HISTORY OF GATT

&
THE WTO SYSTEM

A BREF HSTORY OF THE GATT

Beggar-thy-neighbour tariff policies of 1930s

=> WWII
Bretton Woods Conference at the end of the WWII, finance
ministers from the Allied nations gathered to discuss
creation of a new monetary system that would support
postwar reconstruction, economic stability, and peace.
=> IBRD & IMF
=> need for a third institution, ITO.
1940s: Representatives met to design a postwar trading
system that would parallel the international monetary
system.

Draft a Charter for ITO,

Negotiate the substance of an ITO agreement (rules governing
governing international trade and reductions in tariffs.

1947: 23 Members
Today: 153 Members

GATT TRADE ROUNDS

Year

Place /

Subjects Covered

Countries

1947

Name
Geneva

Tariffs

23

1949

Annecy

Tariffs

13

1951

Torquay

Tariffs

38

1956

Geneva

Tariffs

26

Tariffs

26

1960 1961 Dillon

Round
1964 1967 Kennedy
Round
1973 1979 Tokyo
Round
1986 1994 Uruguay
Round

Tariffs and Anti-Dumping

62
Measures
Tariffs, Non-tariff Measures,
102
Framework Agreements
Tariffs, Non-tariff Measures,
123
Rules, Services, Intellectual
Property, Dispute Settlement,
Textiles, Agriculture, Creation
of WTO

TMELNE OF GATT & WTO -1

1944: At the Bretton Woods Conference, which created

the IBRD and IMF, there is talk of a third
organisation, the ITO.
1947: As support for another international
organisation wanes in the U. S. Congress, the General
Agreement on Tariffs and Trade is created. The Gatt
Treaty Creates a set of rules to govern trade among
23 member countries rather than a formal institution.
1950: Formal U.S. Withdrawal from the ITO concept
as the U.S. Administration abandons efforts to seek
congressional ratification of the ITO

TMELNE OF GATT & WTO -2

1951 1986: Periodic negotiating rounds occur, with

occasional discussions of reforms of GATT. In 1980s,
serious problems with dispute resolutions arise.
The Uruguay Round, a new round of trade
negotiations, is launched. This culminates in 1994
Treaty that establishes the WTO.
1995: The WTO is created at the end of the Uruguay
Round, replacing GATT.
2009: The GATT consists of 153 members, accounting
for approximately 97% of world trade.

SUCCESS OF GATT

Regular meetings of GATT members are known as

negotiating rounds

Primarily focus on further reductions in the in the

maximum tariffs that countries could impose on imports
from other GATT members

Tariffs on manufactured products fell from a tradeweighted average of roughly 35% before the creation
of GATT in 1947, to about 6.4% at the start of the
Uruguay round in 1986.
The volume of trade among GATT members surged:
In 2000 the volume of trade among WTO members
stood at 25 times its 1950 volume.

UNSOLVED PROBLEMS OF GATT -1

By the 1980s several problems had surfaced:

The

dispute resolution mechanism of GATT was not

effectively functioning. Longstanding disagreements
among members regarding issues like government
subsidies, regulations for FDI

number of commodities (agricultural products and

textiles) were widely exempt from GATT disciplines.

Certain

forms of administered trade protection (antidumping duties, VERs, counterveiling duties) were
restricting trade and distorting trade patterns in many
important sectors.

UNSOLVED PROBLEMS OF GATT -2 Trade

in services was expanding rapidly and GATT

had no rules regarding trade in services.

Countries

producing intellectual property were

becoming increasingly frustrated by the lack of
intellectual property protection in many developing
nations.

Rules

regarding trade related investment measures

(eg. Domestic purchase requirements for plants built
from FDI) were hotly disputed

TOKYO ROUND
A first attempt for reforming the system,
Progressive reduction of tariffs, average tariff on
industrial products became 4.7%,
Discussion of fundamental problems:
Agricultural product trade, Safeguards
(emergency import measures),
A series of agreements and arrangements on
non-tariff trade barriers => Small number of
GATT members subscribed to them,
Several Codes on Plurilateral Commitments (Eg.
Government Procurement, Civil Aircraft, Diary
Products).

