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Lesson 2 GATT&WTO
Lesson 2 GATT&WTO
Lesson 2. Multilateral Trade System: The creation of GATT and the WTO as an Institution
Introduction:
The international trade offers significant contributions in making the global economy stable and
successful through the Multilateral Trade System. This unfolds the emerging importance of the various
rules governing international trade and its impact to the government members of the World Trade
Organization (WTO). Looking into this, it provides vast background in the development process of trade
from the various negotiations or rounds happened in the history of trading until such time that the WTO
came into its existence.
Learning Outcomes:
1. Analyse the concept of Multilateral Trade System and its components.
2. Identify the roles and functions of the WTO as an institution governing international trade.
3. Understand the creation of GATT and how it was succeeded by the WTO.
4. Analyse how trade liberalization paved the way towards free international flow of trade.
5. Familiarize oneself in the Uruguay Round in the development of trade.
Contents
The multilateral trade system is an international political system. International trade institutions
stand in the centre of this system. This highlights the creation of the General Agreement on Tariffs and
Trades (GATT) on 1947 which then succeeded by the WTO in 1994.
In a nutshell, what makes GATT different from the WTO is, GATT is a treaty while WTO is an
international organization. WTO is same legal status with that of UN, IMF and World Bank. But WTO is
relatively small compared to other International Organizations. WTO comprises 164 countries (as of July,
2016)
Functions of WTO:
1. Providing a forum for trade negotiations among its member governments
2. Administering the trade agreements that governments conclude
3. Providing a mechanism through which governments can resolve trade disputes
Although WTO is the institutional centre of the world trade system, GATT has not disappeared.
It still provides many of the rules governing international trade relations.
The creation of the WTO, therefore, represented an organizational change and it did not produce a
wholly new set of international trade rules. The rules that provide the foundation of the multilateral trade
system are those that were initially established in 1947 and that have been gradually revised and amended
ever since.
The multilateral trade system can be broken down into three (3) individual components:
1. Intergovernmental bargaining process
2. A set of rules and principles governing international trade relations
3. A dispute settlement machine
WTO focuses on Trade liberalization (elimination of government policies that make it difficult for
the goods and services produced in one country to be sold in another).
Trade liberalization highlighted the tariffs (taxes that governments impose on foreign goods coming
into the country) and nontariff barriers (health and safety regulations and government purchasing
practices)
Trade liberalization was achieved after series of rounds (9 rounds to be exact), one of which is the
Uruguay Round. Each round brought WTO countries to negotiate an agreement covering a specific set of
trade-related issues.
Uruguay Round
Negotiations under this round included tariff reduction, create brand new rules to govern
international trade in services, and protect intellectual property.
It was on the 8th round (the Uruguay) when GATT was succeeded by the WTO. The first six rounds
of GATT focused on tariff.
Uruguay round was the most exceptional because for the first time, the negotiations focused most
heavily on problems other than tariff.
During Uruguay round, they created international rules in three (3) new areas:
Trivia: The GATT text alone which spells out basic rules governing international trade in
goods, is more than 50 pages long.
“…if a good costs less to buy in a foreign market than it does to produce at
home, a country is better off if it imports the good than if it produces the
good itself”
For better understanding and example of this principle, see and check the “absolute
advantage” and “comparative advantage” of Thomas Oatley (page 22-23)
The principle provides a compelling justification for international trade and for trade
liberalization. As result, eliminating barriers to international trade increases the welfare of
the world as a whole and of every country that participates in this trade.
This principle takes a specific form called Most Favored Nation (MFN). This simply
requires each WTO member to treat all other members as well as it treats its most-favored
trading partner.
Example: If US lowered the tariff to the imported goods of Brazil, then it must also give
the same way to other WTO members.
This principle thus assures that all countries have access to foreign markets on equal
terms. No country shall suffer discrimination, and no other countries benefit from special
advantages.
However, it gives specific exception for this principle. Under Generalized System of
Preferences (GSP) which was enacted in the late 1960s, advanced industrialized countries can
allow imports from developing countries to enter their markets at lower tariffs than imports from
other advanced industrialized countries. The U.S. government has used this exemption to allow
certain products from developing countries to enter the American market at a lower tariff rate
than is imposed on the same good imported from Western Europe. Governments are also allowed
to discriminate if they join a free trade area or customs union. In the North American Free Trade
Agreement (NAFTA), for example, goods produced in Mexico enter the United States duty-free,
while the United States imposes tariffs on the same goods imported from other countries. These
exceptions aside, nondiscrimination is a fundamental principle of the multilateral trade system.
Thomas Oatley, International Political Economy: Interest and Institutions in the Global Economy
(Pearson/Longman, 5th edition, 2016)
Wilkinson, B., General Agreement on Tariffs and Trade (GATT) (2021). In The Canadian Encyclopedia.
Retrieved from https://www.thecanadianencyclopedia.ca/en/article/general- agreement-on-tariffs-and-
trade
WTO. (n.d.). WTO | Dispute settlement gateway. World Trade Organization. Retrieved October 2, 2021,
from https://www.wto.org/english/tratop_e/dispu_e/dispu_body_e.htm