GATT (General Agreement on Tariffs and Trade)

The Genesis of GATT. : In 1946, the newly-created Economic and Social Council of the United
Nations called a conference at the Brettonwoods to consider the creation of the International
Trade Organization (ITO) which was envisaged as the final leg of a triad of post-War economic
agencies (the other two were the International Monetary Fund and the International Bank for
Reconstruction and Development - later the World Bank). A preparatory committee was
established to draft the ITO charter.

During 1946-1947, the committee worked on the draft charter. However, independent of this
official task under the UN mandate, the committee members conducted tariff-cutting
negotiations among themselves in advance of the ITO (ITO never came into existence). These
negotiations resulted in about 45,000 tariff concessions affecting some US$ 10 billion of world
trade.

The committee members also agreed to protect the value of the tariff concessions by early
acceptance of some of the trade rules of the draft ITO charter. Thus, tariff concessions and trade
rules together became known as the General Agreement on Tariffs and Trade (GATT) which
was signed on 30 October 1947 by 23 countries and came into force from 01 Jan 1948.

GATT was an agreement which was based on the principle of non-discrimination in trade
relations on a multilateral basis. Through this principle the same rights of market access were
extended to all 23 of the original signing nations, developed and developing alike. Today, the
World Trade Organization, the offspring of the GATT, has 132 members, all of which have
adopted the principle of non-discrimination.

Preamble: - Recognizing that their relations in the field of trade and economic endeavour
should be conducted with a view to raising standards of living, ensuring full employment and a
large and steadily growing volume of real income and effective demand, developing the full use
of the resources of the world and expanding the production and exchange of goods,

Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to
trade and to the elimination of discriminatory treatment in international commerce,

Have through their Representatives agreed as follows……………..

Paradoxically, despite its desire to cocoon itself, India was the founder member of GATT. Founder
members were a mix from developed and developing nations. The list of founding members was
as follows: -

1. Commonwealth of Australia,
2. The Kingdom of Belgium,
3. The United States of Brazil,
4. Burma,
5. Canada,
6. Ceylon,
7. The Republic of Chile,
8. The Republic of China,
9. The Republic of Cuba,
10. The Czechoslovak Republic,
11. The French Republic,
12. India,
13. Lebanon,
14. The Grand-Duchy of Luxemburg,
 15. The Kingdom of the Netherlands,
16. New Zealand,
17. The kingdom of Norway,
18. Pakistan,
19. Southern Rhodesia,
20. Syria,
21. The Union of South Africa,
22. The United Kingdom of Great Britain and Northern Ireland, and
23. The United States of America:

GATT was based on 4 building blocks: -

1. MFN. Most Favoured Nation concept, which meant that the tariffs charged to imports
from the most favourable nation among the GATT members, should be charged to all
the members. In simple terms it meant NO DISCRIMINATION in tariffs.
2. Principle of Providing Equal Market Access Opportunity to all Signatories.
3. Principle of Trade Liberalisation through reciprocal concessions being granted.
4. Dispute settlement mechanism in operation.

“Rounds” of GATT trade negotiations

The countries who signed GATT negotiated new trade agreements that all would enter into. Each
such set of agreements was called a “round”. In general, each of these agreements bound the
members to reduce certain tariffs, with many special-case treatments of individual products, and
in many cases with exceptions and modifications for each country.

1. Geneva Round (1948): 23 countries. GATT enters into force.

2. Annecy Round (1949): 13 countries.
3. Torquay Round (1951): 38 countries.
4. Fourth Round (1956): 26 countries. Tariff reductions. Strategy set for future GATT policy
toward developing countries, improving their positions as treaty participants.
5. Dillon Round (1962): 26 countries. Tariff reductions.
6. Kennedy Round (1967): 62 countries. Tariff reductions. This was an across-the-board
reduction rather than a product-by-product specification, for the first time. Anti-dumping
agreement (which, in the United States, was rejected by Congress).
7. Tokyo Round (1979): 102 countries. Reduced non-tariff trade barriers. Also reduced
tariffs on manufactured goods. Improvement and extension of GATT system.
8. Uruguay Round (1993): 123 countries. Created the World Trade Organization to replace
the GATT treaty. Reduced tariffs and export subsidies, reduced other import limits and quotas
over the next 20 years, agreement to enforce patents, trademarks, and copyrights, and open up
foreign investment

India participated in all the 8 rounds and gained admission into WTO as the founder member by
virtue of being member of GATT. China which was the founder member of GATT but had later
withdrawn from it is yet to get the membership of WTO. It has currently been accorded an
observers status. To become the full member, it requires the vote of 2/3 members of WTO.

GATT had succeeded to a reasonable extent in removing tariffs but was only partly successful in
removing the non-tariff barriers.
Dunkel Draft. Dunkel Draft had generated lot of heat after the Uruguay round. Dunkel Draft
was named after Arthur Dunkel, then President of GATT. Dunkel Draft brought in non-trade
issues like patents and other intellectual property rights and foreign investments into the fold.
(Originally only trade and tariff was the subject matter of GATT). These were the issues which
were prime concern of Western Countries due to rampant piracy of drug patents, films and books
in the third world countries. Thus, the draft was heavily tilted in favour of West. By forcing third
world countries to Dunkel Draft, Western Countries stood to gain the most. This was the prime
reason for its resentment outside the West.

