1. The GATT: History

2. GATT (1947): Foundation, Status, Role
GATT emerged from negotiations to create an ITO
It is an international treaty and not an organisation
Negotiated and signed in 1947, Geneva (GATT 1947) by 23 countries, 12 developed + 11 developing, increasing afterwards
In effect only provisionally (Protocol for Provisional Application actually signed in Geneva) since 1 Jan 1948.
Designed to operate under the umbrella of the ITO once it came into existence
Had to fill the vacuum left by ITO failure => role gradually changing, as nations turned to it as the forum to handle problems in contracting parties (CPs) trading relationships

3. The GATT Rounds ( )

4. GATT Rounds between ITO and EEC
1947: ‘Geneva Round’ (signing of GATT, also brought about tariff reductions)
1947: Annecy Round
1950: China withdraws (GATT seen as “a club of the rich”)
1951: Torquay Round
Inter-sessional Committee established to organise voting by airmail ballot on use of trade measures to safeguard BoP
(West) Germany accedes

5. GATT Rounds between ITO and EEC
1955: Contracting Parties’ 9th regular session designed as a “review session”
Modifies numerous provisions
A move to transform GATT into an Organisation for Trade Cooperation (OTC) fails to get the approval of US Congress
US granted waiver for certain agricultural policies
Japan accedes
1956: Geneva Round
1957: Creation of the European Economic Community (Treaty of Rome)

6. GATT 5th Dillon Round (1960-1962)
Focus on negotiating compensation for traditional exporters for loss of markets due to EEC (1957) and its common external tariff
Agricultural issues were a particular area of conflict
EEC’s move to a common external tariff with variable levies replacing import duties violated previous bindings
“Chicken war” of 1962: EC levy system for imports tripled the level of protection to the poultry industry => US took the matter to GATT and an independent panel found that US was entitled to compensation of $ 26m => US withdrew concessions on potato starch, light trucks, brandy

7. GATT 6th Kennedy Round (1964-1967)
Benefits to agricultural trade again far less significant than those to manufacturing
Non-tariff barriers not addressed although widespread
EEC and US reluctant to subject domestic agro-policy to GATT scrutiny
Conflicting interests of the major players
The U.S., the world’s largest exporter of agricultural products, demanded trade liberalisation and greater reliance on market forces
EEC, world’s largest importer of agricultural products, favoured a system of managed markets via international commodity agreements

8. GATT 6th Kennedy Round (1964-1967)
Amendment to GATT general clauses (‘Part IV’, on trade and development) establishes new guidelines for trade policies of – and towards – developing countries
In force since 1966
Although primarily expression of goals rather than concrete obligations, it has been evoked a lot in policy debates
More on this in lecture three

9. GATT 7th Tokyo Round ( )
Agricultural issues blocked successful conclusion for a long time (U.S. vs. EEC)
Agreement finally reached in 1979 but without addressing contentious issues in agriculture
Results
Average tariff on manufactured products levied by industrialized countries declined to 6% (reduction of 34%)
Legalisation of preferential tariff and non-tariff treatment in favour of developing countries ( lecture 3)
First success in limiting spread of non-tariff barriers through codes of conduct on technical barriers etc. (but no formal expansion of GATT principles as opposed by develop. countries)
Multifibre Arrangement signed in 1974 as part of negotiations, formalising existing restrictions and limiting growth of textile imports ( lecture 6)

10. GATT 8th Uruguay Round (1986-1994)
New GATT areas like services trade and creation of WTO ( lecture 7)
Manufactured goods
Developed countries reduced tariffs on average by 40% (from 6.3 to 3.8%)
Effective reductions for developing countries slightly smaller (30%), but larger than in previous rounds
Textiles and clothing: agreement to phase out multifibre agreement until 2005 ( lecture 6)
Agriculture effectively integrated into GATT negotiations for the first time ( lecture 7)

