General Agreement Success Story on Tariffs and Trade

Introduction

The General Agreement on Trade and Tariffs (GATT) is deemed to have recorded a tremendous success story for a considerable length of time. This agreement was discussed and concluded during one of the United Nations summit talks on matters of trade and employment. The creation of GATT was a result of a missing unanimous nod by different member states to establish a trade organization that would represent trade welfare concerns for member countries. Indeed, GATT was a being incepted to iron out this difficulty.

The nature and tools of protectionism and how to reduce them

There was a multilateral framework which was incepted by the General Agreement on Tariffs and Trade which was aimed at facilitating smooth flow of international trade through a liberalization process. As a result of this GATT initiative, member countries who are also signatories to the agreement have alleviated tariffs that have been negatively affecting international trade every year. Moreover, GATT has also imposed restrictions on the use of quota system which attempts to limit what can be imported or exported within member countries. Some signatories to this agreement have been applying internal restrictive policies to favor domestic trade but with the advent of GATT, such restrictions have been duly reduced or even eliminated. One of the reasons why GATT recorded several success stories was the fact that it had a system that aimed at eliminating domestic restrictions. Out of this effort, GATT managed to create numerous tariff plans through the eight rounds of negotiations which led to huge benefits by member countries. GATT was primarily working to introduce mechanisms that would lead to sustained trade. Developed countries have accrued a lot of benefits from the free trade sphere created by GATT. It can be seen that countries that ignored GATT rules for free trade and reduction of tariffs are still lagging and are not part of the wider GATT community which is far much advanced. Before the enactment of the eighth round of the trade and tariff talks under the GATT protocol, there was an escalating level of trade impediments in the United States which were mainly a result of overprotection (Bagwell & Staiger, p. 36). The interference which most governments have imposed on global trade has been addressed by the numerous restrictions which GATT has put in place. The trade agreement has been given a higher stake in the liberalization process and is being seen as the most viable tool of eliminating regressive forces which have been instituted by individual states. The signatories are also permitted by the GATT provisions to ignore the many trade barrier commitments in their countries to allow free trade participation with minimal restrictions. Article XIX is very categorical on this requirement.

Quantitative restrictions

Import and export restrictions are specifically dealt with in article XI. GATT does not allow quantitative restrictions imposed by member countries to boost local trade. One reason advanced towards the prohibition of domestic restrictive measures is that they have a rather gross negative effect on the performance index of internal trade on a much higher scale than the well-known tariff barriers. The use of tariff barrier5sby by member countries, although not encouraged by GATT, does not limit the volume of imports so long the imported products are competitive enough in the local market. Since quantitative restrictions have a serious retrogressive effect on international trade than tariff barriers, GATT has clear policy guidelines which restrict member countries from engaging in such practices. Nevertheless, there are existing exceptions to this requirement. Member countries can impose quantitative restrictions on imports only if such undertakings are done within the trade policy framework of the country and which are also generally accepted by GATT. Exceptions may cover such areas as in the event of serious food shortages as evident in article eleven-part 2 and also when there is a need to monitor the difference between exports and imports in the balance of payment ratio (GATT, p. 36).

Trade and payments liberalization

Trade and payment liberalization in GATT aims at removing protectionist forces which hinder the free performance of international trade. as a result, multi-lateral free trade agreements have been agreed upon by the GATT member states. The key principle behind the trade liberalization principle is to allow growth and progress in specific trade domains which have been duly affected by quantitative re4strictions. For instance, GATT has been focusing on the field of foreign investment which is specifically directed towards particular countries and which may equally meet the restrictive measure. Another area of trade interest includes agriculture and the textile industry.

