General Agreements on Tariffs and Trade

Toward the end of World War II, representatives of the US and its Allied Forces endeavored to work out the arrangements for the post war era. As a result of these negotiations, after World War II three important international measures were undertaken by the US and its Allies to liberalize trade and payment.

• International Monetary Fund (IMF) was established to facilitate international payments.
• After the War, European countries and Japan had to rebuild their production plants; this meant that these countries required a large amount of foreign capital. To encourage free flow of private capital, International Bank for Reconstruction and Development (IBRD, now the World Bank) was also established.
• To facilitate free trade, ITO was to be born.

GATT was the result of an international conference held at Geneva in 1947 to consider a draft charter for the International Trade Organization (ITO). The US initiated negotiations with 22 other countries that led to commitments to regulate 45,000 tariff rates.

Technically, GATT was viewed as an agreement under the provisions of US Reciprocal Trade Act of 1934, and hence did not require approval of Congress. It was considered a provisional agreement that would be replaced once the ITO became operational to take over its functions.

So GATT began its provisional existence on January 1, 1948, when 23 contracting parties signed the agreement. However, US Congress refused in 1950 to ratify the treaty establishing the ITO.

Major Provisions of GATT

1. Tariff: GATT obligates each country to accord nondiscriminatory, most favored nation (MFN) treatment to all other contracting parties with respect to tariffs. MFN treatment does not mean free trade or national treatment. Imports from contracting parties are subject to tariffs or quotas. MFN treatment means that no other countries with some exceptions receive better treatment or lower tariffs.

   Exceptions:

   • Existing tariff preferences such as those between British Commonwealth.
   • GATT/WTO allows the formation of customs union, which causes a significant erosion of the MFN principle.
   • An escape clause allows any contracting party to withdraw or modify tariff concessions, if it threatens a serious injury to domestic producers.
   
   
2. Quantitative Restrictions: GATT in general prohibits the use of quantitative restrictions on imports and exports.

   Exceptions:

   • agriculture - when government needs to remove surplus of agricultural and fisheries products. Important to US
   • balance of payments - to safeguard balance of payments. If a country's foreign exchange reserve is low.
   • Developing countries - LDCs may use import quotas to encourage infant industries.
   • National Security- Strategic controls on certain exports.
   • Patents, Copyrights, Public Morals
   
   
3. Special Provisions to promote the Trade of Developing Countries. In 1965, the contracting parties added Part IV (Trade and Development) to GATT.
   • GATT gives high priority to reduction/elimination of tariffs on products of LDCs.
   • refrain from introducing tariffs and NTBs to such imports.
   • refrain from imposing internal taxes to discourage consumption of primary products from LDCs
   • not expect reciprocal commitments from LDCs.
   
   
4. Other Provisions
   • provisions to eliminate concealed protection such as customs valuation. For example, American Selling Price valuation. By ASP, an ad valorem tariff is imposed on the domestic price.
   • procedural matters: each member is entitled to one vote, decisions are made by majority vote. 2/3 majority is required to waive obligations. settlements of disputes.

Problems of GATT

Accomplishments

• trade liberalization in industrial products (Kennedy Round)
• Adopted codes on NTBs (Tokyo Round)
• No world wars since 1948 (Choi: Increased trade promotes world peace)

Problems

• failed to liberalize trade in agricultural products to any significant degree. This was one of the major goals of the Uruguay Round.
• has experienced partial success in regulating trade practices adopted by member countries in response to BP difficulties.

  For example, in 1971 the US imposed a 10% surcharge on its imports, thereby doubling its average duties.

• steady erosion of MFN principle by the EC. Article 24 permits member countries to form a CU or 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.
• has condoned managed trade for textiles, largely because of pressure from the US, and automobiles (VERs)
• GATT was an executive agreement under the Protocol of Provisional Application. It was only a gentlemen's agreement with no teeth, no enforcement power to discipline parties that violate the rules. Moreover, contracting parties are not obligated to observe rules that are inconsistent with their domestic laws at the time of entry into GATT. Many countries sidestep or bypass the rules by narrowly defining commodities for tariff purposes.
• Example (of sidestepping): German Tariff Law of 1902 (Franklin Root, International Economics, various years)

  This stipulated a separate duty for "brown or dappled cows reared at a level of at least 300 meters above sea level and passing at least one month in every summer at an altitude of at least 800 meters."

  This was intended to isolate the duties on Swiss cattle from MFN treatment by defining a distinct commodity.

Trade and Diminishing National Sovereignty

A country is presumed to have full sovereignty over its citizens within its territory. Any foreign governments or entities that say any negative things on domestic regulations or problems have been criticized for meddling with internal or domestic politics. This was so at least until GATT was formed in 1948, and GATT was transformed into WTO in January 1995.

Members of WTO are agreeing to abide by the rules of WTO, and hence allowing WTO to monitor domestic laws that may be in conflict with trade rules set by the WTO. Similarly, members of International Monetary Fund also allow the Fund’s surveillance of their exchange rate practices. Thus, increased trade is gained only through reduced national sovereignty. Gains from trade often forces member countries to sacrifice some national sovereignty.

For example, India’s patent laws allowed counterfeit copies of drugs without requiring license fees, which made Indian drugs available at low cost to the mass. Now India overturned its Patent Laws for all medicines invented since 1995. This shows India’s attempt to make their internal laws consistent with the rules of WTO.

Members of EU took steps to deepen integration of European countries. Negative French referendum is evidence of discomfort arising from speedy integration and the loss of national control of French sovereignty which results from these efforts to unite European countries.

WTO not only governs trade of goods, but also services and foreign direct investment. Similarly, IMF monitors exchange practices that harm other member countries. Increased trade will continually exert its pressure to harmonize disparate domestic laws on the movement of goods, services and people. This inexorable process, in my opinion, will continue until nations have formed one world government that not only regulates trade, investment, and the movement of people but also harmonizes all aspects of human rights in the world economy.

Trading countries are mutually interlocked and their economies are so intertwined that it becomes increasingly difficult for one member country to wage war against others. Global peace can be guaranteed only after one world government is established much as the presence of the Federal government eliminates civil war in the United States. WTO, IMF and the United Nations may prove to be just stepping stones that lead to one world goverment that may be formed by the end of this century. Most likely, citizens of trading nations will speak one common international language and their own national languages.

China and the GATT/WTO

• China was one of the 23 founding members of GATT. became a contracting party on May 21, 1948.
• The Kuomintang Government moved to Taiwan and withdrew from the GATT, May 5, 1950.
• In 1982, China was granted observer status in GATT.
• In June 1986, China requested "resumption" of its contracting party status, on the basis that the withdrawal (by the Kuomintang) was null and void.
• In May 1987, the GATT established the Working Party on China's Status
• China became a member of WTO in December 2001.