IMF – The purpose of IMF is to help the countries with short term “Balance of Payment” problems.

World Bank – World Bank takes care of long term funding requirements of the countries.

These two institutions are similar to Money Market and Capital Markets who have similar roles in
the economy of a country.

The trio of Mr Willy Brandt, the German Chancellor and Nobel Peace Prize winner, Mr Robert
McNamara, US Secretary of Defense and the World Bank President from 1968 to 1981, and
Norwegian President (some lady) proposed New International Economic Order through North
South Commission in 1977. Mr Man Mohan Singh was a member of this commission. However,
this initiative did not work out and died a quiet death over time. But these were extremely well
meaning people who proposed integration of poor South with rich North.

Post termination of cold war, re-alignation of the world order is in progress. Eastern Europe which
was till then communist in their ideology broke away from the Russian and has been integrating
with Western Europe and America because of their geographical proximity and religious and
cultural similarities. Some of them have already been admitted into NATO also. However, the
Central Asian Republics have not been able to integrate with the West, again the region is
Religious and cultural. Central Asian Republics are essentially Muslim dominated countries. Also
they are located closer to the Middle East Countries. So, they are religiously and cultural
attracted to the Middle East.

India is today completely out of sync with the world trade. Prior to disintegration of Russia, India
had special relationship with Russia and all other communist countries with the exception of
China. India had special trade treaties with them which allowed India to import their goods
(primarily Defence goods/Weapons) on rupee payment. This rupee account was used by them to
purchase consumer goods like tea leaves etc from India. But after the break-up of USSR, all such
arrangements were lost leaving India out in the cold. Thereafter, India was left out in the cold. It
was member of no trading block. There were NAFTA (North Atlantic Free Trade Association),
European Common Market, ASEAN (Association of South East Asian Nations), OPEC and a few
more which encompassed almost all the major trading nations in the world. India was only
member of the SAARC (South Asian Association for Regional Cooperation), a body which could
never discuss any trade issues due to severe distrust among the member countries. Today,
India’s share in world trade is just 0.82% and share of exports in GDP is barely 6 % against an
average of 30-40% of most of the advanced countries.

Although India professed Non-Alignment, it was viewed with scepticism or even down right smirk
by the West because of more than obvious tilt of India towards USSR. India had even entered
into a Friendship Treaty with Russia prior to launching 1971 offensive against Pakistan. This
treaty unambiguously stated that attack one country would be construed to be attack on other
country and therefore …………. This was one of the deterrents for USA to give full support to
Pakistan in Bangladesh as this could have led to direct confrontation with USSR and could have
become cause for WW III.
China is managing a great paradox. There are two systems in operation in parallel. While the
Eastern Coastal China has embraced the Free Market Economy, Central and Western China are
still steeped deep in communist market economy. The difference in per capita income between
poorest and richest province is of the order of 11.

India embraced the free market economy in 1991. In 1993, the exchange rates were liberalized
to be determined by the market rather than Govt fixing it artificially. RBI still intervenes to
maintain the exchange rates at desired rates but it does so by market operation (selling and
buying the dollars from market).

India has huge trade development potential in Pakistan, Afghanistan and beyond. However,
Kashmir disputes have shut the door for trade with Pakistan. Route to Afghanistan passes
through Pakistan. Other route is too circuitous to be cost effective. Similarly, central Asian
Republics markets are difficult to access due to Pakistan factor. Solution to Kashmir problem will
be not only huge Pakistani Markets but also other markets.

Economic Integration between different states is achieved through a five step process:

1. Free Trade Zone

2. Customs Union
3. Common Market
4. Economic Union
5. Federation

1. Free Trade Zone – A group of countries decide to remove all the restrictions of trade
and services among them.
2. Customs Union – Free trade among members. But custom rates with non member
countries would be higher.
3. Common Markets – In addition to trade and customs, all barriers for capital and
labour are also removed.
4. Economic Union – The group of countries follow common macro economic policies.
European Union is example of Economic Uni0on. An Economic Union involves giving up
part of the economic sovereignty. Like the fiscal deficit of any country in the EU can not
exceed 3% of the GDP. In case it exceeds 3%, certain measures would have to be
taken by the concerned country immediately to check the inflation. It also involves
harmonizing various laws. EU also has a separate parliament in Brussels which has
been announced to be the capital of EU.
5. Federation – Like United States of America.

Such economic integration is also called formation of trading blocks between different states. But
these trading blocks promote protectionism rather than free trade. Free trade between a few
states is always at the cost of free trade with rest of the nations.

Trade is a major fault line among nations. Trade leads to money. And MONEY, WOMAN and LAND
are the three major contributors to the reasons for war besides RELIGION. In the past, quite a few
wars have been fought on trade disputes.

Resources are the second fault line among nations. Oil resources led to Iraq annexing Kuwait and
consequential intervention by USA alarmed by its energy security getting compromised. The
second war on Iraq by USA on the pretext of weapons of mass destruction was also fought to
garner 11% of the world proven oil resources.

The third fault line is the civilization or religion.