INTERNATIONAL TRADE & FINANCE ASSIGNMENT

on
HISTORY AND EVOLUTION OF GATT

SUBMITTED BY- SUBMITTED TO-

MOHD YASIN HINA KAUSAR
MAM
Faculty of Law, JMI

SEC- A

ROLL NO.-22

SEMESTER- 5TH
SESSION- 2017-18
EMAIL- yaseenk316@gmail.com
 ITF ASSIGNMENT on ‘HISTORY AND EVOLUTION OF GATT’

ACKNOWLEDGMENT
I would like to express my special thanks of gratitude to my International Trade and
Finance Teacher, Hina Kausar Mam who gave me the golden opportunity to do this wonderful
project on the topic ‘Marriage under Hindu Law’, which also helped me in doing a lot of
Research and enhancing my knowledge.

Secondly, I would also like to thank my friends and classmates who helped me a lot in
finalizing this project within the limited time frame.

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 ITF ASSIGNMENT on ‘HISTORY AND EVOLUTION OF GATT’

INTRODUCTION

While the World Trade Organization in current existence provides its membership with
forums for three interrelated functions—negotiation, illumination, and litigation—it is probably
best known for the first of these. This project provides a brief overview of the negotiating forum
of the General Agreement on Tariffs and Trade and its WTO successor, as well as how each has
been used by the world’s major trading nations since 1947.

The transformation of General Agreement on Tarrifs and Trade (GATT) into the World
Trade Organisation (WTO) on January 1, 1995, provides an opportune moment to take stocks of
GATT’s achievement and shortcomings alongside those of its 50-year old sister international
institutions set up at Bretton Woods. It is tempting easy to attribute the astounding post war
economic expansion, particularly when set against the turbulent interwar period when
multilateral efforts to contain protectionist pressures failed miserably, to the economic policies
embodied in the GATT and to the initial stability provided by the Bretton Woods institutions.

World War I shattered the treaty networks as countries higher tarrifs, import quotas,
licencing requirements, and foreign exchange controls. Economic reconstruction following the
war lacked any institutional mechanism to facilitate the reduction of the extensive trade barriers
that arisen during the war and had become entrenched thereafter. The political weakness of
European countries in trade policy was evident when a proposal for ‘equality of trade conditions’
in a Draft league of nations was rejected in favour of provision ‘equitable treatment’. The World
Economic Conference in 1927 found it necessary to call upon Governments to remove the still
pervasive controls on trade. A decade after its formation, the League of Nations had yet to
sponsor any negotiations on liberalizing world trade from high tarrifs.

General Agreement on Tariffs and Trade (GATT) was a legal agreement between many
countries, whose overall purpose was to promote international trade by reducing or eliminating
trade barriers such as tariffs or quotas. According to its preamble, its purpose was the "substantial
reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal
and mutually advantageous basis."

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 ITF ASSIGNMENT on ‘HISTORY AND EVOLUTION OF GATT’

It was first discussed during the United Nations Conference on Trade and Employment
and was the outcome of the failure of negotiating governments to create the International Trade
Organization (ITO). GATT was signed by 23 nations in Geneva on October 30, 1947, and took
effect on January 1, 1948. It remained in effect until the signature by 123 nations in Marrakesh
on April 14, 1994, of the Uruguay Round Agreements, which established the World Trade
Organization (WTO) on January 1, 1995. The WTO is in some ways a successor to GATT, and
the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the
modifications of GATT 1994.

GATT, and it successor WTO, have successfully reduced tariffs. The average tariff levels
for the major GATT participants were about 22% in 1947, but were 5% after the Uruguay Round
in 1999. Experts attribute part of these tariff changes to GATT and the WTO.

A BRIEF HISTORY OF GATT NEGOTIATIONS

The current WTO agreements are the legacy of commitments that countries have
voluntarily negotiated with each other, on a repeat basis, in the decades since 1947. To
understand the causes of the present patterns of import protection across WTO member countries
as well as across products and industries within those countries, it is important to turn to the past.
The 1930s and 1940s era of the Great Depression and World War II provide important reminders
of globalization’s last dark episode of protectionism. The U.S. imposition of the Smoot-Hawley
tariffs and the international retaliatory response in the 1930s led to the virtual halting of
international commerce. Table 1-1 illustrates the pattern of the new trade barriers that were
implemented by the United States and a number of other European countries during the Great
Depression. What is clear is that the level of tariffs during the Depression was much higher than
what most developed economies impose today.

