General Agreement on Tariffs and Trade (Gatt)

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

Prior to World War I (1914–18), world trade flourished and international monetary relations were healthy. After 1860 a network of bilateral treaties based on most-favored-nation principals (MFN) governed trade relationships. Nations had flexibility to set and revise tariffs as long as they (tariffs) were consistent with MFN ideals. (A tariff is a special tax applied to imports to protect a domestic market from a competing foreign products or sometimes simply to raise revenue for the government.) Tariffs increase the costs of imports by foreign competitors or by a company domiciled in the U.S. but which exports from another country, thus making it more difficult for the company to be competitive. Besides tariffs, few other trade barriers existed during this early period.

World War I severely undermined existing trade networks as countries charged higher tariffs and introduced import quotas and other controls. These trade barriers persisted after the war, because there was no central authority to reestablish prior order to world trade. Trade reform was an international focus until the Great Depression (1929–1939) struck in 1929. The 1930s witnessed greater protectionism measures, discriminatory trade practices, and other trade actions that impeded international commerce. As a result, during the 1930s world trade stagnated, not keeping pace with increased economic production. Another complicating factor was that the Peace Treaty of Versailles that ended the First World War allowed the Allies (especially France and Great Britain) to receive huge payments of war reparations from Germany. The final amount of reparations, established in 1921, was $56 billion. These reparations cut into the financial resources of central Europe. In addition, the erection of protective tariffs, hobbled Europe's economic recovery, perpetuated poverty, and probably contributed to the rise of fascist nationalistic movements in Italy and Germany during the 1920s and 1930s.

To insure that the World War I precedent of war reparations and protectionism was not renewed at the end of World War II (1939–1945), the United States and Great Britain immediately took steps to arrive at international cooperation among the non-socialist economies of post-war Europe. Rather than further drain Europe's devastated economies, the United States injected much needed economic assistance in the form of the Marshall Plan, which was an attempt to help reconstruct Europe in order to neutralize the considerable political appeal of socialist and communist parties after the war. As part of the economic program for the Western Allies after World War II, trade barriers were reduced and discriminatory tariff preferences were eliminated wherever possible.

It was in this political and economic climate that the General Agreement on Tariffs and Trade (GATT) resulted from a 1947 meeting of 22 nations (representing 80 percent of world trade) in Geneva, Switzerland. GATT, a specialized agency of the United Nations, comprised a system of international obligations to limit tariffs on particular items consistent with a set schedule. GATT's primary goal was to raise living standards and seek full employment by establishing mutually beneficial trade arrangements. GATT sought to reduce or eliminate tariffs and prohibit other trade controls such as import quotas.

Thus, unlike post–World War I experiences, the world economy following World War II witnessed expanding international commerce with lowered trade barriers. The extent to which GATT contributed to the economic success was a subject of debate. Many believed the organization's successes at periodically reducing trade barriers had greater influence on the post–World War II economic boom than other institutions including the World Bank and the International Monetary Fund. With the United States taking the lead, tariffs of industrialized countries fell from approximately 40 percent immediately following World War II to about five percent in the mid-1990s.

The history of GATT was marked by a series of eight negotiating rounds aimed at steadily reducing trade barriers. Some rounds took years to reach signed agreement. The first five rounds, occurring in 1947–1962, expanded membership but they did little to further tariff reduction or eliminate import quotas. Trade reform and, correspondingly, post-war economic recovery were slow through the 1950s. The sixth round, known as the Kennedy Round, lasted from 1962–1967, producing the most substantial tariff reductions of the post-war period. The following Tokyo Round of 1973–1979 added more reductions, and it also developed a code of conduct and made progress on other barrier restrictions.

The eighth series of negotiations, the Uruguay Round, led to more than 20 separate agreements in 1994. The 124 participating nations made substantial progress in several areas. Notably, the 47-year-old GATT organization was replaced by the newly created World Trade Organization (WTO). Unlike GATT, WTO was provided international dispute resolution authority. The participants established more stringent rules on investment and trade in service industries. (Service includes engineering, tourism, accounting, and construction industries.)

The WTO recognized intellectual property rights: trademarks received seven years of protection, patents 20 years, and copyrights 50 years. Inclusion of such property rights was a major benefit to U.S. software industry. It protected books, computer software, film, and pharmaceutical products from piracy. The agreements further reduced tariffs overall by a third. While industrialized nations agreed to completely eliminate some tariffs by 2005, developing countries agreed to hold tariff rates to set levels. This reduction was the largest at that time. Tariffs eliminated by developed countries included a range of products such as construction, agricultural, medical equipment, steel, alcoholic beverages, paper products, and pharmaceuticals. Provisions were made to allow nations to withdraw from agreements based on environmental protection concerns.

Occasionally the hardship of structural relocation of industries in order to arrive at a global division of labor produced political backlash that impeded the implementation of GATT goals. For instance, the U.S. textile industry, which had helped to define the regional economies of the Northeast and Southeast and the West, resisted being phased out to developing nations. The result was the continued protection of U.S. textiles, with tariffs in place as social factors outweighed economics. However, prior protectionist agreements, such as the Multi-Fiber Agreement, established that U.S. import quotas would eventually be phased out. Officials continued to expect that developing countries would eventually take over textile and apparel production.

GATT/WTO supporters estimated U.S. income would be boosted by $122 billion by 2005 and exports would double to one trillion dollars by 2010. U.S. manufacturers thought to benefit most from the Uruguay round were producers of food and chemical products, industrial machinery, computer and telecommunications equipment, and scientific instruments.

Many U.S. jobs in industries previously protected by tariffs migrated to the cheap labor markets of developing countries and Eastern Europe. The U.S. workers who used to fill those jobs could only hope that the promise of new business opportunities and new jobs through expanded international trade would be fulfilled.

See also: Foreign Investment in the United States, Foreign Investment of U.S. Companies Abroad, North American Free Trade Agreement

FURTHER READING

Bhagwati, Jagdish, and Mathias Hirsch, eds. The Uruguay Round and Beyond: Essays in Honor of Arthur Dunkel. Ann Arbor, MI: University of Michigan Press, 1998.

Hoekman, Bernard M., and Michel M. Kostecki. The Political Economy of the World Trading System: From GATT to WTO. New York: Oxford University Press, 1995.

Jackson, John Howard. The World Trading System: Law and Policy of International Economic Relations, 2nd ed. Cambridge, MA: MIT Press, 1997.

Jackson, John H., and Alan O. Sykes. Implementing the Uruguay Round. New York: Oxford University Press, 1997.

Martin, Will, and L. Alan Winters, eds. The Uruguay Round and the Developing Countries. New York: Cambridge University Press, 1996.

Preeg, Ernest H. Traders in a Brave New World: The Uruguay Round and the Future of the International Trading System. Chicago: University of Chicago Press, 1995.