2. A BRIEF HISTORY 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
3. TIMELINE 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
4. TIMELINE 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.
5. 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 trade-
weighted 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.
6. 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…
A number of commodities (agricultural products and
textiles) were widely exempt from GATT disciplines.
Certain forms of administered trade protection (anti-
dumping duties, VERs, counterveiling duties) were
restricting trade and distorting trade patterns in many
important sectors.
7. 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
8. 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).
9. URUGUAY ROUND
Launched in 1986 to address the problems of GATT
Major reforms introduced:
WTO established,
A new dispute resolution mechanism built up,
GATT’s 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.
10. FUNDAMENTAL PRINCIPLES 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.
11. 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.
12. 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
13. A QUESTION
Why is reciprocity important in reducing barriers to
trade? Don’t 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
14. IMPACT OF A TARIFF 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
15. IMPACT OF A TARIFF ON A LARGE COUNTRY
Reciprocity becomes important when large countries are changing
their trading policies,
Because import demand will comprise largeshare of world wide demand, prices
are affected
If a tariff is imposed
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 gov’t collect revenue, and import
competing producers earn higher revenue
16. 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
17. 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 !
18. POWER OF NON DISCRIMINATION
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
country’s 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.
19. EXCEPTIONS TO GATT’S NONDISCRIMINATION
PRINCIPLE
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
20. REGIONAL 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.
21. TRADE CREATION VS. TRADE DIVERSION
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)
22. ADMINISTERED TRADE PROTECTION
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 GATT’s principle of nondiscrimination:
Permits;
Anti-Damping Duties,
Countervailing Duties,
Safeguard Measures, and
Tariffs to assist with BoP problems. VERs are no longer allowed.
23. 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.
24. 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 gov’t 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
25. 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
26. ANTI-DAMPING DUTIES
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 country’s
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
27. COUNTERVAILING DUTIES
Tariffs used to offset the effects of a foreign
government’s subsidy, are similar to anti-dumping
duties,
In markets that are imperfectly competitive, a
foreign government’s subsidy can reduce the
welfare of an importing country,
Consumers in importing country benefit from the
subsidy, but the losses to the firm’s in the importing
country outweigh the benefits to the consumers.
28. POST II. W.W. INTERNATIONAL 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,
29. 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."
30. 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.
31. 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.
32. 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)
33. 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.
