Lecture -8(HISTORY OF GATT).ppt

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1. HISTORY OF GATT
&
THE WTO SYSTEM

2. A BRIEFHISTORYOFTHEGATT
Beggar-thy-neighbourtariffpoliciesof 1930s
=> WWII
BrettonWoodsConferenceat theendof theWWII, finance
ministersfromtheAlliednationsgatheredtodiscusscreation
of a newmonetarysystemthatwouldsupportpostwar
reconstruction, economicstability, andpeace.
=> IBRD & IMF
=> needfora thirdinstitution, ITO.
1940s: Representativesmet todesigna postwartrading
systemthatwouldparalleltheinternationalmonetarysystem.
Drafta Charter forITO,
Negotiatethesubstanceof an ITO agreement(rulesgoverning
governinginternationaltradeandreductionsin tariffs.
1947: 23 Members
Today: 153 Members

3. TIMELINEOFGATT & WTO -1-
1944: At theBrettonWoodsConference, whichcreated
theIBRD andIMF, thereis talk of a thirdorganisation,
theITO.
1947: As supportforanotherinternationalorganisation
wanesin theU. S. Congress, theGeneral Agreementon
TariffsandTradeis created. TheGattTreatyCreatesa
set of rulestogoverntradeamong23 membercountries
ratherthana formalinstitution.
1950: FormalU.S. WithdrawalfromtheITO conceptas
theU.S. Administrationabandonseffortstoseek
congressionalratificationof theITO

4. TIMELINEOFGATT & WTO -2-
1951 –1986: Periodicnegotiatingroundsoccur, with
occasionaldiscussionsof reformsof GATT. In1980s,
seriousproblemswithdisputeresolutionsarise.
TheUruguay Round, a newroundof tradenegotiations,
is launched. Thisculminatesin 1994 Treatythat
establishestheWTO.
1995: TheWTO is createdat theendof theUruguay
Round, replacingGATT.
2009: TheGATT consistsof 153 members, accounting
forapproximately97% of worldtrade.

5. SUCCESSOFGATT
Regularmeetingsof GATT membersareknownas
“negotiatingrounds
Primarilyfocuson furtherreductionsin thein themaximum
tariffsthatcountriescouldimposeon importsfromother
GATT members
Tariffson manufacturedproductsfellfroma trade-
weightedaverageof roughly35% beforethecreationof
GATT in 1947, toabout6.4% at thestart of theUruguay
roundin 1986.
Thevolumeof tradeamongGATT memberssurged: In
2000 thevolumeof tradeamongWTO membersstood
at 25 timesits1950 volume.

6. UNSOLVEDPROBLEMSOFGATT -1-
By the 1980s several problems had surfaced:
The dispute resolution mechanism of GATT was not
effectively functioning. Longstanding disagreements
among members regarding issues like government
subsidies, regulations for FDI…
A number of commodities (agricultural products and
textiles) were widely exempt from GATT disciplines.
Certain forms of administered trade protection (anti-
dumping duties, VERs, counterveiling duties) were
restricting trade and distorting trade patterns in many
important sectors.

7. UNSOLVEDPROBLEMSOFGATT -2-
Trade in services was expanding rapidly and GATT had
no rules regarding trade in services.
Countries producing intellectual property were becoming
increasingly frustrated by the lack of intellectual property
protection in many developing nations.
Rules regarding trade related investment measures (eg.
Domestic purchase requirements for plants built from
FDI) were hotly disputed

8. TOKYOROUND
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).

9. URUGUAY ROUND
Launchedin 1986 toaddresstheproblemsof GATT
Majorreformsintroduced:
WTO established,
A newdisputeresolutionmechanismbuiltup,
GATT’sauthorityexpandedtonewareas, agreements
regardingtradein textiles, agriculture, services, and
intellectualproperty,
New set of rulesregardingadministeredprotection
cameintoeffect.

10. FUNDAMENTALPRINCIPLESOFTHEGATT/WTO
SYSTEM
RECIPROCITY: A practicethatoccursin GATT
negotiatingrounds, wherebyonecountryoffersto
reducea barriertotradeanda secondcountry
“reciprocates” byofferingtoreduceoneof itsown
tradebarriers.
Thepracticeof swappingtariffconcessions, facilitates
thereductionof tradebarriers.
NONDISCRIMINATION: (Equaltreatment) Ifone
GATT memberoffersa benefitora tariffconcession
toanotherGATT member, it mustofferthesame
tariffreductiontoallGATT members.

