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A BRIEF HISTORY OF THE GATT
„ Beggar-thy-neighbour tariff policies of 1930s
=> WWII
„ Bretton Woods Conference at the end of the WWII, finance
ministers from the Allied nations gathered to discuss
creation of a new monetary system that would support
postwar reconstruction, economic stability, and peace.
=> IBRD & IMF
=> need for a third institution, ITO.

„ 1940s: Representatives met to design a postwar trading

system that would parallel the international monetary
system.
u Draft a Charter for ITO,
u Negotiate the substance of an ITO agreement (rules governing
governing international trade and reductions in tariffs.

„ 1947: 23 Members
„ Today: 153 Members
GATT TRADE ROUNDS
  
   !

1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960 ² 1961 Dillon Tariffs 26
Round
1964 ² 1967 Kennedy Tariffs and Anti-Dumping 62
Round Measures
1973 ² 1979 Tokyo Tariffs, Non-tariff Measures, 102
Round Framework Agreements
1986 ² 1994 Uruguay Tariffs, Non-tariff Measures, 123
Round Rules, Services, Intellectual
Property, Dispute Settlement,
Textiles, Agriculture, Creation
of WTO
TIMELINE OF GATT & WTO -1-
„ 1944: At the Bretton Woods Conference, which
created the IBRD and IMF, there is talk of a third
organisation, the ITO.

„ 1947: As support for another international

organisation wanes in the U. S. Congress, the General
Agreement on Tariffs and Trade is created. The Gatt
Treaty Creates a set of rules to govern trade among
23 member countries rather than a formal institution.

„ 1950: Formal U.S. Withdrawal from the ITO concept

as the U.S. Administration abandons efforts to seek
congressional ratification of the ITO
TIMELINE OF GATT & WTO -2-
„ 1951 ² 1986: Periodic negotiating rounds occur, with
occasional discussions of reforms of GATT. In 1980s,
serious problems with dispute resolutions arise.

„ The Uruguay Round, a new round of trade

negotiations, is launched. This culminates in 1994
Treaty that establishes the WTO.

„ 1995: The WTO is created at the end of the Uruguay

Round, replacing GATT.

„ 2009: The GATT consists of 153 members, accounting

for approximately 97% of world trade.
SUCCESS OF GATT
„ Regular meetings of GATT members are known as
´negotiating rounds
u Primarily focus on further reductions in the in the
maximum tariffs that countries could impose on imports
from other GATT members

„ Tariffs on manufactured products fell from a trade-

weighted average of roughly 35% before the creation
of GATT in 1947, to about 6.4% at the start of the
Uruguay round in 1986.

„ The volume of trade among GATT members surged:

In 2000 the volume of trade among WTO members
stood at 25 times its 1950 volume.
UNSOLVED PROBLEMS OF GATT -1-
„ By the 1980s several problems had surfaced:

u The dispute resolution mechanism of GATT was not

effectively functioning. Longstanding disagreements
among members regarding issues like government
subsidies, regulations for FDI«

u A number of commodities (agricultural products and

textiles) were widely exempt from GATT disciplines.

u Certain forms of administered trade protection (anti-

dumping duties, VERs, counterveiling duties) were
restricting trade and distorting trade patterns in many
important sectors.
UNSOLVED PROBLEMS OF GATT -2-
u Trade in services was expanding rapidly and GATT
had no rules regarding trade in services.

u Countries producing intellectual property were

becoming increasingly frustrated by the lack of
intellectual property protection in many developing
nations.