Bilateral/multilateral negotiations

There are quite several rules and techniques which GATT has employed in the past in the process of negotiating bilateral and multilateral agreements. The value of concession in any of these agreements is usually weighed against any future undertakings which may require reference to the current terms of negotiations. Rules must be put in place in any bilateral or multilateral negotiations. The absence of regulations may as well lead to severe outcomes and eventual failure of the pact. This is the reason why GATT has some techniques to ensure strict adherence to these agreements. For instance, reciprocal market access is a very crucial application that ensures that countries that are not participants in the bilateral/multilateral trade agreements are not affected by the pact especially on matters regarding accessibility to the international market. In other words, non-member countries should not be affected in any way by the rules and negotiations being enacted. This bilateral/multilateral technique of negotiating trade is deemed important by GATT because it eliminates the possibility of some countries who are not member states taking advantage of the agreement. Nevertheless, this technique has been found to have some pragmatic limits. As a result, GATT has evolved yet another negotiating technique that seeks to eliminate discriminative measures as opposed to the earlier approach. Together with reciprocity, bilateral/multilateral trade negotiations have been a success throughout the eight rounds of trade talks.

The importance of the most favored nation clause and non-discrimination

The Most Favoured Nation Clause is not applicable to trade establishments that are already in place. This clause is specifically concerned with how investments are spread out through given states. How these investments are managed and operated daily is equally important. Additionally, the expansion program of these investments is a key consideration in the MFN clause. In some instances, the MFN clause has elicited a lot of disputes

The customs and duties which are charged on goods exiting or originating from the Most Favoured Nation may have some advantage or special treatment whereby limited restrictions will be imposed on such goods.

Common markets and free trade areas

The Geneva round of 1947 was a notable success among the 23 member states which were duly represented as it created the first common market platform and a free trading block among the 23 member states. Top on the agenda during the Geneva talks was the endorsement of GATT. The key issue here was on matters of trade tariffs and barriers which member countries felt were a gross impediment in the realization of positive returns. The signing of this first trade treaty which ushered in GATT led to the reduction of tariffs. In other words, trade tariffs were substantially subsidized. Over 40,000 concessions were effected. This led to a surging figure of ten billion dollars being affected in trade transfers among member countries. This marked a positive achievement with upward growth in both regional and international trade.

Two years later, GATT moved another round of trade negotiations in Annecy.

This acted as a follow-up to the Geneva pact but it involved only thirteen member countries. The endorsement of GATT way back in 1947 was a more general move and there was a need to tailor down the treaty according to individual members’ needs. Consequently, the Annecy round targeted the exchange of tariff subsidies which affected a total of five thousand trade deals among the thirteen countries. It was an achievement for GATT because tariff concessions implementation was beginning to take shape more coherently especially through the quota system.

Torquay round took effect towards the end of 1950. This trade talk was major at it involved a total of thirty-eight countries (Jackson, p. 98). Additionally, the main subject of discussion was still tariffs although more members were included in this concession. Even though tariff concessions were already being enjoyed by the partner states, there was still a demanding need to renegotiate the current tariff status among the trading blocs owing to the arising challenges in the dynamic market. The Torquay round reduced the 1948 tariff concession by one quarter, leaving the member countries with a mere 75 percent to cater for. Moreover, this round was a breakthrough to GATT with slightly over eight thousand and seven hundred concessions being exchanged to the benefit of the countries which participated in the 1950 round.

The position of the developing countries

The developing nations are being involved in trade partnership deals one of which is GATT. There are special arrangements that are positioning the third world countries at a better competitive edge with the rest of the international community. The new round of talks under the WTO framework is gradually involving the developing nations (Benitah, p. 46). The peak of the negotiations has been on reducing the potential trade barriers as well as implementing concessions. Most of these countries are still under the hindrance of a myriad of barriers which range from high tariffs to unsubsidized imports.

Agriculture, textiles

Besides, there were those sectors of the economy that had been sidelined and no GATT regulations were being effected. For instance, agriculture which is a major sector in driving the world trade (about 11 percent of the global trade while clothing and textiles consisting slightly over 6 percent of the total global trade) was performing poorly before the introduction of GATT rules. These regulations were equally not put into consideration by quota systems. For example, the importation of steel and other consumer goods in the US suffered a great deal out of ignorance posed by disregard of GATT restrictions. Additionally, both the United States and the European Community were enforcing anti-dumping rules which would hamper the importation of goods from other competing economies.

Such restrictions were not genuine and were only meant to curtail healthy competition. The adoption of GATT rules which followed later attempted to eliminate these non-tariff barriers which were working against achieving growth in world trade (Mathi & Bhagwati, p. 211).

