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GATT (General Agreement on Tariffs and Trade)

Updated on May 29, 2013

After World War II After World War II, the allies, most notably the United States, wanted the major nations, of the world to recover from the effect of the war as fast as possible. To ensure this, the following three major steps were made, their main purpose being were to liberalize international trade and payment.

  • Plans for a cross national system-, and standard of payment were instituted. To ensure the proper functioning of such a standard a financial organisation was created, called the International Monetary Fund, commonly abbreviated as the IMF.
  • As a result of the War, European countries and Japan had their infrastructure devastarted. These countries were in desperate need of additional investments and capital to rebuild their factories and production plants. To ensure the free flow of capital, the International Bank for Reconstruction and Development (abbreviated as IBRD, now called World Bank) was established.
  • Free trade was to be overseen by the International Trade Organization, abbreviated as  ITO, which was also born during this time.

The General Agreement on Trade and Tariffs (abbreviated as GATT) as drawn up and agreed to during an international  conference at Geneva, Switzerland, which was held in 1947. GATT served as the draft charter for the ITO. The US started negotiations with 22 countries, resulting in the by these countries to the regulation of  45,000 tariff rates.

GATT was officially launched on January 1, 1948, by the signature of 23 contracting parties. The United States Congress, however, in 1950 did not ratify GATT, which was to establish the ITO.


Major GATT Provisions

Tariffs

All signing parties of GATT were obligated to utilise a non-discriminatory, most favoured nation treatment (MFN) to all other contracting parties regarding tariffs.

Exceptions

  • Existing tariffs. One example for this was between those of the British Commonwealth (these were nations formerly under colonialist rule).
  • In the event of a threat of serious damage to domestic producers of a GATT country, GATT provided an escape clause to that contracting party.

Quantitative Restrictions

GATT generally prohibits quantitative import and export restrictions.

Exceptions

  • Agriculture - when a government needs to remove surplus of agricultural-, and fisheries products. An example for this is the US.
  • Balance of payments – ensuring the balance of payments. Important when the foreign exchange reserve of a country is low.
  • Developing countries – LDCs are allowed the use of import quotas to protect and develop their infant industries.
  • National Security – Certain export products need strategic controls.
  • Patents, Copyrights, Public Morals.

Special Provisions to enhance the development of the Trade of Developing Countries

As of 1965, the contracting parties added Part IV (Trade and Development) to the Agreement.

  • GATT gives high priority to reduction/elimination of tariffs on products of LDCs.
  • To refrain from introducing tariffs and NTBs to such imports.
  • To refrain from imposing internal taxes to discourage consumption of primary products from LDCs.
  • Not expecting reciprocal commitments from LDCs.

Other Provisions

  • Provisions eliminating concealed protection such as customs valuation. For Example, American Selling Price valuation. By ASP, and ad valorem tariff is imposed on the domestic price.
  • Procedure issues: each member is entitled to a single vote, decisions are made by majority vote (over 50% wins). 2/3 (75%) majority is required to waive obligations. Settlements of disputes.

Over 100 countries are now GATT contractors. These countries are responsible for about 95-90% of world trade.

Accomplishments of GATT

  • No major, worldwide wars have been incured since 1948 (Choi: Increased trade promotes world peace, as members are financially interested in peace).
  • Establishment of the World Trade Organization (WTO) at the Uruguay  Round.

Problems with GATT

  • GATT has failed in significantly liberalizing trade of agricultural products. This was one of the major goals at the Uruguay Round.
  • It has been partially successful in the regulation of trade practices adopted by member countries in response to BP difficulties. For example, the United States in 1971 imposed a 10% additional charge on its imports, thereby doubling its average duties.
  • Steady erosion of the MFN principle by the EC. Article 24 permits member countries to form a CU or a FTA. The EC adopted VILs to keep out agricultural products, lowered duties to many African and Mediterranean countries, which are not extended to other GATT contracting parties.
  • GATT condoned managed trade for textiles, largely due to US pressure, and automobiles (VERs).
  • GATT is an executive agreement under the Protocol of Provisional Application. What this means is that the contracting parties are not obligated to abide by those rules that were inconsistent with their domestic laws at the time of entry of the contracting party into GATT. Many countries bypass or sidestep rules and provisions by deliberately narrowly defining commodities because of tariff purposes.

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    • profile image

      Howard Schneider 

      5 years ago from Parsippany, New Jersey

      Excellent informational Hub, Csanad.

    • dilipchandra12 profile image

      Dilip Chandra 

      8 years ago from India

      very informative hub..

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