u Rules regarding trade related investment measures

(eg. Domestic purchase requirements for plants built
from FDI) were hotly disputed
TOKYO ROUND
„ A first attempt for reforming the system,
„ Progressive reduction of tariffs, average tariff on
industrial products became 4.7%,
„ Discussion of fundamental problems:
Agricultural product trade, Safeguards
(emergency import measures),
„ A series of agreements and arrangements on non-
tariff trade barriers => Small number of GATT
members subscribed to them,
„ Several Codes on Plurilateral Commitments (Eg.
Government Procurement, Civil Aircraft, Diary
Products).
URUGUAY ROUND
„ Launched in 1986 to address the problems of
GATT
„ Major reforms introduced:
u WTO established,

u A new dispute resolution mechanism built up,

u GATT·s authority expanded to new areas,

agreements regarding trade in textiles, agriculture,
services, and intellectual property,

u New set of rules regarding administered protection

came into effect.
FUNDAMENTAL PRINCIPLES OF THE
GATT/WTO SYSTEM

„ RECIPROCITY: A practice that occurs in GATT

negotiating rounds, whereby one country offers to
reduce a barrier to trade and a second country
´reciprocatesµ by offering to reduce one of its own
trade barriers.
u The practice of swapping tariff concessions,
facilitates the reduction of trade barriers.

„ NONDISCRIMINATION: (Equal treatment) If

one GATT member offers a benefit or a tariff
concession to another GATT member, it must
offer the same tariff reduction to all GATT
members.
NONDISCRIMINATION -1-
„ Most Favoured Nation Treatment: Grant someone a
special favour, then have to do the same for all other
WTO members. Each member treats all the other
members as ´most favoured trading partnersµ.

„ National Treatment: Imported or locally-produced

goods should be treated equally ² at least after the
foreign goods have entered the market.

„ Freer Trade: Lowering trade barriers, gradually and

through negotiation. Trade barriers concerned include
customs duties and measures such as import bans or
quotas, red tape, and exchange rate policies.
NONDISCRIMINATION -2-
„ Predictability through binding and transparency:
Once lowered, promising not to raise trade barriers gives
businesses a clearer view of their future opportunities.
With stability and predictability, investment is encouraged,
jobs are created, and consumers can fully enjoy the benefits
of competition (variety, and lower prices).

„ Percentages of Tariffs Bound Before and After the 1986 ²

1994 Talks

V" "
Developed Countries 78 99
Developing Countries 21 73
Transition Economies 73 98
A QUESTION
„ Why is reciprocity important in reducing barriers
to trade? Don·t countries benefit by unilaterally
reducing their tariffs because lower tariffs lead to
lower domestic prices?

„ Theories of International Economics tell us that,

it depends on the size of the country:
u If the country is small, captures all the benefits from
trade => no need for reciprocity
IMPACT OF A TARIFF ON A SMALL COUNTRY
„ Import tariffs=Tax
A Raise the price that
consumers pay for a
good,
A Provide tax revenue to
the government
A Potential to create
inefficiencies in
consumption and
production decisions,
„ Very small country will
benefit by unilaterally
lowering its tariffs,
u Because very small
countries are unable to
affect the world prices
 IMPACT OF A TARIFF ON A LARGE COUNTRY

„ Reciprocity becomes important when large countries are changing

their trading policies,
u Because import demand will comprise largeshare of world wide demand,
prices are affected
„ If a tariff is imposed
A Quantity of Imports demanded will decrease
A Wold Price falls
A Terms of Trade Improves
A Cost of tariff is pushed on to foreign producers
A Country is better off
„ Consumers pay higher prices, but gov·t collect revenue, and import
competing producers earn higher revenue
„ The use of tariff policy by the large country
A Beggar-thy-neighbour policy
A Importing Country better off
A Exporting Country worse off
A Inefficiencies in the world trading system
A Level of production becomes too high in importing country,
and level of production becomes too low in exporting
country
T-O-T DRIVEN PRISONER·S DILEMMA
„ Two situations:
A Two parties can improve
their situations by acting
cooperatively,
A However, indivudual
incentives they face lead
them to act non-
cooperatively.
„ The problem facing the
countries at the end of
WWII was that they knew
they would collectively be
better off under free trade.
Though each country
benefited from its own
import tariff, it also
suffered at the hand of its
trading partner·s import
tariffs.
GATT MECHANISM
„ A mechanism was needed by which countries could
jointly commit to tariff reductions that would reduce
the losses due to production and consumption
distortions, and through gains in efficiency, make all
countries, better off.

