General Agreement on Tariffs and Trade

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 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

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• Part of economic recovery after World War II,
Bretton Woods Conference suggested an
organization to regulate trade.
• Parallel to the Governments negotiating the ITO,
15 negotiating states began negotiating for the
GATT as a way to attain early tariff reductions
• The ITO failed in 1950 and then GATT agreement
was introduced

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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
• It was a treaty, not an organization
• A small secretariat occupied what is today the
Centre William Rappard in Geneva, Switzerland

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 HISTORY OF GATT

 Efforts to negotiate international trade agreements began in 1927 at

the League of Nations but were unsuccessful.
 Precursor organization to GATT, ITO, was first proposed in February
1945 by the United Nations Economic and Social Council (UNESCO).
 Owing to the United States failing to implement the ITO, GATT was
the only organization left.
 On 1 January, 1948 the agreement was signed by 23 countries:
Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China,
Cuba, the Czechoslovak Republic, France, India, Lebanon,
Luxembourg, Netherlands, New Zealand, Norway, Pakistan,
Southern Rhodesia, Syria, South Africa, the United Kingdom, and
the United States.
 According to GATT's own estimates, the negotiations created 123
agreements that covered 45,000 tariff items that related to 6

approximately one-half of world trade or $10 billion in trade.

• The General Agreement on Tariffs and Trade
(GATT) was first signed in 1947.

• Was designed
• To provide an international forum
• That encouraged free trade between member states
• By regulating and reducing tariffs on traded goods
• Providing a common mechanism for resolving trade
disputes.

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 TERMS WHICH HELP
UNDERSTANDING GATT

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 TRADE BARRIERS
TARIFF AND NON-TARIFF
BARRIERS
• 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 9
the tariff.
 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. 10
 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. 11
 TRADE BARRIERS (CONTD)
• 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 it’s
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 are likely to
retaliate, so that in the end all nations usually lose.
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 TRADE BARRIERS (CONTD)
• 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
producing consumer products.
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 NON-TARIFF BARRIERS
• International trade also hampered by
numerous
• Technical, administrative, and other regulations.
• 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.
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 NON TARIFF BARRIER
[SUBSIDIES]
• National government sometimes grant 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.
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 OTHER NON TARIFF
BARRIERS
• 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 extend preferences to domestic
suppliers in the form of buy-national policies
campaigns.
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 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 17
(WTO)to police the international trading system
 IMPACT OF TRADE
BARRIERS
• In the late 2001, the WTO launched a new round of talks
[Doha,Qatar] aimed at further liberalizing the global trade
and investment framework.
• 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 worlds poorer
nations have the most to gain from any reductions in
agricultural tariffs and subsidies. 18
Did GATT
succeed?

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 SUCCESSES

• 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.
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But…….

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 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 23
• Factors convinced GATT members that a
new effort to reinforce and extend the
multilateral system should be attempted.

That effort resulted in the Uruguay Round,

the Marrakesh Declaration, and the creation
of the WTO. 24
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