GLOBAL BUSINESS

Module 3 :

Trade Agreements, Organizations,

Institution

MARK ANTHONY P. LACUESTA, RNDMaster in ManagementMajor in Business Management

General Agreement on Tariffs and Trade (GATT)

General Agreement on Tariffs and Trade (GATT) Outcome of the failure of negotiating

governments to create the International Trade Organization (ITO)

Negotiated during the UN Conference on Trade and Employment

Formed in 1947 and transformed to World Trade Organization (WTO) in 1995

Part of economic recovery after World War II, Bretton Woods Conference suggested an organization to regulate trade

Parallel to the Governments negotiating the ITO, 15 negotiating states began negotiating for the GATT as a way to attain early tariff reductions

The ITO failed in 1950 and then GATT agreement was introduced

General Agreement on Tariffs and Trade (GATT)

GATT's main objective Reduction of barriers to international trade

achieved through reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements

It was a treaty, not an organization A small secretariat occupied what is today

the Centre William Rappard in Geneva, Switzerland

General Agreement on Tariffs and Trade (GATT)

InceptionEfforts to negotiate international trade agreements began in

1927 at the League of Nations but were unsuccessful. Precursor organization to GATT, ITO, was first proposed in

February 1945 by the United Nations Economic and Social Council (UNESCO).

Owing to the United States failing to implement the ITO, GATT was the only organization left.

On 1 January, 1948 the agreement was signed by 23 countries: Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, the Czechoslovak Republic, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, the United Kingdom, and the United States.

According to GATT's own estimates, the negotiations created 123 agreements that covered 45,000 tariff items that related to approximately one-half of world trade or $10 billion in trade.

In Brief

General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade (GATT) was first signed in 1947.

Was designedTo provide an international forum that

encouraged free trade between member states by regulating and reducing tariffs on traded goods

Providing a common mechanism for resolving trade disputes.

ObjectiveThe GATT's main objective was the “Reduction of Barriers to International Trade”

This was achieved through the Reduction ofTariff barriersQuantitative RestrictionsSubsidies on trade through a series of

agreements

HistoryDivided into 3 phases:

First:From 1947 until the Torquay RoundLargely concerned which commodities would be covered

by the agreement Freezing existing tariff levels

Second:From 1959 to 1979Focused on reducing tariffs

Third:Consists only of the Uruguay Round from 1986 to 1994 It extended the agreement to new areas such as

intellectual property, services, capital, and agricultureFinal outcome was creation of WTO

History (Contd...)GATT signatories occasionally negotiated

new trade agreements that all countries would enter into

Each set of agreements was called a roundIn general, each agreement bound

members to reduce certain tariffs. Usually this would include many special-case treatments of individual products, with exceptions or modifications for each country.

First PhaseCommodities which would be covered by the

agreement and freezing existing tariff levels Year Place/name Subjects

covered

1947 Geneva Tariffs

1949 Annecy Tariffs

1951 Torquay Tariffs

Second PhaseFocused on reducing tariffs

Year Place/name Subjects covered

1960-1961 GenevaDillon Round

Tariffs

1964-1967 GenevaKennedy Round

Tariffs and anti-dumping measures

1973-1979 GenevaTokyo Round

Tariffs, non-tariff measures, “framework”agreements

Third Phase

Year Place/name Subjects covered

1986-1994 GenevaUruguay Round

Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc

Extended the agreement fully to new areas such as intellectual property, services, capital, and agriculture. Out of this round the WTO was born.