„ Practice of reciprocal tariff reductions provided the

necessary mechanism for countries to commit to freer
trade

„ In all countries, the reallocation of labour and capital

away from protected import competing firms and
toward export sectors would generate real efficiency
gains => Export Oriented Growth Strategy !
POWER OF NON DISCRIMINATION
„ Convenience and practicality,

„ Setting the same tariff policy on imports from all countries

ensures that resources are allocated to their most productive
use,

„ On the import side, nondiscrimination ensures that countries

purchase imports from the lowest-cost source country, (trade
diversion is prevented)

„ Prevents #! $ in order to circumvent high tariffs, in

which exporter ships its goods to a third country repackages it,
and then ships it to a final destination where it will qualify for
the third country·s preferential tariff, sometimes  !
 "! becomes necessary that leads the firm to move
a stage of production to the third country,

„ On export side, nondiscrimination protects exporting countries

from ! %% !. If one country were later to offer
a lower tariff rate to a third country, this could erode the value
of the original tariff concession to the first trading partner.
EXCEPTIONS TO GATT·S
NONDISCRIMINATION PRINCIPLE

„ Regional Trade Agreements

A Free Trade Agreements
A Customs Unions

„ Administered Protection
A Special Tariffs that can be used for particular
purposes
A Safeguards,
A Anti-Damping Duties

A Countervailing Duties
REGIONAL TRADE AGREEMENTS
„ Free Trade Area: Members maintain their
original external tariff with the rest of the world,
but engage in free trade with one another.

„ Customs Union: All members set the same

external tariff for imports from non-members and
eliminate the tariffs from members.
A When GATT members form a CU, CET can be no
higher than a weighted average of the tariffs of the
members countries before the CU was formed.
TRADE CREATION VS. TRADE DIVERSION
„ Is it controversial that GATT members form a
regional trade agreement?
u Trade Creation vs Trade Diversion

„ Reduction of tariffs among RTA members leads to

trade creation,

„ But may also create a diversion of trade away from a

non RTA country to a RTA member,
A If the non RTA country is the lowest cost producer, there
may be no worldwide efficiency gains

A Argument: Since the Tariff Preference (the difference

btw. the tariff for RTA members and others), is very
small it cannot impose huge trade diversion.
A Tariff preference associated with anti-damping duties
create substantial ´ "! µ effect (exports
are diverted to countries with lower import tariffs)
ADMINISTERED TRADE PROTECTION
„ ! !! refers to trade
restrictions that provide protection from imports
above and beyond the protection afforded by the
tariffs that were negotiated as part of GATT.

„ Deviation from GATT·s principle of nondiscrimination:

A Permits;
A Anti-Damping Duties,
A Countervailing Duties,

A Safeguard Measures, and

A Tariffs to assist with BoP problems. VERs are no longer allowed.

PRO ARGUMENTS:
„ Temporary Tariff that are usually discriminatory
was allowed for a variety of reasons:

A Administered Protection improves worldwide welfare.

Protection may make some countries better off, some
worse off, but if we add up gains and losses, the sum
total is positive,

A Administered Protection improves the welfare of

politically powerful importing countries, and,
especially, their import competing sectors. Some
group profits from the use of administered protection.
Eventhough protection may reduce worldwide
welfare, those who benefit are politically powerful
enough to see that it remains within the agreement.
SAFEGUARDS
„ A safeguard measure is a temporary tariff or quota
that is used to protect a domestic industry from ´fairµ
foreign competition,

„ In 1940s, US gov·t insisted that a safeguard provision

be part of every trade treaty that it signed,

„ To encourage countries to make greater concessions,

GATT included two provisions under which countries
could reintroduce protective trade policies,
u Article XIX Safeguard Provision, Countries remained free
to temporarily raise a tariff above the maximum level or
introduce a temporary quantitative restriction
u Article XXVIII: allows to permanantly raise tariffs
SAFEGUARDS - RULES
„ Measures should be nondiscriminatory,
u Eg. US Global Steel Safeguard raised the import tariff on
steel for many countries, but granted exemptions for steel
imports from many of free trade partners, such as Canada,
Mexico,.. => Violation of GATT rules!
„ Safeguards should only be used when imports
increase unexpectedly, or as a result of unforeseen
developments,