The Uruguay round which is still in effect has continued to record significant success in world trade. Tariff reduction has been one of the major successes of GATT. The ten-year period of the eighth round has delivered innumerable outcomes. A case example is a reduction in protection levels especially in agricultural goods which are pertinent in accelerating world trade (p. 77). Member states have benefited from the changing of most barriers to subsidize rates. Included in this package is a six-year plan to cut down budgetary costs related to agriculture by one-third and an equal reduction for all subsidies which are realized from trade exports (Bénitah, p. 49). Member countries will also benefit from the elimination of trade barriers on textile materials that had been imposed earlier.

The General Agreement on Tariffs and Trade (GATT) plan will greatly benefit the developing countries much more than the industrialized ones. The mean tariff level in these developing nations is usually high ranging between 25 and 50 percent (Wilkinson, p. 54).

The non-tariff barriers are also being eliminated from the world trade equation. This is indeed a major boost bearing in mind such restrictions have slowed down international trade for a considerable length of time. The GATT regulations are duly committed to doing away with these non-tariff barriers. This initiative has immensely contributed to the growth and well-being of trade values within member countries who have now transformed into WTO membership.

Although the conversion of barriers to free trade and subsidies is not an easy undertaking, GATT did manage to achieve this through implementing specific quota systems especially on agricultural goods like clothing and textile materials. Under the quota system, GATT permitted the entry of a given imported good at a subsidized rate. By so doing, the dumping of substandard goods was put into check. This system would also ensure an uninterrupted liberalization of imports and exports.

Escape clauses

Article XIX within the provisions of GATT allows member states to withdraw tariffs or other subsidies which may prove to be injurious to the local producers. This article is further treated as a piece of legislation that seeks to assist domestic producers from gross losses which result from imported goods. The escape clause is further categorical in permitting members to go against GATT regulations should the local industry be put under threat. Consultations should also follow between or among countries that take up such measures. The act further specifies the need for thorough auditing to be done on the domestic industries which claim t have been seriously injured by the competing imported goods. This auditing task is the mandate of the U.S International Trade Commission. Section 203 of the escape clause provides that if the complaints filed by domestic industries are found to be true, some form of aid may be offered for the affected industries to adjust themselves accordingly. The relief may be effected in different forms which may include monetary assistance, restricting further importation of competing goods until some given specified time, or training of the domestic industries on how to retrieve themselves out of similar circumstances in the future. The rate tariffs imposed may also be adjusted under the provisions in the escape clause. However, the clause does not guarantee an unlimited period under which a member country can legally violate the rules and regulations of GATT (Das, p. 38). The period is usually a maximum of five years although the respective head of state can request for further adjustment up a period of three years.

Growth in trade (statistics)

After the enactment of this agreement, both the European community and the United States pledged to undo all the local trade restriction arrangements which were restricting the Eastern bloc like Japan from exporting their goods. This was only possible after GATT crafted and implemented a series of tariff and nontariff reforms.

Meanwhile, the most versatile outcome of the GATT rules was on subsidies (World Trade Organization, p. 321).

It is from this backdrop that global trade has grown significantly. Growth statistics obtained from World Trade Organization (WTO) reveal that the world merchandise trade volume grew by about 25 percent in the first quarter of 2010 (Haus, p. 132). This was an increase compared to the previous year. This growth factor is directly linked to the GATT efforts in reducing tariffs and encouraging competitive trade. On the same note, the volume of export on a worldwide scale also saw a remarkable rise by 27 percent (Jackson, p. 98). The increasing volume of export trade implied that most restrictions especially on the quota system had been dealt with at length (Gupta, p. 24). Similarly, importation of goods from member countries was also on an upward trend with 24 percent being recorded on a global scale. Although this value was a bit lower than those realized from exports, the growth was generally impressive bearing in mind that this represented a three-month growth based on yearly comparisons. The figure below shows export values on world merchandise from the 2007 quarter to 2010 quarter.

