General Agreement on Tariffs and Trade (GATT) (1/3)

Outcome of the failure of negotiating governments to

create the International Trade Organization (ITO) Negotiated during the UN Conference on Trade and Employment Formed in 1947 and transformed to World Trade Organization (WTO) in 1995

GATT (2/3)
Part of economic recovery after World War II, Bretton

Woods Conference suggested an organization to regulate trade Parallel to the Governments negotiating the ITO, 15 negotiating states began negotiating for the GATT as a way to attain early tariff reductions The ITO failed in 1950 and then GATT agreement was introduced

GATT (3/3)
GATT's main objective Reduction of barriers to international trade Achieved through reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements It was a treaty, not an organization
A small secretariat occupied what is today the Centre

William Rappard in Geneva, Switzerland

Inception
Efforts to negotiate international trade agreements began in 1927 at

the League of Nations but were unsuccessful. Precursor organization to GATT, ITO, was first proposed in February 1945 by the United Nations Economic and Social Council (UNESCO). Owing to the United States failing to implement the ITO, GATT was the only organization left. On 1 January, 1948 the agreement was signed by 23 countries: Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, the Czechoslovak Republic, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, the United Kingdom, and the United States. According to GATT's own estimates, the negotiations created 123 agreements that covered 45,000 tariff items that related to approximately one-half of world trade or $10 billion in trade.

In Brief

General Agreement on Tariffs and Trade

 The General Agreement on Tariffs and Trade

(GATT) was first signed in 1947.

Was designed
To provide an international forum That encouraged free trade between member

states By regulating and reducing tariffs on traded goods Providing a common mechanism for resolving trade disputes.

GATT ??
A Treaty, not an Organization

Was the outcome of the failure of negotiating

governments to create the ITO The Bretton Woods Conference introduced the idea for an organization to regulate trade as part of a larger plan for economic recovery after World War II As governments negotiated the ITO, 15 negotiating states began parallel negotiations for the GATT as a way to attain early tariff reductions Once the ITO failed in 1950, only the GATT agreement was left.

Objective
The GATT's main objective was the Reduction of Barriers to International Trade This was achieved through the Reduction of Tariff barriers Quantitative Restrictions Subsidies on trade through a series of agreements

History
Divided into 3 phases: First:

From 1947 until the Torquay Round Largely concerned which commodities would be covered by the agreement Freezing existing tariff levels

Second: From 1959 to 1979 Focused on reducing tariffs

Third: Consists only of the Uruguay Round from 1986 to 1994 It extended the agreement to new areas such as intellectual property, services, capital, and agriculture Final outcome was creation of WTO

History (Contd...)
GATT signatories occasionally negotiated new trade

agreements that all countries would enter into Each set of agreements was called a round In general, each agreement bound members to reduce certain tariffs. Usually this would include many special-case treatments of individual products, with exceptions or modifications for each country.

First Phase
Commodities which would be covered by the agreement

and freezing existing tariff levels

Year 1947 1949 Place/name Geneva Annecy Subjects covered Tariffs Tariffs

1951

Torquay

Tariffs

Second Phase
Focused on reducing tariffs
Year
1960-1961 1964-1967

Place/name
Geneva Dillon Round Geneva Kennedy Round Geneva Tokyo Round

Subjects covered
Tariffs Tariffs and anti-dumping measures Tariffs, non-tariff measures, framework agreements

1973-1979

Third Phase
Extended the agreement fully to new areas such as intellectual property, services, capital, and agriculture. Out of this round the WTO was born.
Year 1986-1994 Place/name Geneva Uruguay Round Subjects covered Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc

ROUNDS
NAME
1.GENEVA

START APRIL 1947

DURAT COUNTR SUB. ION IES COVERED

7 MONTHS

ACHIVEMENTS
SIGNING OF GATT, 45,000 TARIFF CONCESSIONS AFFECTING $10 BILLION OF TRADE.

23

TARIFFS

2. ANNECY APRIL 1949

5 MONTHS

13

TARIFFS

COUNTRIES EXCHANGED SOME 5000 TARIFF

CONCESSIONS.

ROUNDS CONT
NAME
3. TORQUAY

START DURATION COUNTR IES

SEPT. 1950 8 MONTHS

SUB. COVERED TARIFFS

ACHEVEMENTS
COUNTRIES EXCHANGED SOME 8700 TARIFF CONCESSIONS, CUTTING THE TARIFFS BY 25%

38

4. GENEVA II

JAN. 1956

5 MONTHS

26

TARIFFS, ADMISSION OF JAPAN

$2.5 BILLION IN TARIFF REDUCTION

5. DILLON

SEPT. 1960

11 MONTHS

26

TARIFFS

TARIFF CONCESSION WORTH $4.9 BILLION OF WORLD TRADE.

