Gatt

GATT
◦ Source: Article by KIMBERLY AMADEO, ERIC ESTEVEZ

◦ Only for class room teaching
History
◦ The GATT grew out of the Bretton Woods Agreement. The summit at Bretton Woods
also created the World Bank and the International Monetary Fund to coordinate
global growth.
◦ The summit almost led to a third organization. It was to be the highly ambitious
International Trade Organization (ITO). The 50 countries that started negotiations
wanted it to be an agency within the United Nations that would create rules, not
just on trade, but also employment, commodity agreements, business practices,
foreign direct investment, and services. The ITO charter was agreed to in March
1948, but the U.S. Congress and some other countries' legislatures refused to ratify
it. In 1950, the Truman Administration declared defeat, ending the ITO.
History
◦ At the same time, 15 countries focused on negotiating a simple trade agreement.

They agreed on eliminating trade restrictions affecting $10 billion of trade or a fifth
of the world’s total. A total of 23 countries signed the GATT deal on October 30,
1947, clearing the way for it to take effect on June 30, 1948.
◦ Unlike the ITO charter, the GATT didn’t require the approval of Congress. That's
because, technically, the GATT was an agreement under the provisions of the U.S.
Reciprocal Trade Act of 1934.
◦ The details of the GATT were tweaked in the decades that followed its creation. The
main goal of continued negotiations was to further reduce tariffs. In the mid-1960s,
the Kennedy round added an Anti-Dumping Agreement.8 The Tokyo round in the
'70s improved other aspects of trade. The Uruguay round lasted from 1986 to 1994
and created the World Trade Organization.
GATT
◦The General Agreement on Tariffs and Trade (GATT) was the first
multilateral free trade agreement. It first took effect in 1948 as
an agreement between 23 countries, and it remained in effect
until 1995—at which point its membership had grown to 128
countries.
◦It was replaced by the World Trade Organization.
GATT
◦The General Agreement on Tariffs and Trade was a

free trade agreement that eliminated tariffs and increased
international trade.
◦ The purpose of the GATT was to eliminate harmful
trade protectionism.
◦Trade protectionism likely contributed to the 66% reduction of global
trade during the Great Depression.3
◦The GATT helped restore economic health to the world after the
devastation of the Depression and World War II.
How Did the GATT Work?
◦The GATT had three main provisions.
◦The most important requirement was that each member must
confer most favored nation status to every other member. All
members must be treated equally when it comes to tariffs. It
excluded the special tariffs among members of the British
Commonwealth and customs unions. It permitted tariffs if their
removal would cause serious injury to domestic producers.
◦Second, the GATT prohibited restrictions on the number of
imports and exports. The exceptions were:
◦When a government had a surplus of agricultural products
◦If a country needed to protect its balance of payments
because its foreign exchange reserves were low
◦Emerging market countries that needed to protect fledgling
industries
◦In addition, countries could restrict trade for reasons of
national security. These included protecting patents,
copyrights, and public morals.
◦The third provision was added in 1965, addressing developing
countries joining the GATT.4
◦Developed countries agreed to eliminate tariffs on imports
from developing countries to boost those economies.
◦Lower tariffs had benefits for developed countries, as well. As
the GATT increased middle-class consumers throughout the
world, there was an increased demand for trade with
developed countries.
Member Countries
◦The original 23 GATT members were Australia, Belgium, Brazil,
Burma (now Myanmar), Canada, Ceylon (now Sri Lanka),
Chile, China, Cuba, Czechoslovakia (now the Czech Republic
and Slovakia), France, India, Lebanon, Luxembourg,
Netherlands, New Zealand, Norway, Pakistan, Southern
Rhodesia (now Zimbabwe), Syria, South Africa, the United
Kingdom, and the United States.5 The membership increased
to 128 countries by 1994.
GATT vs. WTO
GATT vs. WTO
GATT WTO
Paved the way for the WTO Took over in place of GATT
A component of the WTO Enforces aspects of GATT
The GATT lives on as the foundation of the WTO. The 1947 agreement itself is defunct. 9 But,
its provisions were incorporated into the GATT 1994 agreement. That was designed to keep
the trade agreements going while the WTO was being set up. Therefore, the GATT 1994 is
itself a component of the WTO Agreement.
Pros
o Encourages international trade
The GATT reduced tariffs, which boosted trade between countries. As countries
traded more freely with each other, more countries saw the benefits of free trade and
wanted to join the agreement. By the time the GATT was replaced by the WTO, more
than 100 countries had joined the original 23 signatories.
◦ Reduces the likelihood of war
By increasing trade, the GATT promoted world peace. It set the stage for the
European Union. Despite the EU's problems, it has helped to prevent wars between
its members. The general idea is that, if your economy depends on trade with a
country, then you're less likely to go to war with that county. The more countries
trade with each other, the less likely war becomes.
◦ Improves communication
In addition to reducing the chances of war, the GATT provided incentives for countries
to better communicate with one another. Even average citizens are more likely to
learn a foreign language these days since it allows them to access larger consumer
markets than they have domestically. For instance, many people learn English, the
language of the world's largest consumer market, which allows them to work for
call centers for companies based in English-language countries.
Cons
◦ Domestic industries may struggle to compete

Low tariffs destroy some domestic industries, contributing to high unemployment in
those sectors. Governments with more money or policy power can manipulate
industries for their benefit more than smaller countries. A rich country can spend
money subsidizing industries to make them more competitive on a global scale.
Another example comes from the Nixon Administration. When it took the U.S. dollar
off the gold standard in 1973, it lowered the value of the dollar compared to other
currencies. That further lowered the international price of U.S. exports.10 Other
countries didn't have the same tools to make their exports more competitive.
Cons
◦ Exposes more of the world to risks within a given domestic industry

By the 1980s, the nature of world trade had changed. The GATT did not address the
trade of services that allowed them to grow beyond a single country's ability to
manage them. For example, financial services became globalized. Foreign direct
investment had become more important. As a result, when U.S. investment bank
Lehman Brothers collapsed, it threatened the entire global economy.
Central banks scrambled to work together to address the 2008 financial crisis.11 They
were forced to provide liquidity for frozen credit markets.
Cons
◦ Governments cede some level of control to an international agreement

Like other free trade agreements, the GATT reduced the rights of a nation to rule its
own people. The agreement required them to change domestic laws to gain trade
benefits. For example, India had allowed companies to create generic versions of
drugs without paying a license fee. This helped more people afford medicine.
However, since other countries had stricter requirements, this also led to disputes
with other GATT countries.

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GATT

◦ Source: Article by KIMBERLY AMADEO, ERIC ESTEVEZ

◦ At the same time, 15 countries focused on negotiating a simple trade agreement.

◦The General Agreement on Tariffs and Trade was a

◦ Domestic industries may struggle to compete

◦ Exposes more of the world to risks within a given domestic industry

◦ Governments cede some level of control to an international agreement

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