General Agreement on Tariffs and Trade (GATT) – Its Role in International Trade
Post World War 2, the economies were drained and needed significant restructuring. Hence, several nations came together to support each other. This is when GATT or General Agreement on Tariffs and Trade came into the picture. GATT was formed when 23 countries joined hands and signed a legal agreement to minimise trade barriers among countries by reducing tariffs, quotas, and subsidies.
Read this blog to learn about GATT, its importance in foreign trade and its principles.
What is the GATT (General Agreement on Tariffs and Trade)?
The full form of GATT is the General Agreement on Tariffs and Trade. History beckons that the agreement was signed on 30th October 1947. Twenty-three countries came together post World War 2 to sign the agreement.
The primary objective of the GATT agreement was to reduce trade restrictions by revising or removing certain tariffs, subsidies, and quotas. This was done at a time when international trade was affected by the ills of war.
The GATT aimed to improve existing international relations by making trade easier. It consisted of a set of rules that defined the new trade restrictions that were much more relaxed as compared to the ones that existed before. The agreement also established a system to resolve trade-related disputes among nations.
It is important to note that the World Trade Organization was established because of GATT; which is why, GATT and WTO go hand in hand. The World Trade Organization was established on 1st January 1995, and the body was responsible for extending the application of GATT.
Why was the GATT Created?
The GATT agreement aimed at resolving a wide variety of issues. However, most of these issues were related to trade and barriers to trade. Some of the major reasons why GATT came into existence are:
- The primary motive of GATT was to establish a system to regulate the policies of the pre-war protectionist period. The agreement aimed at restricting or removing quantitative trade barriers like trade controls between two countries.
- The other important motive of the GATT agreement is to provide a system to resolve commercial conflicts among nations. Therefore, a framework to resolve these conflicts and conduct multilateral tariff reduction negotiations was added to the agreement.
- GATT established a set of trading standards, and hence, it served the purpose of aligning the trade practices of different countries
The GATT agreement was a successful intervention as several trade reforms were brought about post its implementation.
How Does the GATT Work?
The primary purpose of GATT was to eliminate different kinds of trade protectionism imposed by nations worldwide. The GATT also contributed to reviving economies dealing with the after-effects of World war 2.
Three Provisions of GATT
GATT works on three main provisions.
- As per the first provision, all the member nations must give each other the status of the most favoured nation. As per the status, the tariffs and other quantitative restrictions would be the same for all nations. However, the special tariffs imposed on the British Commonwealth countries and customs unions were not under the purview of GATT.
- The second provision included the number of imports on which there will be no trade restrictions. However, there were some exclusions to this provision:
- In case of a surplus of agricultural produce
- If the country was facing issues with its balance of payments due to a reduction in the foreign exchange reserves
- Counties that were emerging and needed to protect their industries
- Issues involving national security
- The third provision was added to the GATT agreement in 1965. According to the provision, the developed countries must agree to remove import tariffs from developing countries. The primary motive of this provision was to support developing countries. Based on these three provisions, the GATT works.
What Are the Principles of GATT?
A set of principles governs the GATT. These principles are discussed in detail below.
- The most crucial principle of GATT is trade without discrimination. The principal of the most favoured nation was made a part of GATT, as non-discrimination was a primary principle of the agreement. As per the principle, no country should try to take advantage of another country’s economic condition.
- The second principle ensures that tariffs protect the domestic industries. Hence, GATT promoted customs tariffs over any other form of trade restrictions.
- The promotion of fair competition is another important principle. Several countries practised dumping goods, and the principle addressed the issue.
- The prohibition of quantitative trade restrictions is the driving principle of GATT. The only exception to this principle could be exercised if the country faced issues related to the balance of payments.
- The principle of possible emergency actions is another vital aspect of GATT. According to this principle, a country can ask for release from a particular GATT obligation. The country will have to follow the waiver procedures stated in the agreement. This principle can be exercised only if the economic or trade circumstances of the country are bad.
- Another principle that is a part of GATT is regional trading agreements. Under this policy, an exception to most favoured nations can be exercised. These exceptions will be granted as a customs union or a free trade area.
