GAAT Structure, Functions and Roles in the Current International Business Scenario

13/03/2020 1 By indiafreenotes

The General Agreement on Tariffs and Trade (GATT) was created after World War II to aid global economic recovery through reconstructing and liberalizing global trade. 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 It has since been superseded by the creation of the World Trade Organization (WTO).

The General Agreement on Tariffs and Trade (GATT) was formed in 1947 with a treaty signed by 23 countries, and signed into international law on January 1, 1948. GATT remained one of the focal features of international trade agreements until it was replaced by the creation of the World Trade Organization on January 1, 1995. By this time, 125 nations were signatories to its agreements, which covered about 90% of global trade.

The aim behind GATT was to form rules to end or restrict the most costly and undesirable features of the pre-war protectionist period, namely quantitative trade barriers such as trade controls and quotas. The agreement also provided a system to arbitrate commercial disputes between nations, and the framework enabled a number of multilateral negotiations for the reduction of tariff barriers. GATT was regarded as a significant success in the post-war years.

Key Achievement of GATT

One of the key achievements of GATT was that of trade without discrimination. Every signatory member of GATT was to be treated as equal to any other. This is known as the most-favored nation principle (and it has been carried through into the WTO). A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT signatories. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts.

Most nations adopted the most-favored nation principle in setting tariffs, which largely replaced quotas. Tariffs (preferable to quotas but still a trade barrier) were in turn cut steadily in rounds of successive negotiations. The average tariff rate fell from around 22% when GATT was first signed in Geneva in 1947, to around 5% by the end of the Uruguay Round (concluded 1993). The Uruguay Round also negotiated the creation of the WTO, a formal organization that has absorbed and extended GATT.

Structure and Basic Information

After World War II, the United Kingdom (UK) and the United States (US) submitted proposals to the Economic and Social Council (ECOSOC) of the United Nations regarding the establishment of an international trade body that was to be named the International Trade Organization (ITO). That is, perhaps, why the GATT is often referred to as a UN related body and its documents are sometimes mistakenly referred to as UN documents.

ECOSOC convened a conference, the United Nations Conference on Trade and Employment in 1946, to consider the UK and US proposals. A Preparatory Committee drafted the ITO Charter and it was approved in 1948 at the conference in Havana, Cuba. The Charter is often referred to as the Havana Charter or the ITO Charter.

The first round of trade negotiations took place while the Preparatory Committee was still working on drafting the Charter because the participants were anxious to begin the process of trade liberalization as soon as possible. Their results were incorporated into the General Agreement, which was signed in 1947.

Since the original signatory nations expected the agreement to become part of the more permanent ITO Charter, the text of the GATT contains very little “institutional” structure. This lack of detail within the agreement has created increasing difficulties as the GATT membership and rules governing trade between so many of the world’s nations have grown. The GATT has function as an international organization for many years even though it has never been formalized as such.

ECOSOC established an Interim Commission for the ITO that is referred to as ICITO. Unfortunately, when time came for the members to ratify the ITO Charter, the Congress of the United States refused and the ITO never became a reality.

The GATT survived, but remained intact only due to the Protocol of Provisional Application of the General Agreement of Tariffs and Trade which was concluded in 1947 and which came into force in 1948.

The GATT completed 8 rounds of multilateral trade negotiations (MTNs). The Uruguay Round (the 8th round) concluded with the signing of the Final Action April 15, 1994, in Morocco and produced the World Trade Organization (WTO) and it annexes.

The contracting party’s means:

(i) When you see: CONTRACTING PARTIES in capital letters it is referring to the members acting jointly.

(ii) When you see: contracting parties in lower case letters, it is referring to individual member states.

(iii) When you see the words: Contacting Parties, they will be in press releases or in published works concerning the GATT.

The Basic Functions of the GATT

  1. Most-Favored-Nation (MFN) Treatment

This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article 1 of the GATT 1947. It states that each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them, i.e., each contracting party is required to treat all contracting parties in the same way that it treats its “most-favoured nation”.

  1. Reciprocity

GATT advocates the principles of “rights” and “obligations”. Each contracting party has a right, e.g. access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis. In a way, this is closely associated with the MFN principle.

  1. Transparency

Fundamental to a transparent system of trade is the need to harmonize the system of import protection, so that barriers on trade can be reduced through the process of negotiations. The GATT therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only”.

In addition, the GATT and now the WTO, required many notifications from contracting parties on their agricultural and trade policies so that these can be examined by other parties to ensure that they are GATT/WTO compatible.

  1. Tariff Binding and Reduction

When GATT was established, tariffs were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction. The text of the 1947, GATT lays out the obligations on the contracting parties in this regard.