ROUNDS CONT
NAME
6. KENNEDY

START DURATIO N
MAY 1964 37 MONTHS

COUNT RIES 62

SUB. COVERED
TARIFFS & ANTIDUMPING

ACHIVEMENTS
TARIFF CONCESSION WORTH $40 BILLION OF WORLD TRADE

7. TOKYO

SEPT. 1973

74 MONTHS

102

TARIFF, NON TARIFF MEASURES, FRAMEWORK AGREEMENTS

TARIFF REDUCTION WORTH $190 BILLION ACHIEVED.

8. URUGUAY

SEPT. 1986

87 MONTHS

123

TARIFFS,NON TARIFFS,RULES, SERVICES,IP,DISPU TE SETTLEMENT,TEXTI LES,AGRI.

CREATION OF WTO, & EXTENDED THE RANGE OF TRADE NEGOTIATION,LEADING TO THE REDUCTION IN TARIFFS(ABOUT 40%).

Before moving on.

Terms which help understanding GATT

 While free-trade maximizes world welfare, most

TRADE BARRIERS Tariff and Non-Tariff Barriers

nations impose some trade restrictions that benefit special groups in the nation. The most important type of trade restriction historically is the tariff. This is a tax or duty on the imports or exports. When a small nation imposes an import tariff, the domestic price of the importable commodity rises by the full amount of the tariff for individuals in nation. As a result, domestic production of the importable commodity expands while domestic consumption and imports fall. However, the nation as a whole faces the unchanged world price since the nation itself collects the tariff.

Tariffs
Tariffs can be ad-Valorem, specific, or compound.
Ad-Valorem tariff is expressed as a fixed percentage of

the value of the traded commodity. Specific tariff is expressed as a fixed sum per physical unit of the traded commodity. A compound tariff is a combination of an Ad Valorem and a specific tariff.

Trade Restrictions /Trade Barriers

An import tariff is a duty on the imported commodity,

while an export tariff is a duty on the exported commodity. Export tariffs are prohibited by the U.S. Constitution but are often applied by developing countries on their traditional exports (such as Ghana on its cocoa and Brazil on its coffee) to get better prices and revenues. Developing nations rely heavy on export tariff to raise revenues because of their ease of collection. On the other hand, industrial countries invariably impose tariffs or other trade restrictions to protect some(usually labor-intensive)industry, while using mostly income taxes to raise revenues.

Trade Barriers (Contd)

According to Stolper-Samuelson theorem , an increase in

the relative price of a commodity (for example, as a result of a tariff ) raises the return or earnings of the factor used intensively in its production. if a capital-abundant nation imposes an import tariff on the labor intensive commodity, wages in the nation will rise.
However, since the nations benefit comes at the expense of
For example,

other nations, latter are likely to retaliate, so that in the end all nations usually lose.

Trade Barriers (Contd)

Two arguments are that protection is needed to reduce domestic

unemployment and a deficit balance of payments. A more valid argument for protection is the infant-industry argument. However, what trade protection can do, direct subsidies and taxes can do better in overcoming purely domestic distortions.The same is true for industries important for national defense.The closest we come to a valid economic argument for protection is the optimal tariff (which,however, invites retaliation). Trade protection in the United States is usually given to lowwage workers and to large, well organized industries producing producing consumer products.

Non-Tariff Barriers
International trade also hampered by numerous
Technical, administrative, and other regulations. These include safety regulations for automobile and

electrical equipment, health regulations for the hygienic Production and packaging of imported food products, and labeling requirements showing origin and contents.

Non Tariff Barrier [Subsidies]

National government sometimes grant subsidies to

domestic producers to help improve their trade position. Such devices are indirect form of protection provided to domestic businesses, whether they may be import competing producers or exporters.
Two types of subsidies can be distinguished: a domestic

subsidy , which is sometimes granted to producers of import-competing goods,and an export subsidy, which goes to producers of goods that are to be sold overseas.

Other Non Tariff Barriers

Government Procurement Policies: Because government

agencies are large buyers of goods and services, they are attractive customers for foreign suppliers. Most governments however, favor domestic suppliers over foreign ones in the procurement materials and products. E.g, Government often extend preferences to domestic suppliers in the form of buy-national policies campaigns.

