General Agreement on Tariffs and Trade (GATT)10/02/2020
The General Agreement on Tariffs and Trade 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.
Purpose of the General Agreement on Tariffs and Trade (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.
Three Provisions of GATT
GATT had three main provisions.
- 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.
- Second, 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.
- 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.
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.
Pros of GATT
For 47 years, GATT reduced tariffs. This boosted world trade 8 percent a year during the 1950s and 1960s. That was faster than world economic growth. Trade grew from $332 billion in 1970 to $3.7 trillion in 1993.
It was such a success that many more countries wanted to join. By 1995, there 128 members, generating at least 80 percent of world trade.
By increasing trade, GATT promoted world peace. In the 100 years before GATT, the number of wars was 10 times greater than the 50 years after GATT. Before World War II, the chance of a lasting trade alliance was only slightly better than 50/50.
By showing how free trade works, GATT inspired other trade agreements. It set the stage for the European Union. Despite the EU’s problems, it has prevented wars between its members.
GATT also improved communication. It provided incentives for countries to learn English, the language of the world’s largest consumer market. This adoption of a common language reduced misunderstanding. It also gave less developed countries a competitive advantage. English gave them insight into the developed country’s culture, marketing, and product needs.
For example, most Indians know English. It allows them to work in call centers that support U.S. countries. It has been a major reason for call center outsourcing.
Cons of GATT
Low tariffs destroy some domestic industries, contributing to high unemployment in those sectors. Governments subsidized many industries to make them more competitive on a global scale. U.S. and EU agriculture were major examples. In the early 1970s, the textile and clothing industries were exempted from GATT. When the Nixon Administration took the U.S. dollar off the gold standard in 1973, it lowered the value of the dollar compared to other currencies. That further lowered the international price of U.S. exports.
By the 1980s, the nature of world trade had changed. GATT did not address the trade of services that allowed them to grow beyond any one country’s ability to manage them. For example, financial services became globalized. Foreign direct investment had become more important. As a result, when U.S. investment bank Lehman Brothers collapsed, it threatened the entire global economy. Central banks scrambled to work together for the first time to address the 2008 financial crisis. They were forced to provide the liquidity for frozen credit markets.
Like other free trade agreements, GATT reduced the rights of a nation to rule its own people. The agreement required them to change domestic laws to gain the trade benefits. For example, India had allowed companies to create generic versions of drugs without paying a license fee. This helped more people afford medicine. GATT required India to remove this law. That raised the price of drugs to a level out of reach for many Indians.
Trade agreements like GATT often destabilize small, traditional economies. Countries like the United States that subsidize agricultural exports can put local family farmers out of business. Unable to compete with low-cost grains, the farmers migrate to cities looking for work, often in factories set up by multi-national corporations. Often these factories can move to other countries with lower-cost labor, leaving the farmers unemployed.
Farmers that stay often grow opium, coca, or marijuana, just because they can’t grow traditional crops and stay in business. Violence from the drug trade may force them to emigrate to protect themselves and their children.