General Agreement On Tariffs And Trade

Published Apr 29, 2024

Definition of General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) was established in 1948 as a multi-national treaty to encourage international trade by reducing or eliminating trade barriers such as tariffs or quotas. GATT played a pivotal role in the post-World War II economic recovery by laying down a foundation for international trade negotiations, creating a forum for trade disputes resolution, and ensuring a level playing field for its member countries. In 1995, GATT was replaced by the World Trade Organization (WTO), which continues its mission with broader authority, including trade in services and intellectual property.

Example

Consider a scenario where two countries, Country A and Country B, are both members of GATT. Country A is a major producer of wheat, while Country B specializes in manufacturing automobiles. Before GATT, both countries imposed high tariffs on each other’s exports, making the wheat expensive for consumers in Country B and the automobiles costly for buyers in Country A. After joining GATT, both countries agreed to significantly reduce these tariffs. As a result, Country A’s wheat became more affordable in Country B, boosting sales and benefits for Country A’s agricultural sector. Similarly, Country B’s automobiles found a larger market in Country A, enhancing its automotive industry. This trade liberalization led to increased efficiency, lowered consumer prices, and strengthened economic ties between the two countries.

Why General Agreement on Tariffs and Trade Matters

GATT has been critical in promoting international trade, which in turn has contributed to global economic growth, job creation, and the availability of a wider range of products for consumers. By reducing the barriers to trade, GATT has helped to increase the flow of goods and services between its member countries, making it easier and cheaper to import and export products. This not only boosts the economies of member countries but also enhances the global economy by making it more interconnected and interdependent. A strong international trade network, facilitated by agreements like GATT, helps to stabilize economies, reduce the likelihood of conflicts, and promote global economic justice by offering developing countries opportunities to grow through trade.

Frequently Asked Questions (FAQ)

What are the principles that guided GATT?

GATT was guided by several key principles designed to facilitate free trade across national borders. These include non-discrimination, which enforced the most favored nation (MFN) principle ensuring that any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be extended to all GATT signatories. Another principle was transparency, requiring member countries to publish their trade regulations. Protection was to be afforded through customs tariffs only, avoiding the use of quantitative restrictions. Finally, it encouraged negotiation and consultation to resolve trade disputes among member countries.

How did GATT evolve into the WTO?

After several rounds of negotiations aimed at reducing tariffs and addressing new challenges in international trade, it became evident that a more comprehensive system was needed to manage the evolving complexity and scope of global trade. The Uruguay Round, which took place from 1986 to 1994, was the last and most extensive of GATT rounds. It led to the Marrakesh Agreement, which established the WTO in 1995. The WTO inherited the principles and agreements of GATT but with a broader mandate, including not just goods but also trade in services, intellectual property rights, and dispute resolution mechanisms.

What impact did GATT have on global trade?

GATT significantly impacted global trade by systematically reducing tariffs and other trade barriers, which increased trade flows worldwide. By providing a stable and predictable environment for international commerce, GATT contributed to a period of unprecedented economic growth and development across its member nations. Moreover, the establishment of a set of agreed rules for international trade helped reduce the risk of trade wars and promoted peaceful economic cooperation between countries. This regulatory framework encouraged investment, innovation, and economic expansion on a global scale, benefitting countries at all levels of development.