Impact of trade barriers

Advanced industrial nations committed themselves after

World War II to removing barriers to the free flow of goods, services,and capital between nations This goal was enshrined in the General Agreement on Trade and Tariffs [GATT] Under the umbrella of GATT, eight rounds of negotiations among member states(now numbering 146) have worked to lower barriers to the free flow of goods and services The most recent round of negotiations, known as the Uruguay Round, was completed in Dec,1993.The Uruguay round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the World Trade Organization (WTO)to police the international trading system

Impact of trade barriers

In the late 2001, the WTO launched a new round of talks

[Doha,Qatar] aimed at further liberalizing the global trade and investment framework. The agenda included cutting tariffs on industrial goods, services,and agricultural products; phasing out subsidies to agricultural producers; reducing barriers to cross border investments; and limiting the antidumping laws. The rich nations spend around $300 billion a year in subsidies to support their farm sectors. The worlds poorer nations have the most to gain from any reductions in agricultural tariffs and subsidies.

Counter Trade
Counter trade denotes whole range of barter like

agreements; its principle is to trade goods and services for other goods and services when they cannot be traded for money.Some examples are; 1. An Italian co. that manufactures power generating equipment, ABB SAE Sadelmi SpA, was awarded a720 Million Baht $17.7Mn) contract by the Electricity Generating Authority of Thailand.The contract specified that he company had to accept 218 million baht($5.4 million) of Thai farm products as part payment.

Counter Trade
2.Saudi Arabia agreed to buy 10 747 jets from Boeing with payment in crude oil, discounted at 10 percent below posted world prices.

3. GE won a contract for a $ 150 million electric generator project in Romania by agreeing to market $150 million of Romanian products in markets to which Romania did not have access.
4.The Venezuelan government negotiated a contract with Caterpillar under which Venezuela would trade 3,50,000 tons of iron ore for Caterpillar earthmoving equipment.

INTERNATIONAL TRADE AND INTERNATIONAL FINANCE

Trade and Balance of Payment, Dis-equilibrium in Balance of Payment and its rectification.

International Monetary System: Components Foreign Exchange Market International Equity Market and Euro Currency Market. IMF and International Monetary System: Exchange Rate Determination [Concept only], Capital Account Convertibility.

International Monetary Fund [IMF]

The IMF was established at a conference in

Brettonwoods,New Hampshire, U.S.A on July 1-22, 1944.(The conference also established the World Bank).The IMF came in to official existence on December27,1945, and commenced financial operations on March1,1947.It currently has 184 member countries. The statutory purpose of IMF are to promote international monetary co-operation, facilitate the expansion and balanced growth of international trade, promote exchange rate stability, help to establish a multilateral payments system, make the general resources of the IMF temporarily available to its members under adequate safeguards, and shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

WORLD BANK GROUP

The World Bank Group is made of five organizations:
The International Bank for Reconstruction and Development(IBRD) The International Development Association(IDA), The International Finance Corporation(IFC) The Multilateral Investment Guarantee Agency (MIGA) The International Center for Settlement of Investment Disputes (ICISD).

Established in 1944 at a conference of the world leaders in

Bretton woods, New Hampshire,United States, the World Bank is the worlds largest source of development assistance. The World Banks mission is to fight poverty and improve the living standards of people in the developing world.The World Bank has 184 member countries.

Did GATT succeed?

 Continual reductions in tariffs helped spur very high rates of world trade growth during the 1950s and 1960s around 8% a year on average
Trade growth consistently out-paced production growth The rush of new members during the Uruguay Round demonstrated recognition of multilateral trading system as the anchor for development and an instrument of economic and trade reform.

But.

 GATTs success in reducing tariffs to a low level, with a

series of economic recessions 1970-80s drove governments to devise other forms of protection for sectors facing increased foreign competition
High rates of unemployment and constant factory

closures led governments in Western Europe and North America to seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade
Both these changes undermined GATTs credibility and

effectiveness.

 The problem was not just a deteriorating trade

policy environment. By the early 1980s the General Agreement was clearly no longer as relevant to the realities of world trade as it had been in the 1940s World trade had become far more complex and important than 40 years before The globalization of the world economy was underway Trade in services not covered by GATT rules Ever increasing international investments

 Factors convinced GATT members that a new effort

to reinforce and extend the multilateral system should be attempted.

That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.