11. Summary and Learning Outcomes
The principal historical events that led to the establishment of GATT (but not ITO)
The key functions of the international trading system
The five key principles of GATT
Nondiscrimination
Reciprocity
Enforceable commitments
Transparency
Safety valves
The GATT rounds: key dates, recurring issues

12. The 1930s, 1940s and Bretton Woods
The 1934 Reciprocal Tariff Act marks the starting point of U.S. efforts to roll back protectionist measures introduced since 1930 (Smoot-Hawley Tariff Act etc.)
Between , USA enters into thirty-two bilateral reciprocal trade agreements, many with clauses foreshadowing GATT
Bretton Woods conference held in 1944
Establishment of the IMF and World Bank
Trade not directly on the agenda but need for institution governing international trade recognised

13. The Havana Charter
Dec 1945: U.S. “Proposals for the Expansion of World Trade and Employment”, inviting 15 countries to conclude multilateral agreement for mutual tariff reduction
Feb 1946: UN’s Economic and Social Council (EcoSoC) 1st meeting adopts a resolution calling for a conference to draft a charter for an International Trade Organization (ITO, complementary to IMF and World Bank)

14. The Havana Charter Four meetings of a preparatory committee
Oct 1946, London: a draft charter suggested and circulated by US
Early 1947, New York: the New York Draft published
Spring-autumn 1947, Geneva: negotiations in three parts – (i) ITO, (ii) multilateral tariff cuts, (iii) general clauses on tariff obligations
from (ii)-(iii) a single document, GATT 1947, came into existence (18 Nov)
and a Protocol of its Provisional Application was signed (Oct) by 23 contracting parties
21 Nov 1947, Havana, conference opened: ITO Charter completed, and signed, 28 Mar 1948, by 53 nations… but never ratified…

15. GATT: Philosophy and Working Methods

16. GATT (1947): Philosophy Fundamental perception of GATT’s founders:
Multilateral institutions facilitating cooperation among countries important not only for economic reasons
Will also help reduce the risk of war  positive correlation between trade and peace and non-discrimination and good foreign relations
Objectives according to the Preamble of GATT 1947:
Raising standards of living. Ensuring full employment, steady growing real income and effective demand. Full use of world’s resources, expanding goods production and exchange
Reciprocal reductions of trade barriers and elimination of discriminatory treatment will help realising these goals
But no mention of free trade as an ultimate goal (the case under WTO too)!

17. The Multilateral Trading System
Two main functions of the multilateral trading system (GATT/WTO)
Mechanism for the exchange of trade policy commitments
Code of Conduct for Trade Policy

18. The Trading System as a Forum for Exchange
Bargaining and negotiations are the main instruments to reduce trade barriers.
GATT/WTO provide the framework (a ‘market’) to facilitate the reciprocal exchange of market access commitments.
Why ‘exchange’ if trade theory (and some evidence) suggests that unilateral liberalization is beneficial?
Losers from unilateral liberalization not easily compensated and usually well organized
Need to create counter-lobby: export industries
Reciprocal agreements make liberalization politically feasible (and more beneficial than unilateral ones)

19. The Trading System as a Code of Conduct
GATT/WTO contain a set of specific legal obligations regulating trade policies of member states.
Provides mechanisms that are designed to prevent members from succumbing to protectionist pressure from lobby groups (industry associations, trade unions, regional authorities etc.).
If nothing else, mechanisms increase visibility of violations of GATT/WTO philosophy (e.g. through public settlement procedures).
Five key principles under GATT/WTO to ensure this.

