article XXVIII bis: Tariff Negotiations
Article XXIX: The Relation of this Agreement to the Havana Charter
Article XXX: Amendments
Article XXXI: Withdrawal
Article XXXII: Contracting Parties
Article XXXIII: Accession
Article XXXIV: Annexes
Article XXXV: Non-application of the Agreement between Particular
Contracting Parties
PART IV: TRADE AND DEVELOPMENT
GATT 1947
Article XXXVI: Principles and Objectives
Article XXXVII: Commitments
Article XXXVIII: Joint Action
ANNEX A: List of Territories referred to in Paragraph 2 (a) of Article I
ANNEX B: List of Territories of the French Union referred to in Paragraph 2 (b) of
Article I
ANNEX C: List of Territories referred to in Paragraph 2 (b) of Article I as respects the
Customs Union of Belgium, Luxemburg and the Netherlands
ANNEX D: List of Territories referred to in Paragraph 2 (b) of Article I as respects the
United States of America
ANNEX E: List of Territories covered by Preferential Arrangements between Chile and
Neighboring Countries referred to in Paragraph 2 (d) of Article I
ANNEX F: List of Territories covered by Preferential Arrangements between Lebanon
and Syria and Neighboring Countries referred to in Paragraph 2 (d) of Article I
ANNEX G: Dates establishing Maximum Margins of Preference referred to in Paragraph
4 of Article I
ANNEX H: Percentage Shares of Total External Trade to be used for the Purpose of

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Making the Determination referred to in Article XXVI

ANNEX I: Notes and Supplementary Provisions
Problems of GATT:
1. Failed to ease up trade in agricultural products to any significant degree. This was
one of the major goals of the Uruguay Round.
2. Has overlook managed trade for textiles, largely because of pressure from the US,
and automobiles.
3. GATT was an executive agreement under the Protocol of Provisional Application.
It was only a gentlemen's agreement with no teeth, no enforcement power to
discipline parties that violate the rules.
4. Contracting parties are not obligated to observe rules that are inconsistent with
their domestic laws at the time of entry into GATT. Many countries sidestep or
bypass the rules by narrowly defining commodities for tariff purposes.
5. Non-Tariff Barriers!
What is the difference between GATT & WTO?
The major differences between the two are:
1. The GATT had no status whereas the WTO has a legal status. It has been created by
international agreement approved by governments and legislatures of member states.
2. The GATT clash settlement system was lagging and not binding on the parties to the
clash. The WTO clash settlement mechanism is faster and binding on all parties.
3. GATT was a forum where the member countries met once in a decade to discuss and
solve world trade problems. The WTO, on the other hand, is a properly established rule
based World Trade Organization where decisions on agreement are time bound.
4. The GATT rules applied to trade in goods. Trade in services was included in the
Uruguay Round but no agreement was arrived at. The WTO covers both trade in goods
and trade in services.
5. The GATT had a small secretariat managed by a Director General. But the WTO has a
large secretariat and a huge organizational setup
GATT has enjoyed a membership of over 100 countries and generated about 85-90% of
world trade.

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