Chapter 5

GATT and Its Origin

5.1 Meaning of GATT

The General Agreement on Tariffs and Trade (GATT) was a free trade
agreement between 23 countries that eliminated tariffs and
increased international trade. It was the first worldwide multilateral free
trade agreement. It was in effect from January 1, 1948 until January 1,
1995. It ended when it was replaced by the more robust World Trade
Organization. The General Agreement on Tariffs and Trade (GATT) was
created to aid global economic recovery through reconstructing and
liberalizing global trade. The General Agreement on Tariffs and Trade,
known as the GATT, is one-third of the Bretton Woods system that was
created after World War II to ensure a stable trade and economic world
environment. The International Monetary Fund (IMF) and World Bank are
the other two bodies of the Bretton Woods system**1.

The GATT is an international trade agreement concluded in 1947. It

contains rules and obligations that governed trade in goods for almost
fifty years between its "CONTRACTING PARTIES". From 1948 to 1994, before
the WTO was created, the GATT provided the legal framework for the bulk
of world trade.
The Geneva 1947 Meeting was an important step in the creation of GATT
and the world trading order. Prof. John H. Jackson describes the 1947
Geneva Meeting as an elaborate conference divided in three parts
dealing with the following areas**2:
i. The first dealt with the preparation of a charter for an
international trade institution i.e. the International Trade
Organization (ITO);

1. http://www.yourarticlelibrary.com/trade-2/general-agreement-on-tariffs-
and-trade
2. https://epgp.inflibnet.ac.in/

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 i. The second dealt with the negotiation of a multilateral
agreement to reduce tariffs on a reciprocal basis;
ii. The third dealt with the drafting of general clauses of
obligations relating to the tariff obligations.

5.2 Purpose of GATT

The purpose of GATT was to eliminate harmful trade protectionism. That

had sent global trade down 65 percent during the Great Depression.
GATT restored economic health to the world after the devastation of the
depression and World War II. GATT's main objective was to reduce barriers
to international trade through the reduction of tariffs, quotas and
subsidies. It has since been superseded by the creation of the World Trade
Organization (WTO).

Main objectives of GATT

By reducing tariff barriers and eliminating discrimination in international

trade. The GATT aims at**3

1. Expansion of international trade

2. Increase of world production by ensuring full employment in the
participating nations.
3. Development and full utillsation of world resources; and
4. Rising standard of living of the world community as a whole.

However, the articles of the GATT do not provide directives for attaining
these objectives. These are to be indirectly achieved by the GATT through
the promotion of free (unrestricted) and multilateral international trade.

As such the rules adopted by GATT are based on the following

fundamental principles.

1. Trade should be conducted in a one-discriminatory way;

2. The use of quantitative restrictions should be condemned and
3. Disagreements should be resolved through consultations.

In short members of GATT agree to reduce trade barriers and to eliminate

discrimination in international trade so that multilateral and free trade
may be promoted leading to wider dimensions of world trade and
prosperity.
____________________________________________________________________
3. http://www.yourarticlelibrary.com/trade-2/general-agreement-on-tariffs-
and-trade
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5.3 Main Provisions of GATT

GATT had three main provisions.

1) 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.

2) GATT prohibited restriction 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.

3) The third provision was added in 1965. That was because more
developing countries joined GATT, and it wished to promote them.
Developed countries agreed to eliminate tariffs on imports of
developing countries to boost their economies. It was also in the
stronger countries' best interests in the long run. It would increase
the number of middle-class consumers throughout the world.

15
5.4 History of GATT -Institutionalization of International Trade

The General Agreement on Tariffs and Trade (GATT) was launched in

Geneva in 1948 by 23 countries including India in order to reshape the
world economy shattered by the Second World War (1939-45) which
followed the Great Depression (1929-32). The GATT comprised a trade
pact among the member countries (more than a hundred, latter) with the
objective of forming a permanent organization, which would enforce a
set of rules for the conduct of world trade and also update these rules.