20. GATT – Key Principles Non-discrimination Reciprocity
Enforceable Commitments
Transparency
Safety Valves

21. GATT Principles: Non-Discrimination
Key rules: MFN and National Treatment Principles.
Most-Favoured Nation (MFN), embodied in Art. I:
A product made in one member country (or CP, initially) cannot be treated less favourably than a like product originating in any other country
The benchmark for MFN is thus the best treatment (e.g. 5% tariff) offered to a country (including nonmembers to GATT, as initial CPs were only 23)
Three areas of application under WTO: goods (GATT), services (GATS) and intellectual property (TRIPs)
MFN is a basic pillar of GATT/WTO
Applies unconditionally, e.g. not conditional on reciprocity
Disputes can be brought alleging both de jure et de facto violation

22. GATT Principles: Non-Discrimination
National Treatment, in Art. III  having once passed the border, foreign goods cannot be treated less favourably than similar domestic goods in terms of
(i) internal (indirect) taxation and
(ii) non-tax policies (e.g. regulations)

23. GATT Principles: Reciprocity
No clear motivation from economics, but intended
To limit the scope for free riding that may arise from MFN
To “pay” for trade liberalisation, which occurs on a quid pro quo basis
Rationale from the political economy literature:
Costs of liberalisation concentrated => loosing industries organised
Benefits (although in the aggregate usually greater than costs) dispersed  lesser incentives for consumers to defend expected welfare gains
Potential reciprocal sector-specific gains may thus help sell trade liberalisation politically
To negotiate, a country has to gain more than from unilateral liberalisation

24. GATT Principles: Enforceable Commitments
Liberalisation commitments useless if not enforceable
Agreed-upon tariff commitments are enumerated in lists termed Schedules of Concessions (Art. II)
Tariff ceilings are established
Members concerned cannot raise tariffs above bound levels without negotiating compensation with the principal suppliers of the product concerned
If another government’s actions are perceived to have the effect of nullifying or impairing committed market access => dispute settlement procedure

25. GATT Principles: Enforceable Commitments
Elements of this procedure
Panel of impartial experts determines whether a contested measure violates GATT/WTO or not
Since GATT/WTO is an intergovernmental agreement, private parties do not have legal standing before its dispute settlement body, only governments have the right to bring cases!
Existence of dispute settlement procedure precludes use of unilateral retaliation
Small countries have a great stake in a rule-based international system, as this constrains the likelihood of being confronted with bilateral pressure from large trading powers!

26. GATT Principles: Transparency
Access to information on the trade regime of signatories
Internal transparency: requirement to publish national trade regulations
External transparency: multilateral surveillance facilitated by periodic country reports prepared by GATT/WTO Secretariat (and discussed by its Council)  so-called Trade Policy Review (TPR) mechanism
Benefits of transparency, e.g. publishing TPRs and other reports
Reduces pressure on the dispute settlement system: measures can first be discussed by the appropriate GATT/WTO body before filing an appeal

27. GATT Principles: Transparency
Benefits (continued):
Strengthens GATT/WTO legitimacy by informing civil society what is going on in multilateral trade policy and what are the key implications
According to studies in the 1990s, reduces trade-policy uncertainty
Might otherwise result in low investment and growth rates and shift to nontradables
Reduces risk premium paid in capital markets for likely trade regime/policy reversals

28. GATT Principles: Safety Valves
Government can restrict trade in specific circumstances. There are three types of provisions/articles (exceptions in GATT/WTO):
To attain noneconomic objectives: protect public health, national security or industries so seriously injured by import competition that social/political problems arise
To ensure “fair competition”: often in conflict with market access as its instruments are duties
Countervailing duties on imports that have been subsidised
Antidumping duties on imports that have been dumped, i.e. sold at a price below the one charged in the home market
To attain economic objectives
if serious balance-of-payments difficulties
or to support an infant industry

29. GATT Working Methods Rounds of multilateral trade negotiations
Contracting parties (CP’s) usually met every six months for several weeks at regular sessions
Interim Commission for ITO (ICITO), since Havana
Later, ICITO transformed into GATT Secretariat
In earlier GATT rounds, reciprocal tariff reductions were of primary concern. Later, other issues became more important (NTBs, trade in services ...)