URUGUAY ROUND
Launched in 1986 to address the problems of
GATT
Major reforms introduced:

WTO
A

established,

new dispute resolution mechanism built up,

GATTs

authority expanded to new areas, agreements

regarding trade in textiles, agriculture, services, and
intellectual property,

New

set of rules regarding administered protection

came into effect.

FUNDAMENTAL PRNCPLES OF
THE GATT/WTO SYSTEM

RECIPROCITY: A practice that occurs in GATT

negotiating rounds, whereby one country offers to
reduce a barrier to trade and a second country
reciprocates by offering to reduce one of its own
trade barriers.
The

practice of swapping tariff concessions, facilitates

the reduction of trade barriers.

NONDISCRIMINATION: (Equal treatment) If

one GATT member offers a benefit or a tariff
concession to another GATT member, it must
offer the same tariff reduction to all GATT
members.

NONDISCRIMINATION -1

Most Favoured Nation Treatment: Grant someone a

special favour, then have to do the same for all other
WTO members. Each member treats all the other
members as most favoured trading partners.
National Treatment: Imported or locally-produced
goods should be treated equally at least after the
foreign goods have entered the market.
Freer Trade: Lowering trade barriers, gradually and
through negotiation. Trade barriers concerned include
customs duties and measures such as import bans or
quotas, red tape, and exchange rate policies.

NONDISCRIMINATION -2

Predictability through binding and transparency:

Once lowered, promising not to raise trade barriers gives
businesses a clearer view of their future opportunities.
With stability and predictability, investment is encouraged,
jobs are created, and consumers can fully enjoy the benefits
of competition (variety, and lower prices).
Percentages of Tariffs Bound Before and After the 1986
1994 Talks
Before

After

Developed Countries

78

99

Developing Countries

21

73

Transition Economies

73

98

A QUESTON

Why is reciprocity important in reducing barriers

to trade? Dont countries benefit by unilaterally
reducing their tariffs because lower tariffs lead to
lower domestic prices?
Theories of International Economics tell us that,
it depends on the size of the country:
If

the country is small, captures all the benefits from

trade => no need for reciprocity

IMPACT OF A TARFF ON A SMALL

COUNTRY

Import tariffs=Tax
Raise the price that
consumers pay for a
good,
Provide tax revenue to
the government
Potential to create
inefficiencies in
consumption and
production decisions,
Very small country will
benefit by unilaterally
lowering its tariffs,

Because very small

countries are unable to
affect the world prices

IMPACT OF A TARFF ON A LARGE

COUNTRY

Reciprocity becomes important when large countries are changing

their trading policies,

If a tariff is imposed

Because import demand will comprise largeshare of world wide demand,

prices are affected
Quantity of Imports demanded will decrease
Wold Price falls
Terms of Trade Improves
Cost of tariff is pushed on to foreign producers
Country is better off

Consumers pay higher prices, but govt collect revenue, and import
competing producers earn higher revenue

The use of tariff policy by the large country

Beggar-thy-neighbour

policy

Importing

Country better off

Exporting

Country worse off

Inefficiencies

in the world trading system

Level of production becomes too high in importing country,

and level of production becomes too low in exporting
country

T-O-T DRVEN PRSONERS

DLEMMA

Two situations:

Two parties can improve

their situations by acting
cooperatively,
However, indivudual
incentives they face lead
them to act noncooperatively.

The problem facing the

countries at the end of
WWII was that they knew
they would collectively be
better off under free trade.
Though each country
benefited from its own
import tariff, it also suffered
at the hand of its trading
partners import tariffs.