At the Breton wood Conference the participating states had decided to

establish three international institutions such as:
(1) The International Monetary Fund (IMF);
(2) The International Bank for Reconstruction & Development (IBRD) or
World Bank; and
(3) The International Trade Organization (ITO).

The first two institutions came into existence on December 27, 1945. These
institutions deal with the international economics and financial aspects at
international level. Following the establishment of the above institutions,
there was a need for a third organization to regulate trade issues which
had resulted ITO. The ITO Charter was much broader than the GATT and
contained several provisions to promote co-operation for economic
development and reconstruction.

The negotiation of the GATT dates back to the 1940's. It was part of the
post-war project to reconstruct a multilateral system of world trade
through the elimination of discrimination, the reduction of tariffs and the
dismantlement of other trade barriers. The initial objective was to create
an International Trade Organization (the ITO) to handle the trade side of
international economic cooperation, which was meant to join the two
"Bretton Woods'' institutions, the World Bank and the International
Monetary Fund (IMF). The project went on two tracks:
 drafting a Charter for an International Trade Organization (the
ITO); and,
 launching tariff negotiations on a multilateral basis.
The GATT was never intended to be an international organization but only
to be a subsidiary agreement under the ITO Charter. Nevertheless, the ITO
did not materialize and the GATT came into force by means of a
Provisional Protocol, signed on 30 October 1947 and effective since 1
January 1948.
The signatory countries to the Protocol agreed to apply the provisions
contained in the GATT until the ITO could take over its administration.
Hence, for 47 years, the GATT served as a de facto international
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organization, taking up some of the functions originally intended for the
ITO.
However, the proposed ITO could not be established as wished due to
clash of interests between the United States and other states. Origin and
development of the international trading system can be classified into
two sub-parts, such as
i) ITO to GATT; and
ii) GATT to WTO

The ITO was never formally rejected, essentially as drafted as an interim

arrangement with some rectifications agreed just after the close of
Havana Conference.

ITO was one piece of the so called Bretton Woods system, designed in the
post – World War II era to promote and manage global economic
development.
Promotion and liberalization of free trade in goods and services has been
the objective of international trade law since the formation of ITO. The
foundations of the International Trade Regime date back to the 1947
when the GATT was concluded
The GATT is a key institution that has shaped the current international trade
regime, and is responsible for many rules present in the WTO covered
agreements. The practices of the GATT are still considerably relevant in
guiding the practices of the WTO, as affirmed by Article XVI:1 of the WTO
Agreement which states that ―..the WTO shall be guided by the decisions,
procedures and customary practices followed by the Contracting Parties
to GATT 1947 and the bodies established in the framework of GATT 1947.

The original 23 GATT members were Australia; Belgium; Brazil; Burma, now
called Myanmar; Canada; Ceylon, now Sri Lanka; Chile; China; Cuba;
Czechoslovakia, now 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. The membership increased to more than
100 countries by 1993.

The World Bank recommended the establishment of an International Trade

Organization (ITO). Instead of ITO, General Agreement on Tariff and Trade
(GATT) was formed in 1948.

The Preamble to the GATT looks to raising standards of living, ensuring full
employment and a large and steadily growing of volume of real income
17
and effective demand by expanding the production and exchange of
goods.
The percolating states aim to accomplish these goals by entering into
reciprocal and mutually advantageous agreements to the substantial
reduction of tariffs and other trade barriers and to the elimination of
discriminatory treatment in international commerce.
There was no role is the decision making and also GATT were able to
enforce their decisions on the basis of international law, which limited their
influence on the emerging international economic order. However equal
participation amongst the contracting parties will be beneficial on the
emerging of international economic order.
1. Universal Most Favoured Nation Treatment (MFN);
2. No Increased Trade Barriers;
3. Accepted Form of Trade Tariffs;
4. National Treatment; and
5. Regular Negotiations.

5.5 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

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.