At the conclusion of World War II, twenty-three countries, led primarily by the United
States, Canada, and the United Kingdom, negotiated the General Agreement on Tariffs and
Trade.1 The goal was to create an agreement that would ensure postwar stability and avoid a
repeat of the mistakes of the recent past, including the Smoot-Hawley tariffs and retaliatory
1 The twenty-three countries engaging in the Geneva negotiations that led to the signing of the GATT in 1947 were
Australia, Belgium, Brazil, Burma (Myanmar), Canada, Ceylon (Sri Lanka), Chile, China, Cuba, Czechoslovakia
(Czech Republic and Slovakia), France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway,
Pakistan, South Africa, Southern Rhodesia (Zimbabwe), Syria, United Kingdom, and United States. For a discussion
of the negotiating history leading up to the GATT, see Irwin, Mavroidis, and Sykes (2008).

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responses, which had been a contributor to the devastating economic climate that culminated in
the death and destruction of the Second World War. The 1947 GATT created a new basic
template of rules and exceptions to regulate international trade between members (referred to as
contracting parties) and locked in initial tariff reductions that these countries committed to
establish. Even as early as 1952, the tariff cuts had reduced average tariffs substantially, as
shown in table 1-1, for a number of these countries. Over the next forty-seven years, more
countries signed on to the GATT, and further trade liberalization negotiations ensued.2

As table 1-2 documents, between 1947 and 1994, the GATT contracting parties began and
concluded eight separate negotiating rounds of voluntary trade liberalization. The last of these
completed rounds was the Uruguay Round, which ended the GATT era in 1994 by ushering in
the World Trade Organization. By 1994, the GATT membership had simultaneously expanded
from an initial 23 contracting parties to 128 participating countries. With a number of new
members acceding to the WTO since its 1995 inception, more than 150 countries have signed the
agreement.

2 Barton and others (2006) provide an economic, legal, and political assessment of the trade regime from the GATT
through to the WTO.

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 ITF ASSIGNMENT on ‘HISTORY AND EVOLUTION OF GATT’

THE NEGOTIATING ROUNDS AND NEGOTIATING APPROACHES

The first five rounds of GATT negotiations covering the initial 1947–61 period were typically
dominated by major exporting countries, or those with a “principal supplying interest” in a
particular product, getting together and negotiating reciprocal market access improvements. 3 The
initial negotiators under the GATT, especially those with a principal supplying interest, were
developed economies. They focused their negotiation efforts on reducing import barriers in other
countries that were of primary interest to their own exporters, and they used the political trade-
off of expanded market access abroad for exporting industries against increased market access
granted at home to foreign industries and thus the losses to industries competing against these
imports.

Since the trade barriers targeted for elimination were typically those in the import markets of
other developed countries, the primary result was that developed countries were asked to reduce
their tariffs. Put differently, since most developing countries were neither principal suppliers nor
major importing markets, little was asked of them in terms of their own trade liberalization, and
little of what was of direct export interest to developing countries was liberalized by others. Such
an outcome is consistent with the pattern of import tariff protection that persists today, which is
explored in more depth in the next chapter, a remnant of the form of the negotiations begun in
the 1940s.

Kennedy Rounds:

The Kennedy Round of negotiations in 1964 through the Tokyo Round in the 1970s, countries
participating in the trade negotiations used formulaic approaches to reduce further the remaining
trade barriers across the board. Certain tariff-cutting formulas can be preferable to reciprocal
negotiations between principal suppliers, in that they can serve to reduce average tariff levels as
3 For a discussion, see Dam (1970, chapter 5). Hoekman and Kostecki (2009, chapter 4) discuss not only the
negotiating history but also the economic outcomes of different negotiating approaches of principal suppliers versus
tariff formulas and exceptions. Ludema and Mayda (2009) provide an economic theory that rationalizes participation
by the largest exporters in negotiations, and thus supports the principal supplier rule as a feature of the negotiations.
Their theory justifies the principal supplier rule as a means to overcome the otherwise nontrivial concern of
externalities that can lead to the failure of multilateral negotiations attributed to the free rider problem. Then, using
data on the United States, they also provide evidence for how the principal supplier rule affects the imposition of
tariffs, finding that a higher concentration of exporters in a sector reduces free riding and thus results in a lower
tariff.

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well as their dispersion. The dispersion of tariffs within a country, and even for products within
an industry, is related to the difference between the average tariff and the country’s highest
tariffs, or the phenomenon of “tariff peaks,”

This round was named after U.S. President John F. Kennedy in recognition of his support for the
reformulation of the United States trade agenda, which resulted in the Trade Expansion Act of
1962. This Act gave the President the widest-ever negotiating authority.