GATT MECHANISM

A mechanism was needed by which countries could

jointly commit to tariff reductions that would reduce
the losses due to production and consumption
distortions, and through gains in efficiency, make all
countries, better off.
Practice of reciprocal tariff reductions provided the
necessary mechanism for countries to commit to freer
trade
In all countries, the reallocation of labour and capital
away from protected import competing firms and
toward export sectors would generate real efficiency
gains => Export Oriented Growth Strategy !

POWER OF NON DSCRMNATON

Convenience and practicality,

Setting the same tariff policy on imports from all countries
ensures that resources are allocated to their most productive
use,
On the import side, nondiscrimination ensures that countries
purchase imports from the lowest-cost source country, (trade
diversion is prevented)
Prevents re-reouting in order to circumvent high tariffs, in
which exporter ships its goods to a third country repackages it,
and then ships it to a final destination where it will qualify for
the third countrys preferential tariff, sometimes substantial
transformation becomes necessary that leads the firm to move
a stage of production to the third country,
On export side, nondiscrimination protects exporting countries
from bilateral opportunism. If one country were later to offer
a lower tariff rate to a third country, this could erode the value of
the original tariff concession to the first trading partner.

EXCEPTONS TO GATTS
NONDSCRMNATON PRNCPLE

Regional Trade Agreements

Free

Trade Agreements
Customs Unions

Administered Protection
Special

Tariffs that can be used for particular

purposes
Safeguards,
Anti-Damping Duties
Countervailing Duties

REGONAL TRADE AGREEMENTS

Free Trade Area: Members maintain their

original external tariff with the rest of the world,
but engage in free trade with one another.
Customs Union: All members set the same
external tariff for imports from non-members and
eliminate the tariffs from members.
When

GATT members form a CU, CET can be no

higher than a weighted average of the tariffs of the
members countries before the CU was formed.

TRADE CREATON VS. TRADE

DVERSON

Is it controversial that GATT members form a regional

trade agreement?

Trade Creation vs Trade Diversion

Reduction of tariffs among RTA members leads to

trade creation,
But may also create a diversion of trade away from a
non RTA country to a RTA member,

If the non RTA country is the lowest cost producer, there

may be no worldwide efficiency gains

Argument: Since the Tariff Preference (the difference

btw. the tariff for RTA members and others), is very
small it cannot impose huge trade diversion.
Tariff preference associated with anti-damping duties
create substantial trade deflection effect (exports
are diverted to countries with lower import tariffs)

ADMNSTERED TRADE
PROTECTON

Administered Protection refers to trade

restrictions that provide protection from imports
above and beyond the protection afforded by the tariffs
that were negotiated as part of GATT.
Deviation from GATTs principle of nondiscrimination:
Permits;

Anti-Damping Duties,
Countervailing Duties,
Safeguard Measures, and
Tariffs to assist with BoP problems. VERs are no longer allowed.

PRO ARGUMENTS:

Temporary Tariff that are usually discriminatory

was allowed for a variety of reasons:
Administered

Protection improves worldwide welfare.

Protection may make some countries better off, some
worse off, but if we add up gains and losses, the sum
total is positive,

Administered

Protection improves the welfare of

politically powerful importing countries, and,
especially, their import competing sectors. Some
group profits from the use of administered protection.
Eventhough protection may reduce worldwide
welfare, those who benefit are politically powerful
enough to see that it remains within the agreement.

SAFEGUARDS

A safeguard measure is a temporary tariff or quota

that is used to protect a domestic industry from fair
foreign competition,
In 1940s, US govt insisted that a safeguard provision
be part of every trade treaty that it signed,
To encourage countries to make greater concessions,
GATT included two provisions under which countries
could reintroduce protective trade policies,

Article XIX Safeguard Provision, Countries remained free

to temporarily raise a tariff above the maximum level or
introduce a temporary quantitative restriction
Article XXVIII: allows to permanantly raise tariffs

SAFEGUARDS - RULES

Measures should be nondiscriminatory,

Eg. US Global Steel Safeguard raised the import tariff on

steel for many countries, but granted exemptions for steel
imports from many of free trade partners, such as Canada,
Mexico,.. => Violation of GATT rules!