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.

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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 is 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 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.

Reciprocity

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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 favoured 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 be
endangered by selective protectionist measures.

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

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
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However, as stated above, 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.

5.6 Non Application of GATT-Article XXXV

This Article deals with Non-Application of the Agreement between
Particular Contracting Parties. The agreement shall not apply as between
any contracting party and any other contracting party if the two
contracting parties have not entered into tariff negotiations with each
other. The contracting parties may review the operation of this Article in
particular cases at the request of any contracting party and make
appropriate recommendations.

Annexure-1

Principles and Objectives

Of
GATT
Article XXXVI

1.The contracting parties,

(a) recalling that the basic objectives of this Agreement include the
raising of standards of living and the progressive development of the

21
economies of all contracting parties, and considering that the attainment
of these objectives is particularly urgent for less developed contracting
parties;

(b) considering that export earnings of the less-developed contracting

parties can play a vital part in their economic development and that the
extent of this contribution depends on the prices paid by the less-
developed contracting parties for essential imports, the volume of their
exports, and the prices received for these exports;

(c) noting, that there is a wide gap between standards of living in less-
developed countries and in other countries;

(d) recognizing that individual and joint action is essential to further the
development of the economies of less-developed contracting parties
and to bring about a rapid advance in the standards of living in these
countries;

(e) recognizing that international trade as a means of achieving

economic and social advancement should be governed by such rules
and procedures _ and measures in conformity with such rules and
procedures _ as are consistent with the objectives set forth in this Article;

(f) noting that the CONTRACTING PARTIES may enable less-developed

contracting parties to use special measures to promote their trade and
development; agree as follows.

2. There is need for a rapid and sustained expansion of the export

earnings of the less-developed contracting parties.

3. There is need for positive efforts designed to ensure that less developed
contracting parties secure a share in the growth in international trade
commensurate with the needs of their economic development.

4. Given the continued dependence of many less-developed contracting

parties on the exportation of a limited range of primary products,* there is
need to provide in the largest possible measure more favourable and
acceptable conditions of access to world markets for these products, and
wherever appropriate to devise measures designed to stabilize and
improve conditions of world markets in these products, including in
particular measures designed to attain stable, equitable and
remunerative prices, thus permitting an expansion of world trade and
demand and a dynamic and steady growth of the real export earnings of
these countries so as to provide them with expanding resources for their
economic development.
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5. The rapid expansion of the economies of the less-developed
contracting parties will be facilitated by a diversification of the structure of
their economies and the avoidance of an excessive dependence on the
export of primary products. There is, therefore, need for increased access
in the largest possible measure to markets under favourable conditions for
processed and manufactured products currently or potentially of
particular export interest to less-developed contracting parties.

6. Because of the chronic deficiency in the export proceeds and other

foreign exchange earnings of less-developed contracting parties, there
are important inter-relationships between trade and financial assistance
to development. There is, therefore, need for close and continuing
collaboration between the CONTRACTING PARTIES and the international
lending agencies so that they can contribute most effectively to
alleviating the burdens these less-developed contracting parties assume
in the interest of their economic development.

7. There is need for appropriate collaboration between the CONTRACTING

PARTIES, other intergovernmental bodies and the organs and agencies of
the United Nations system, whose activities relate to the trade and
economic development of less-developed countries.

8. The developed contracting parties do not expect reciprocity for

commitments made by them in trade negotiations to reduce or remove
tariffs and other barriers to the trade of less-developed contracting
parties.*

9. The adoption of measures to give effect to these principles and

objectives shall be a matter of conscious and purposeful effort on the part
of the contracting parties both individually and jointly.