Export values on world merchandise from the 2007 quarter to 2010 quarter
Figure 1. Export values on world merchandise from the 2007 quarter to 2010 quarter

From the chart above, it can be observed that the world merchandise trade slightly dropped in the first two months of 2010 but rose steadily in March. Furthermore, there was a positive outlook in the overall growth in merchandise trade within the three consecutive years.

In the second chart below, the merchandise trade on a monthly basis covering a total of 70 former member states of GATT.

The merchandise trade on a monthly basis covering a total of 70 former member states of GATT
Figure 2. The merchandise trade on a monthly basis covering a total of 70 former member states of GATT

The gradual drop in the volume of exports and exports in the first quarter of 2009 is attributed to the world economic meltdown coupled with inflationary changes which was experienced in most economies. Nevertheless, the growth in exports and imports steadily picked up towards the April 2009 and this has continued to rise over time (Zietz, p. 39).

The percentage shift on the price of commodities during the first quarter of 2010 is illustrated in the chart below.

The percentage shift on the price of commodities during the first quarter of 2010
Figure 3. The percentage shift on the price of commodities during the first quarter of 2010

Crude petroleum had the highest price change for the first three months of 2010 wile food and beverages maintained a rather low price in the global market. Additionally, all basic commodities were almost average in terms of percentage change in price. However, it should be noted that the high fuel prices were a result of increasing energy demands within the WTO member countries which is directly attributed to high growth in trade. This is equally the reason why all the basic commodities fetched a higher market value except food and beverages. A further forecast on the state of the world trade depicts a growth rate of 9.5 percent in 2010. Further, the developed economies are anticipated to enjoy a rebound in the volume of exports by approximately 9.45 percent. These expected growth rates are to be realized despite the just concluded world economic recession and it is primarily attributed to the baseline trade rules and practices which were earlier implemented by GATT. Additionally, the developing economies will not lag either. The economic analysts from WTO have observed that shipment will generally go up by about 10 percent. This rebound will in some way help in the economic recovery of the WTO nations which went through the bitter recession of 2009 (Hoda, p. 142). The world economic meltdown reached a peak of 12.2 percent reduction in world economies and was considered the worst ever since the end of the Second World War. It is also notable that the economic recovery back to the 2008 status will take yet another year.

One of the achievements of GATT which worked towards the elimination of trade barriers was visualized in 2009 when member states did not affect any local arrangements by introducing trade barriers (Stewart, p. 35). Additionally, trade restrictions by individual WTO members have substantially gone down. Despite this achievement, the impact of the 2009 recession may still have a lasting effect in most economies especially through job losses and reduced employment opportunities within the remaining period of 2010. Incessant strains on employment opportunities might still compel some governments to practice protectionist policy although such fears are minimal due to elaborate GATT rules and regulations on world trade of which most countries are signatories (WTO Press releases par.5).

Conclusion

In summing up this paper, it is important to note that the contribution made by the General Agreement on Tariffs and Trade (GATT) was enormous and has substantially contributed to the sustained growth in world trade. Even as GATT transformed itself to World Trade Organisation, the ideals laid down which targeted the conversion of trade barriers to tariffs have continued to boost growth in world trade. The numerous trade barriers which had existed for over 70 years were neatly ironed out when GATT took over the world trade mantle way back in 1947. through the eight rounds of trade talks held in different cities within the member states, several workable tariff concessions were enacted (WTO, p. 6). These were adopted by reducing the cost of existing tariffs by injecting subsidies. As the different rounds of trade talks continued, GATT saw the need of addressing other key areas of concern that were equally affecting global trade (GATT Committee on Anti-Dumping Practices par.3). One such area was the importation and exportation of agricultural goods such as clothing materials and textile products. GATT strengthened trading on agricultural commodities on the basis that it constitutes about 12 percent by volume of the total world trade (Collins & Bosworth, p. 27).

Finally, there has been sustained positive growth in trade since the inception of GATT albeit the world economic recession of 2009 which drained most economies within the WTO membership. However, the 2010 economic prospects are impressive with a positive growth having been recorded in the first quarter of 2010.

Works Cited

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  20. Zietz Joachim and Valdés Alberto. Agriculture in the GATT: an analysis of alternative approaches. Volume 1. New York: International Food Policy Research Institute, 1988.

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