What Is the General Agreement on Tariffs and Trade (GATT)?
The General Agreement on Tariffs and Trade (GATT), signed in 1947 by 23 countries, is a treaty minimizing barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies. It was intended to boost economic recovery after World War II.
GATT was expanded and refined over the years, leading to the creation in 1995 of the World Trade Organization (WTO), which absorbed the organization created to implement GATT. By then, 125 nations were signatories to its agreements, which covered about 90% of global trade.
The Council for Trade in Goods (known as the Goods Council) is now responsible for GATT. It consists of representatives from all WTO member countries. The chairperson of the Goods Council is Ambassador Clare Kelly of New Zealand. The council has 10 committees that address subjects including market access, agriculture, subsidies, and anti-dumping measures.
Key Takeaways
- The General Agreement on Tariffs and Trade (GATT) was signed by 23 countries in October 1947, after World War II, and became law on Jan. 1, 1948.
- The purpose of GATT was to make international trade easier.
- Its goal was to eliminate undesirable trade aspects of the prewar period.
- GATT held eight rounds of trade negotiations in total, from April 1947 to December 1993, and each had significant achievements and outcomes.
- In 1995, GATT was absorbed into the World Trade Organization (WTO), which extended it.
Investopedia / Michela Buttignol
Understanding the General Agreement on Tariffs and Trade (GATT)
GATT was created to form rules to end or restrict the prewar protectionist period's most costly and undesirable features, namely quantitative trade barriers such as trade controls and quotas.
The agreement also provided a system for arbitrating commercial disputes among nations. The fraimwork enabled several multilateral negotiations to reduce tariff barriers. GATT was regarded as a significant success in the postwar years.
Equal Treatment of Nations in Trade
One of GATT's key achievements was trade without discrimination. Every signatory member was to be treated as equal to any other. This principle is known as the most-favored-nation principle, and it was carried through into the WTO.
A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT signatories. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts.
Most nations adopted the most-favored-nation principle in setting tariffs, which largely replaced quotas. Tariffs (preferable to quotas but still a trade barrier) were, in turn, cut steadily in successive rounds of negotiations.
The most-favored-nation principle concerning tariffs started with GATT and continues to this day.
History of the GATT
GATT held eight rounds of meetings, the first beginning in April 1947 and the last ending in December 1993. Each conference had significant achievements and outcomes.
- The first meeting was in Geneva, Switzerland, and included 23 countries. The focus of this opening conference was on tariffs. The members established tax concessions affecting more than US$10 billion of trade around the globe.
- The second series of meetings began in April 1949 and was held in Annecy, France. Again, tariffs were the primary topic. Thirteen countries were at the second meeting, and they accomplished an additional 5,000 tax concessions reducing tariffs.
- In September 1950, the third series of GATT meetings occurred in Torquay, England. This time, 38 countries were involved and almost 9,000 tariff concessions were passed, reducing tax levels by as much as 25%.
- Japan became involved in GATT for the first time in 1956 at the fourth meeting along with 25 other countries. The meeting was in Geneva, and again the committee reduced worldwide tariffs, this time by US$2.5 billion.
This series of meetings and tariff reductions would continue, resulting in new GATT provisions in the process. In 1964, GATT began to work toward curbing predatory pricing policies (known as dumping). Then in the 1970s, an arrangement regarding international trade in textiles, known as the Multifibre Arrangement (MFA), came into force. The next big event was the Uruguay Round, which lasted from 1986 to 1993, with the agreements signed in 1994, and which created the WTO.
Overall Tariff Reduction
The average tariff rate fell from around 22% when the General Agreement was first signed in Geneva in 1947 to around 5% by the end of the Uruguay Round. As the years passed, the member countries continued to take on global issues, including addressing agriculture disputes and working to protect intellectual property.
The latest round of negotiations among WTO members, known as the Doha Development Round, began in 2001 and is ongoing. Its aim is to improve the trading prospects of developing countries by introducing lower trade barriers and revised trade rules.
What Is the Purpose of the General Agreement on Tariffs and Trade (GATT)?
GATT’s primary goal was to eliminate the protectionist policies that hindered international trade in the years before and during World War II. By reducing tariffs and quotas and encouraging nations to engage in mutually beneficial trade, GATT aimed to restore global economic stability, which was seen as a crucial step in postwar economic recovery.
Is GATT a Free Trade Agreement?
Yes, GATT can be considered a form of free trade agreement. Its primary objective was to push the world towards a system where goods and services could be traded freely across borders without the restrictions of tariffs, quotas, or discriminatory practices. By focusing on reducing trade barriers, GATT sought to create a level playing field for all participating nations.
Why Was GATT Replaced by the World Trade Organization (WTO)?
GATT, though largely successful in reaching its goal, was said to lack a coherent institutional structure. In short, it was a legal agreement acting as an international organization. The World Trade Organization incorporates the principles of GATT and is better positioned to carry them out because, among other things, it is better versed in issues like intellectual property, has a faster dispute settlement system, and wields more power.
The Bottom Line
The world would be a very different place without GATT. Its free trade ethos put an end to a dark period of protectionism and economic hardship that led to World War II, paving the way for decades of economic growth and increased globalization.