GATT Articles*
1 Article I General Most-Favoured-Nation Treatment
2 Article II Schedules of Concessions
3 Article III National treatment on Internal Taxation and
Regulation
4 Article IV Special Provisions relating to Cinematograph
Films
5 Article V Freedom of Transit
6 Article VI Anti-dumping and Countervailing
23
 Duties [Superseded by later agreements]
7 Article VII Valuation for Customs Purposes [Superseded by
later agreement]
8 Article VIII Fees and Formalities connected with Importation
and Exportation
9 Article IX Marks of Origin
10 Article X Publication and Administration of Trade
Regulations
11 Article XI General Elimination of Quantitative Restrictions
12 Article XII Restrictions to Safeguard the Balance of
Payments
13 Article XIII Non-discriminatory Administration of Quantitative
Restrictions
14 Article XIV Exceptions to the rule of Non-discrimination
15 Article XV Exchange Arrangements
16 Article XVI Subsidies
17 Article XVII State Trading Enterprises
18 Article XVIII Governmental Assistance to Economic
Development [Includes exception for infant
industries]
19 Article XIX Emergency Action on Imports of Particular
Products [Safeguards]
20 Article XX General Exceptions [Non-economic
objectives (health, safety)]
21 Article XXI Security Exceptions [National defense]
22 Article XXII Consultation
23 Article XXIII Nullification of Impairment [Dispute settlement]
24 Article XXIV Territorial Application, Frontier Traffic, Customs
Unions and Free-trade Areas
25 Article XXV Joint Action by the Contracting Parties
26 Article XXVI Acceptance, Entry into Force, and Registration
27 Article XXVII Withholding or Withdrawal of Concessions
28 Article XXVIII Modification of Schedules; Tariff Negotiations
29 Article XXIX The Relation of this Agreement to the Havana
Charter
30 Article XXX Amendments
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 31 Article XXXI Withdrawal
32 Article XXXII Contracting Parties
33 Article XXXIII Accession
34 Article XXXVI Principles & Objectives
35 Article XXXVII Commitments
36 Article
Joint Action
XXXVIII

*These titles are taken from the Text of the General Agreement on Tariffs
and Trade, dated 1986 but referred to in the Final Act of the Uruguay
Round Negotiations as GATT 1947.

A SUMMARY OF THE GATT ARTICLES

The Articles of the General Agreement on Tariffs & Trade (GATT)

were originally agreed in 1947 (referred to as GATT 1947) and
subsequently, with some revisions, in 1994 (referred to as GATT
1994) as part of the Uruguay Round negotiations that created the
World Trade Organization (WTO). The GATT Articles are only one
component of the WTO Agreements that were incorporated into
the Marrakesh Declaration of 15 April 1994 which marked the
conclusion of the Uruguay Round. The remaining WTO Agreements
are summarised briefly in Milner & Read, Introduction: Trade
Liberalisation, Competition & the WTO, also on the reading list**4.

For the purpose of this exercise, any queries relating to the

meaning, interpretation and application of these Articles should,
in the first instance, be referred to the Executive Director of the
WTO (John Mackness).
____________________________________________________________
4. https://www.wto.org/english/res_e/booksp_e

25
Part I

Article I: General Most-Favoured-Nation Treatment

This outlines the concept of Most-Favoured-Nation (MFN)

treatment and states that trade concessions granted to one
Member are applied immediately and without conditions to all
other Members.

Article II: Schedules of Concessions

All trade concessions made by Members must be stated and

incorporated into the legal agreement – ‘bound’ rates. No other
Member may be treated less favourably than any ‘bound’ rate.

Part II
Article III: National Treatment on Internal Taxation &
Regulation

Members may not use internal measures to discriminate between

domestic goods and those imported from Members; that is to say
that imports from Members are accorded National Treatment.

Article V: Freedom of Transit

Apart from standard customs procedures, no trade measures or

other regulations to be applied by Members to goods in transit
between other Members.

Article VI: Anti-Dumping & Countervailing Duties

Members may apply duties and other measures can be applied

to goods originating in other Members which are dumped and/or
enjoy export subsidies subject to specific conditions.