Safeguards should only be used when imports

increase unexpectedly, or as a result of unforeseen
developments,

If a country imposed a safeguard on a product its

trading partners that were hurt by the safeguard
could retaliate with their own tariff increases on other
products => Uruguay Round Reforms: No retaliation
for the first three years.
Safeguards may provide an incentive for protected
firms to innovate quickly, if the cost of new technology
is falling

ANT-DAMPNG DUTES

Anti-Damping Duty is a tariff that an importing

country imposes on imports of a product that have
been dumped into its domestic market by some
exporting countrys firms

Evidence that foreign firms sold their products at less than

normal value and this has injured the domestic industry.

Anti-Damping Code: Allows countries to violate

nondiscrimination rule and impose an additional
tariff on imports from a firm that is dumping. Allows
price undertakings,

Predatory Dumping
Sporadic Dumping
Persistent Dumping

COUNTERVALNG DUTES

Tariffs used to offset the effects of a foreign

governments subsidy, are similar to antidumping duties,
In markets that are imperfectly competitive, a
foreign governments subsidy can reduce the
welfare of an importing country,
Consumers in importing country benefit from the
subsidy, but the losses to the firms in the
importing country outweigh the benefits to the
consumers.

POST II. W.W. INTERNATONAL

FACTORS

U.S. led institutional multilateralism,

Bretton

Woods,
Establishment of Twin Institutions, and GATT.

Marshall Plan: imposed economic policies on

developing countries,
Cold War and U.S., Western European
Cooperation against USSR,

MARSHALL PLAN

On June 5, 1947, speaking to the

graduating class at Harvard
University, Secretary of State
George C. Marshall laid the
foundation, in the aftermath of
World War II, for a U.S. program
of assistance to the countries of
Europe. At a time when great
cities lay in ruins and national
economies were devastated,
Marshall called on America to "do
whatever it is able to do to assist
in the return of normal economic
health in the world, without
which there can be no political
stability and no assured peace."

MARSHALL PLAN
The official mission statement: To
give a boost to the Europe economy,
to promote European production, to
bolster European currency, and to
facilitate international trade,
especially with the United States,
whose economic interest required
Europe to become wealthy enough to
import U.S. goods.
Unofficial goal: The containment of
growing Soviet influence in Europe,
evident especially in the growing
strength of communist parties in
Czechoslovakia, France, and Italy.

MARSHALL PLAN

The first substantial aid went to Greece and

Turkey in January 1947, which were seen as
being on the front lines of the battle against
communist expansion and were already being
aided under the Truman Doctrine.

MARSHALL PLAN

In 1949, in response to a
request from Turkish officials
for American technical
assistance and training, an
American expert discusses
newly donated agricultural
equipment with Turkish
farmers at the Ankara
Agricultural School. (Courtesy of
the George C. Marshall Research
Library, Lexington, Virginia)

MARSHALL PLAN

Conditions laid down to make use of the plan:

Public

entrepreneurship should be constricted

Private entrepreneurship should be encouraged
Heavy industry (iron-steel, heavy chemical etc.)
should not be established in Turkey.
Industrialization must be based on processed
agricultural products, construction materials, leather,
forest products etc.
Increased tractor usage and highway construction.

POST WW IMPLEMENTED POLCES

(1947 1950)

1948 Economic Congress:

Businessmen,

and Professors gathered to determine

necessary conditions for rapid development,
From Etatism towards a more international economy,

Foreign Aid through Marshall Plan, and

prospects of trade and foreign investment,
Integration to the International Economic
System,
Turkey

became member to, ILO in 1945, IBRD and

IMF in 1947, and IFC (1956) and IDA (1960), GATT
and OECD (1961), BIS (1964)