As the Dillon Round went through the laborious process of item-by-item tariff negotiations, it
became clear, long before the Round ended, that a more comprehensive approach was needed to
deal with the emerging challenges resulting from the formation of the European Economic
Community (EEC) and EFTA, as well as Europe's re-emergence as a significant international
trader more generally.

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Japan's high economic growth rate portended the major role it would play later as an exporter,
but the focal point of the Kennedy Round always was the United States-EEC relationship.
Indeed, there was an influential American view that saw what became the Kennedy Round as the
start of a transatlantic partnership that might ultimately lead to a transatlantic economic
community.

To an extent, this view was shared in Europe, but the process of European unification created its
own stresses under which the Kennedy Round at times became a secondary focus for the EEC.
An example of this was the French veto in January 1963, before the round had even started, on
membership by the United Kingdom.

In May 1963 Ministers reached agreement on three negotiating objectives for the round:

(a) Measures for the expansion of trade of developing countries as a means of furthering their
economic development,

(b) Reduction or elimination of tariffs and other barriers to trade, and

(c) Measures for access to markets for agricultural and other primary products.

One significant outcome of the Kennedy Round was the adoption of an Anti-dumping Code,
which gave more precise guidance on the implementation of Article VI of the GATT. In
particular, it sought to ensure speedy and fair investigations, and it imposed limits on the
retrospective application of anti-dumping measures. In essence, $40 billion in tariffs were
eliminated or reduced.

Tokyo Round:

Reduced tariffs and established new regulations aimed at controlling the proliferation of non-
tariff barriers and voluntary export restrictions. 102 countries took part in the round. Concessions
were made on $19 billion worth.

Uruguay Round:

The Uruguay Round began in 1986. It was the most ambitious round to date, hoping to expand
the competence of the GATT to important new areas such as services, capital, intellectual
property, textiles, and agriculture. 123 countries took part in the round. The Uruguay Round was

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also the first set of multilateral trade negotiations in which developing countries had played an
active role.

Agriculture was essentially exempted from previous agreements as it was given special status in
the areas of import quotas and export subsidies, with only mild caveats. However, by the time of
the Uruguay round, many countries considered the exception of agriculture to be sufficiently
glaring that they refused to sign a new deal without some movement on agricultural products.
These fourteen countries came to be known as the "Cairns Group", and included mostly small
and medium-sized agricultural exporters such as Australia, Brazil, Canada, Indonesia, and New
Zealand.

The Agreement on Agriculture of the Uruguay Round continues to be the most substantial trade
liberalization agreement in agricultural products in the history of trade negotiations. The goals of
the agreement were to improve market access for agricultural products, reduce domestic support
of agriculture in the form of price-distorting subsidies and quotas, eliminate over time export
subsidies on agricultural products and to harmonize to the extent possible sanitary and
phytosanitary measures between member countries.

Basic Principles of GATT

Although the WTO and the GATT are often described as enhancing “free trade”, the system
allows certain forms of protection. This is why, more accurately, one should speak of a system of
rules dedicated to open, fair and undistorted competition. Three main principles are thereby
binding for the member states when concluding above-mentioned international arrangements.

 Non-discrimination

 Reciprocity

 Liberalization through negotiations

1. Non-discrimination: The central principle of non-discrimination shall prevent protectionist

measures and guarantee the freedom of trade among all member states. It is designed to secure
fair conditions of trade.

Most-favoured-nation principle (MFN-principle), Art. I.

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According to this principle, a signatory state granting any trade or financial advantage to another
one shall grant it to all the other signatory states as well. This happens unconditionally (i.e.
without asking for reciprocity) and immediately. Pursuant to Art. 1, custom tariffs or other fees
charged by one country for the import or export of like products have to be identical for all
contracting parties. Equal competition conditions are thereby established for all member states.

However, relating to this principle there are emerging various exceptions and uncertainties. It is
only applicable to “like products”, while a definition of “likeness” is not provided. Dependent on
the specific situation, the crucial question is whether the goods are in competition with each
other due to their characteristics and quality, are meant for an identical consumer, or whether
they are exchangeable. Problems can also emerge from the definition of a “foreign” or “local”
product. Furthermore, numerous exceptions are provided by the GATT itself. Countries can raise
barriers against products that are considered to be traded unfairly from specific countries or set
up a free trade agreement that applies only to goods traded within the group, thus discriminating
against goods from outside (see, for instance, the free trade areas NAFTA and EFTA or the EU’s
customs union). The most important exception refers to the treatment of developing countries. To
such can be given special access to the developed countries’ markets (“Generalized system of
trade preferences”).