Article VII: Valuation for Customs Purposes

The fair valuation of imports from Members for customs purposes

xxxii
in determining any liability for duties etc.

Article VIII: Fees & Formalities Connected with Importation & Exportation

These should be a fair reflection of cost and not be used as a

means of protection.

Article IX: Marks of Origin

These should be applied no less favourably to Members than third

countries. They should be low cost and not materially damage
the goods. Members should also prevent their fraudulent use.

Article X: Publication & Administration of Trade Regulations

All trade measures of Members should be published and
therefore transparent.

Article XI: General Elimination of Quantitative Restrictions

Trade restrictions should be in the form of duties, taxes and other

charges whether effective through quotas, import and export
licences and other measures, ultimately requiring the tariffication
of all quantitative restrictions. All new trade measures to be in the
form of tariffs.

Article XII: Restrictions to Safeguard the Balance of Payments

Conditions relating to the use and subsequent removal of

emergency trade measures to safeguard the Balance of
Payments position of Members.

Article XIII: Non-Discriminatory Administration of Quantitative Restrictions

No discrimination between Members in the application of

quantitative restrictions and the allocation of such restrictions
27
should reflect their underlying trade shares. Details of any
restrictions should be transparent and negotiated with affected
Members.

Article XIV: Exceptions to the Rule of Non-Discrimination

Applies to Articles XII and XVIII.

Article XVI: Subsidies

Any subsidies affecting exports to and imports from Members

should be notified in writing. Members should recognise the
deleterious impact of subsidies and avoid their general and
specific use.

Article XVII: State Trading Enterprises

Member should notify the operations of State Trading Enterprises

(STEs), including Marketing Boards. STEs should not be accorded
favourable government assistance in the form of discriminatory
measures and they should act in a general manner consistent
with commercial considerations.

Article XVIII: Governmental Assistance to Economic Development

Recognition of the position of developing countries and their

need for derogations from some trade measures with respect to
the GATT Articles, including the support of Infant Industries and
remedying Balance of Payments problems.

Article XIX: Emergency Action on Imports of Particular Products

Scope for remedial action, including the suspension of trade

measures, if imports of certain products increase in such a
manner as to be injurious to like products, domestic producers
and competition.

Article XX: General Exceptions

Permission for non-arbitrary and non-discriminatory measures

against certain imports for reasons including: public moral
xxxii
 grounds; health; prison labour; and national historic/cultural
treasures.

Article XXI: Security Exceptions

Nothing in this Agreement is construed to commit Members to

actions etc contrary to their national security.

Article XXIII: Nullification & Impairment

Any Member whose benefits under the Agreement are being

nullified or impaired by the failure of other Members to fulfil their
obligations may make representations and seek satisfactory
adjustment.

Part III
Article XXIV: Territorial Application – Frontier Traffic – Customs
Unions & Free Trade Areas

Conditions and measures relating to the formation of customs

unions and free trade areas by Members.

Article XXVIII: Modification of Schedules & Tariff Negotiations

Regulations concerning the modification of the schedule of trade

regulations (‘bound’ rates). The use of negotiations to further
reduce tariffs and other trade measures between Members on a
reciprocal and mutually advantageous basis.

Article XXXIII: Accession

A non-Member may accede to the Agreement on terms agreed

between itself and other Members by a two-thirds majority.

Part IV Trade & Development

Article XXXVI: Principles & Objectives

29
That the facilitation of economic progress by developing country
Members requires more favourable access to world markets
without reciprocity for commitments made by developed
Members. This is in the form of Special & Differential (S&D)
treatment for developing countries under the Generalized System
of Preferences (GSP).

Article XXXVII: Commitments

Commitments by developed Members to accord higher priority

and have special regard to the elimination of trade barriers on
products of interest to developing countries. Developing
countries also undertake to do this with respect to other
developing Members.

Article XXXVIII: Joint Action

That Members should collaborate to improve the situation of

developing Members with respect to the latter’s problems,
including those relating to trade.

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