ROUNDSNAME START DURA

TIONCOUNTRIES

SUB. COVERED

ACHIVEMENTS

1.GENEVA APRIL

1947

7 MONTHS

23 TARIFFS SIGNING OF GATT, 45,000 TARIFF CONCESSIONS AFFECTING $10 BILLION OF TRADE.

2. ANNECY

APRIL

1949

5

MONTHS

13 TARIFFS COUNTRIES EXCHANGED SOME 5000 TARIFF CONCESSIONS.

ROUNDS CONT…NAME STAR

TDURATION

COUNTRIES

SUB. COVERED

ACHEVEMENTS

3. TORQUAY

SEPT. 1950

8 MONTHS 38 TARIFFS COUNTRIES EXCHANGED SOME 8700 TARIFF CONCESSIONS, CUTTING THE TARIFFS BY 25%

4. GENEVA II

JAN. 1956

5 MONTHS 26 TARIFFS, ADMISSION OF JAPAN

$2.5 BILLION IN TARIFF REDUCTION

5. DILLON SEPT. 1960

11 MONTHS 26 TARIFFS TARIFF CONCESSION WORTH $4.9 BILLION OF WORLD TRADE.

ROUNDS CONT…NAME STAR

TDURATION

COUNTRIES

SUB. COVERED

ACHIVEMENTS

6. KENNEDY

MAY 1964

37 MONTHS

62 TARIFFS & ANTIDUMPING

TARIFF CONCESSION WORTH $40 BILLION OF WORLD TRADE

7. TOKYO SEPT. 1973

74 MONTHS

102 TARIFF, NON TARIFF MEASURES, “FRAMEWORK” AGREEMENTS

TARIFF REDUCTION WORTH $190 BILLION ACHIEVED.

8. URUGUAY

SEPT. 1986

87 MONTHS

123 TARIFFS,NON TARIFFS,RULES, SERVICES,IP,DISPUTE SETTLEMENT,TEXTILES,AGRI.

CREATION OF WTO, & EXTENDED THE RANGE OF TRADE NEGOTIATION,LEADING TO THE REDUCTION IN TARIFFS(ABOUT 40%).

Terms which help understanding GATT

TRADE BARRIERSTariff and Non-Tariff BarriersWhile free-trade maximizes world welfare,

most nations impose some trade restrictions that benefit special groups in the nation. The most important type of trade restriction historically is the tariff.

This is a tax or duty on the imports or

exports.

TariffsTariffs can be ad-Valorem, specific, or

compound.Ad-Valorem tariff is expressed as a fixed

percentage of the value of the traded commodity.

Specific tariff is expressed as a fixed sum per physical unit of the traded commodity.

A compound tariff is a combination of an Ad Valorem and a specific tariff.

Trade Restrictions /Trade BarriersAn import tariff is a duty on the imported

commodity, while an export tariff is a duty on the exported commodity.

Developing nations rely heavy on export tariff to raise revenues because of their ease of collection.

On the other hand, industrial countries invariably impose tariffs or other trade restrictions to protect some(usually labor-intensive)industry, while using mostly income taxes to raise revenues.

Trade Barriers (Contd)According to Stolper-Samuelson theorem , an

increase in the relative price of a commodity (for example, as a result of a tariff) raises the return or earnings of the factor used intensively in it’s production.

For example, if a capital-abundant nation imposes an import tariff on the labor intensive commodity, wages in the nation will rise.

However, since the nation’s benefit comes at the expense of other nations, latter are likely to retaliate, so that in the end all nations usually lose.

Non-Tariff Barriers

International trade also hampered by numerous Technical, administrative, and other regulations.

These include safety regulations for automobile and electrical equipment, health regulations for the hygienic

Production and packaging of imported food products, and labeling requirements showing origin and contents.

Non Tariff Barrier [Subsidies]

National government sometimes grant subsidies to domestic producers to help improve their trade position. Such devices are indirect form of protection provided to domestic businesses, whether they may be import competing producers or exporters.

Two types of subsidies can be distinguished: a domestic subsidy , which is sometimes granted to producers of import-competing goods,and an export subsidy, which goes to producers of goods that are to be sold overseas.

Other Non Tariff BarriersGovernment Procurement Policies:

Because government agencies are large buyers of goods and services, they are attractive customers for foreign suppliers. Most governments however, favor domestic suppliers over foreign ones in the procurement materials and products. E.g, Government often extend preferences to domestic suppliers in the form of buy-national policies campaigns.

Did GATTsucceed?

Continual reductions in tariffs helped spur very high rates of world trade growth during the 1950s and 1960s — around 8% a year on average

Trade growth consistently out-paced production growth

The rush of new members during the Uruguay Round demonstrated recognition of multilateral trading system as the anchor for development and an instrument of economic and trade reform.

But…….

GATT’s success in reducing tariffs to a low level, with a series of economic recessions 1970-80’s drove governments to devise other forms of protection for sectors facing increased foreign competition

High rates of unemployment and constant factory closures led governments in Western Europe and North America to seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade

Both these changes undermined GATT’s credibility and effectiveness.

The problem was not just a deteriorating trade policy environment.

By the early 1980s the General Agreement was clearly no longer as relevant to the realities of world trade as it had been in the 1940s

World trade had become far more complex and important than 40 years before

The globalization of the world economy was underway

Trade in services — not covered by GATT rules

ever increasing international investments

Factors convinced GATT members that a new effort to reinforce and extend the multilateral system should be attempted.

That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.

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