General Agreement On Tariffs And Trade (Gatt)

Published Oct 25, 2023

Definition of General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) is an international treaty that aims to promote free trade by reducing barriers such as tariffs (taxes on imports) and quotas (limits on the quantity of imports). It was established in 1947 and served as the foundation for the World Trade Organization (WTO) when it was created in 1995.

Example

To provide an example of how GATT works, imagine two countries, Country A and Country B, that want to engage in international trade. Country A produces cars and has a comparative advantage in car manufacturing, while Country B produces computers and has a comparative advantage in computer manufacturing.

Under GATT, both countries agree to reduce their tariffs on cars and computers. This reduction in trade barriers allows country A to export more cars to country B and country B to export more computers to country A. As a result, both countries can benefit from specializing in the production of the good in which they have a comparative advantage and trading with each other.

By promoting free trade and reducing trade barriers, GATT aims to create a more efficient allocation of resources, increase economic growth, and provide consumers with access to a wider variety of goods at lower prices.

Why General Agreement on Tariffs and Trade (GATT) Matters

GATT has played a crucial role in fostering global trade and economic cooperation. By providing a framework for negotiations and trade liberalization, GATT has helped reduce trade barriers and increase market access for countries around the world.

The principles of GATT, such as non-discrimination and the most-favored-nation treatment, have been instrumental in promoting fair trade practices and ensuring that countries do not discriminate against each other in terms of trade policies.

GATT’s successor, the WTO, continues to build on the foundation laid by GATT and works towards further liberalizing global trade. The agreements and commitments made under GATT and the WTO have facilitated the growth of international trade and contributed to the economic development of many countries.