- Settling trade disputes is another principle of GATT. As per the agreement, GATT performs regular activities like consultation, dispute settlement, etc.
All the principles stated above are important aspects of GATT. All decisions made under GATT are based on these principles.
Member Countries of GATT
The GATT had 23 members when it was established. These countries included Australia, Belgium, Brazil, Burma, Canada, Czechoslovakia, Ceylon (now Sri Lanka), Chile, China, Netherlands, Cuba, France, India, Lebanon, Luxembourg, Norway, New Zealand, Pakistan, Syria, Southern Rhodesia, South Africa, the United Kingdom, and the United States.
The number of members increased from 23 to 128 in 1994 and more countries came under the purview of GATT. Hence, the trade patterns could be standardised at a larger level.
Pros and Cons of the GATT
The implementation of GATT was a milestone in World History. However, GATT has its own set of pros and cons. Let’s understand both aspects:
1. Pros
- Improves International Trade Relations
GATT eliminated several trade barriers and reduced tariffs. Hence, the countries became more open to trading with each other. Also, they realised the advantages of participating in free trade, and the number of signatories to GATT increased from 23 to 128. - Promotion of Harmony and Peace
Post World War 2, several countries came together for the first time to take a collective decision. Hence, the agreement promoted world peace and collaboration. Also, the European countries were struggling, and a war-like situation was built. However, GATT kept the situation in check and helped reduce the possibility of war. - Better Communication among Nations
GATT incentivised nations to interact with each other and improve their trade relations. Hence, the nations tried to understand the problems in other nations and used effective communication to solve these problems.
2. Cons
- Impact on Domestic Industries
With the implementation of GATT, more countries started importing goods instead of promoting their domestic industries. Therefore, the unemployment rates of different countries shot up. GATT enabled rich countries to increase production and push the products to other nations. Hence, the middle and low-income nations suffered a lot. - Exposure to Risk
The trade of services was not under the purview of GATT. Hence, services like finance, technology, etc. expanded worldwide, and only a few nations dominated these industries. Hence, an impact on any of these nations impacted the entire economy. - The Reduced role of the Government
Once a country signs an agreement like GATT, it must abide by all its principles. Hence, the government loses control over its own country and its people.
What is the Relationship Between GATT and WTO?
GATT and WTO are related to each other as GATT became a part of WTO post its incorporation. GATT did not cover several aspects of world trade. Therefore, there was a need for a stronger body to take care of the entire aspect of world trade. This led to the establishment of the World Trade Organization.
WTO is a permanent body and GATT came under its umbrella. The WTO took over GATT and came up with overarching principles that covered services and intellectual property apart from goods.
Final Word
The GATT shaped world trade as it was the first agreement that came into existence to reduce trade barriers. The 23 countries that signed the GATT agreement wanted to promote free trade of goods among nations. The GATT also lived up to its expectations as it conducted several negotiations to improve world trade.
However, due to a lack of coherent structure, it was replaced by the World Trade Organisation. The World Trade Organization has developed several policies that enforce different aspects of GATT. Hence, the GATT still functions under the umbrella of WTO.
FAQs
Ans. The GATT agreement was signed on 30th October 1947, and 23 countries came together to sign the agreement.
Ans: GATT was established following World War II as a way to help rebuild the global economy and promote international trade. It was originally signed by 23 countries and has since grown to include more than 120 member countries. GATT was replaced by the World Trade Organization (WTO) in 1995.
Ans. The driving principle of GATT is the Most Favoured Nation principle. However, other principles, like the prohibition of quantitative trade restrictions, are important.
Ans. The World Trade Organization (WTO) was formed on January 1, 1995. It was established as a successor to the General Agreement on Tariffs and Trade (GATT), which had been in operation since 1947. The WTO is a global organisation that deals with the rules of trade between nations and is headquartered in Geneva, Switzerland. It provides a forum for governments to negotiate trade agreements and settles trade disputes between member countries.
Ans: GATT promotes free trade by establishing rules and procedures for the settlement of trade disputes and by encouraging countries to lower their trade barriers and reduce their tariffs on imported goods. This helps to create a level playing field for all participating countries and enables them to trade with each other more freely.
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