In short terms: Grant someone a special favour and you have to do the same for all other
signatory states.

Principle of National Treatment, Art. 3.

This principle is supporting non-discrimination between the member states and guarantees
national compliance with the non-discrimination rule in foreign trade. Therefore, it prohibits
unequal treatment of foreign imported and locally-produced goods. The Agreement on Subsidies
and Countervailing Measures (SCM) is concretizing this basic principle as it prohibits certain
subsidies to companies contingent upon export performance and upon the use of domestic over
imported goods. If domestic companies are given an advantage by the subsidies, the WTO
members are authorized to take countermeasures.

Also in terms of this principle, “like goods” serve as the – undefined – reference point.
Restrictions are imposed on this rule as well insofar as it only applies once the goods have

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entered the market. Charging unequal customs duty on an import is therefore not a violation of
national treatment.

In short terms: Give others the same treatment as your own nationals.

2. Reciprocity: According to the preamble as well as various provisions of the GATT,

negotiations are to be concluded “on a reciprocal and mutually advantageous basis”. That is to
say, that to a country which takes new steps towards liberalization granting trade advantages to
another member state is to be granted in turn – “reciprocally – equivalent privileges by the
favored state. In declaring this, the member states aim at limiting the scope of free-riding that
may arise because of the MFN rule and at obtaining better access to foreign markets. For the
member states, the gain available from negotiating is greater than from unilateral liberalization.

Also in terms of reciprocity, an exception is made in favour of the developing countries. Under
the Enabling Clause it is permitted to the members to accept less than full reciprocity from their
developing trading partners. In doing so, the nations comply with the principle of solidarity.

The described principles affect one another, thus increasing their effectiveness as a whole. When,
for instance, two countries conclude a bilateral agreement which advances liberalization,
applying the Principle of Reciprocity in doing so, this progressive agreement automatically
becomes effective on a multilateral basis under the Most-favoured-nation Principle.
Consequently, global liberalization of trade is not being endangered by selective protectionist
measures.

In short terms: Lower your import duties and other trade barriers in return for similar
concessions from another country.

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3. Liberalization through negotiation: Although one important target of the GATT is to reduce
tariffs and trade barriers substantially, it is not prohibiting any kind of custom tariffs of individual
countries. By way of multilateral negotiations between the member states (for instance the so-
called “Uruguay Round”, held in Uruguay from 1986 to 1994, from which emerged the WTO),
custom tariffs shall be lowered and made transparent. The individual custom tariffs are listed and
cannot be raised unilaterally afterwards. Connected to the process of liberalization, to the
developing countries is once more given a privilege as they have more time to fulfil their
obligations.

In short terms: Each signatory state lowers its own trade barriers through negotiation.

CONCLUSION
The average tariff levels for the major GATT participants were about 22 percent in
1947. As a result of the first negotiating rounds, tariffs were reduced in the GATT core of the
United States, United Kingdom, Canada, and Australia, relative to other contracting parties and
non-GATT participants. By the Kennedy round (1962–67), the average tariff levels of GATT
participants were about 15%. After the Uruguay Round, tariffs were under 5%.

In addition to facilitating applied tariff reductions, the early GATT's contribution to trade
liberalization "include binding the negotiated tariff reductions for an extended period (made
more permanent in 1955), establishing the generality of nondiscrimination through most-favored
nation (MFN) treatment and national treatment, ensuring increased transparency of trade policy
measures, and providing a forum for future negotiations and for the peaceful resolution of
bilateral disputes. All of these elements contributed to the rationalization of trade policy and the
reduction of trade barriers and policy uncertainty."

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The theoretical main principles of the GATT as formulated on paper are not strictly
adhered to in practical usage. Due to the numerous exceptions and restrictions as well as a wide-
ranging scope of interpretation with regard to their implementation, it has become custom talking
about the “grey area of the GATT”. Focusing in particular on the MFN-principle, today, about
50% of the world trade is not obeying it anymore. This is not only a consequence of the
exceptional areas mentioned explicitly in the GATT but also resulting from various nontariff
barriers put into practice in- and outside its regulatory terms. Taking into account this recent
development, the question needs to be asked whether one can still speak of it as applied
“unconditionally” or it is rather become a privilege granted only to certain countries under
certain conditions, thus evading somehow the whole ambitious concept of global reintegration
pursued by the international community. It remains to be seen to what extent the GATT will be
undermined in future times.

BIBLIOGRAPHY

1. S.R. Myneni, International Trade Law

2. Universal Law Series, International Trade Law

3. Amrita Narlikar: The World Trade Organisation

4. Niharika Vij, International Trade Law

5. GATT

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