„ If a country imposed a safeguard on a product its

trading partners that were hurt by the safeguard
could retaliate with their own tariff increases on other
products => Uruguay Round Reforms: No retaliation
for the first three years.
„ Safeguards may provide an incentive for protected
firms to innovate quickly, if the cost of new
technology is falling
ANTI-DAMPING DUTIES
„ Anti-Damping Duty is a tariff that an importing
country imposes on imports of a product that have
been dumped into its domestic market by some
exporting country·s firms
u Evidence that foreign firms sold their products at less than
normal value and this has injured the domestic industry.

„ Anti-Damping Code: Allows countries to violate

nondiscrimination rule and impose an additional
tariff on imports from a firm that is dumping. Allows
price undertakings,
u Predatory Dumping
u Sporadic Dumping
u Persistent Dumping
COUNTERVAILING DUTIES
„ Tariffs used to offset the effects of a foreign
government·s subsidy, are similar to anti-
dumping duties,

„ In markets that are imperfectly competitive, a

foreign government·s subsidy can reduce the
welfare of an importing country,

„ Consumers in importing country benefit from the

subsidy, but the losses to the firm·s in the
importing country outweigh the benefits to the
consumers.
POST II. W.W. INTERNATIONAL FACTORS
„ U.S. led institutional multilateralism,
u Bretton Woods,
u Establishment of Twin Institutions, and GATT.

„ Marshall Plan: imposed economic policies on

developing countries,

„ Cold War and U.S., Western European

Cooperation against USSR,
MARSHALL PLAN
„ On June 5, 1947, speaking to the
graduating class at Harvard
University, Secretary of State
George C. Marshall laid the
foundation, in the aftermath of
World War II, for a U.S. program
of assistance to the countries of
Europe. At a time when great
cities lay in ruins and national
economies were devastated,
Marshall called on America to "do
whatever it is able to do to assist
in the return of normal economic
health in the world, without
which there can be no political
stability and no assured peace."
MARSHALL PLAN

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 To
give a boost to the Europe economy,
to promote European production, to
bolster European currency, and to
facilitate international trade,
especially with the United States,
whose economic interest required
Europe to become wealthy enough to
import U.S. goods.
 The containment of
growing Soviet influence in Europe,
evident especially in the growing
strength of communist parties in
Czechoslovakia, France, and Italy.
MARSHALL PLAN
„ The first substantial aid went to Greece and
Turkey in January 1947, which were seen as
being on the front lines of the battle against
communist expansion and were already being
aided under the Truman Doctrine.
MARSHALL PLAN
„ In 1949, in response to a
request from Turkish officials
for American technical
assistance and training, an
American expert discusses
newly donated agricultural
equipment with Turkish
farmers at the Ankara
Agricultural School. (Courtesy of
the George C. Marshall Research
Library, Lexington, Virginia)
MARSHALL PLAN
„ Conditions laid down to make use of the plan:
u Public entrepreneurship should be constricted
u Private entrepreneurship should be encouraged
u Heavy industry (iron-steel, heavy chemical etc.)
should not be established in Turkey.
u Industrialization must be based on processed
agricultural products, construction materials,
leather, forest products etc.
u Increased tractor usage and highway construction.
POST WW IMPLEMENTED POLICIES
(1947 ² 1950)
„ 1948 Economic Congress:
u Businessmen, and Professors gathered to determine
necessary conditions for rapid development,
u From Etatism towards a more international economy,

„ Foreign Aid through Marshall Plan, and

prospects of trade and foreign investment,

„ Integration to the International Economic

System,
u Turkey became member to, ILO in 1945, IBRD and
IMF in 1947, and IFC (1956) and IDA (1960), GATT
and OECD (1961), BIS (1964)