11. NONDISCRIMINATION -1-
MostFavouredNationTreatment:Grant someonea
specialfavour, thenhavetodo thesameforallother
WTO members. Eachmembertreatsalltheother
membersas “mostfavouredtradingpartners”.
NationalTreatment:Importedorlocally-producedgoods
shouldbe treatedequally–at leastaftertheforeign
goodshaveenteredthemarket.
FreerTrade:Loweringtradebarriers, graduallyand
throughnegotiation. Tradebarriersconcernedinclude
customsdutiesandmeasuressuchas importbansor
quotas, redtape, andexchangerate policies.

12. NONDISCRIMINATION -2-
Predictabilitythroughbindingandtransparency:
Oncelowered, promisingnot toraisetradebarriersgives
businessesa clearerviewof theirfutureopportunities. With
stabilityandpredictability, investmentis encouraged, jobsare
created, andconsumerscan fullyenjoythebenefitsof
competition(variety, andlowerprices).
Percentagesof TariffsBoundBeforeandAfterthe1986 –
1994 Talks
Before After
DevelopedCountries 78 99
DevelopingCountries 21 73
TransitionEconomies 73 98

13. 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:
If the country is small, captures all the benefits from
trade => no need for reciprocity

14. IMPACTOFATARIFFONASMALLCOUNTRY
Importtariffs=Tax
Raisethepricethat
consumerspay fora
good,
Providetaxrevenueto
thegovernment
Potentialtocreate
inefficienciesin
consumptionand
productiondecisions,
Verysmallcountrywill
benefitbyunilaterally
loweringitstariffs,
Becauseverysmall
countriesareunableto
affecttheworldprices

15. IMPACTOFATARIFFONALARGECOUNTRY
Reciprocitybecomesimportantwhenlargecountriesarechanging
theirtradingpolicies,
Becauseimportdemandwillcompriselargeshareof worldwidedemand, prices
areaffected
Ifa tariffis imposed
Quantityof Importsdemandedwilldecrease
WoldPricefalls
Termsof TradeImproves
Costof tariffis pushedon toforeignproducers
Countryis betteroff
Consumerspay higherprices, but gov’tcollectrevenue, andimport
competingproducersearnhigherrevenue

16. The use of tariff policy by the large country
Beggar-thy-neighbour policy
Importing Country better off
Exporting Country worse off
Inefficiencies in the world trading system
Level of production becomes too high in importing country, and
level of production becomes too low in exporting country

17. GATT MECHANISM
A mechanismwasneededbywhichcountriescould
jointlycommittotariffreductionsthatwouldreducethe
lossesduetoproductionandconsumptiondistortions,
andthroughgainsin efficiency, makeallcountries,
betteroff.
Practiceof reciprocaltariffreductionsprovidedthe
necessarymechanismforcountriestocommittofreer
trade
Inallcountries, thereallocationof labourandcapital
awayfromprotectedimportcompetingfirmsandtoward
exportsectorswouldgeneraterealefficiencygains=>
ExportOrientedGrowthStrategy!

18. POWEROFNONDISCRIMINATION
Convenienceandpracticality,
Settingthesametariffpolicyon importsfromallcountriesensures
thatresourcesareallocatedtotheirmostproductiveuse,
On theimportside, nondiscriminationensuresthatcountries
purchaseimportsfromthelowest-costsourcecountry, (trade
diversion is prevented)
Preventsre-reoutingin order to circumvent high tariffs, in which
exportershipsitsgoodstoa thirdcountryrepackagesit, andthen
shipsit toa final destinationwhere it will qualify for the third
country’s preferential tariff, sometimes substantial transformation
becomes necessary that leads the firm to move a stage of
production to the third country,
On export side, nondiscriminationprotectsexportingcountriesfrom
bilateralopportunism. 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.

19. EXCEPTIONSTOGATT’SNONDISCRIMINATION
PRINCIPLE
Regional Trade Agreements
Free Trade Agreements
Customs Unions
Administered Protection
Special Tariffs that can be used for particular purposes
Safeguards,
Anti-Damping Duties
Countervailing Duties

20. REGIONALTRADEAGREEMENTS
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.
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.

21. TRADECREATIONVS. TRADEDIVERSION
Is it controversialthatGATT membersform a regional
tradeagreement?
TradeCreationvs TradeDiversion
Reductionof tariffsamongRTA membersleadstotrade
creation,
But mayalsocreatea diversionof tradeawayfroma
nonRTA countrytoa RTA member,
IfthenonRTA countryis thelowestcostproducer, theremay
be no worldwideefficiencygains
Argument: Since theTariffPreference(thedifference
btw. thetariffforRTA membersandothers), is very
smallit cannotimposehugetradediversion.
Tariffpreferenceassociatedwithanti-damping duties
createsubstantial“tradedeflection” effect(exportsare
divertedtocountrieswithlowerimporttariffs)

22. ADMINISTEREDTRADEPROTECTION
Administered Protectionrefers 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:
Permits;
Anti-Damping Duties,
Countervailing Duties,
Safeguard Measures, and
Tariffs to assist with BoP problems. VERs are no longer allowed.

23. PROARGUMENTS:
TemporaryTariffthatareusuallydiscriminatorywas
allowedfora varietyof reasons:
AdministeredProtectionimprovesworldwidewelfare.
Protectionmaymakesomecountriesbetteroff, some
worseoff, but ifweaddupgainsandlosses, thesum
total is positive,
AdministeredProtectionimprovesthewelfareof
politicallypowerfulimportingcountries, and, especially,
theirimportcompetingsectors. Somegroupprofitsfrom
theuseof administeredprotection. Eventhough
protectionmayreduceworldwidewelfare, thosewho
benefitarepoliticallypowerfulenoughtoseethatit
remainswithintheagreement.

24. SAFEGUARDS
A safeguardmeasureis a temporarytarifforquotathat
is usedtoprotecta domesticindustryfrom“fair” foreign
competition,
In1940s, US gov’tinsistedthata safeguardprovisionbe
partof everytradetreatythatit signed,
Toencouragecountriestomakegreaterconcessions,
GATT includedtwoprovisionsunderwhichcountries
couldreintroduceprotectivetradepolicies,
ArticleXIX SafeguardProvision, Countriesremainedfreeto
temporarilyraisea tariffabovethemaximumlevelor
introducea temporaryquantitativerestriction
ArticleXXVIII: allowstopermanantlyraisetariffs

25. SAFEGUARDS-RULES
Measuresshouldbe nondiscriminatory,
Eg. US Global SteelSafeguardraisedtheimporttariffon
steelformanycountries, but grantedexemptionsforsteel
importsfrommanyof freetradepartners, suchas Canada,
Mexico,.. => Violationof GATT rules!
Safeguardsshouldonlybe usedwhenimportsincrease
unexpectedly, oras a resultof unforeseen
developments,
Ifa countryimposeda safeguardon a productitstrading
partnersthatwerehurt bythesafeguardcouldretaliate
withtheirowntariffincreaseson otherproducts=>
Uruguay RoundReforms: No retaliationforthefirst
threeyears.
Safeguardsmayprovidean incentiveforprotectedfirms
toinnovatequickly, ifthecostof newtechnologyis
falling

26. ANTI-DAMPINGDUTIES
Anti-Damping Dutyis a tariffthatan importingcountry
imposeson importsof a productthathavebeendumped
intoitsdomesticmarket bysomeexportingcountry’s
firms
Evidencethatforeignfirmssoldtheirproductsat lessthan
normal valueandthishas injuredthedomesticindustry.
Anti-Damping Code: Allowscountriestoviolate
nondiscriminationruleandimposean additionaltariffon
importsfroma firmthatis dumping. Allowsprice
undertakings,
PredatoryDumping
SporadicDumping
PersistentDumping

27. COUNTERVAILINGDUTIES
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.

28. POSTII. W.W. INTERNATIONALFACTORS
U.S. led institutional multilateralism,
Bretton Woods,
Establishment of Twin Institutions, and GATT.
Marshall Plan: imposed economic policies on
developing countries,
Cold War and U.S., Western European Cooperation
against USSR,

29. MARSHALLPLAN
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."

30. MARSHALLPLAN
The official mission statement: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.
Unofficial goal:The containment of
growing Soviet influence in Europe,
evident especially in the growing
strength of communist parties in
Czechoslovakia, France, and Italy.

31. MARSHALLPLAN
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.

32. MARSHALLPLAN
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)

33. MARSHALLPLAN
Conditions laid down to make use of the plan:
Public entrepreneurship should be constricted
Private entrepreneurship should be encouraged
Heavy industry (iron-steel, heavy chemical etc.) should
not be established in Turkey.
Industrialization must be based on processed
agricultural products, construction materials, leather,
forest products etc.
Increased tractor usage and highway construction.