Role of GATT and WTO in International Trade

The main role of GATT in the international trade was regulating the contracting parties to achieve the purpose of the agreement which were reducing tariffs and other barriers, and to achieve the liberalization in international trade. The role was reflected in following aspects:

Firstly, GATT established a set of standard to guide the contracting parties to participate in international trade practices. GATT stipulated several of basic principle to conduct the contracting parties in international business, such as General Most-Favored-Nation Treatment (Article II), Non-discriminatory Administration of Quantitative Restrictions (Article XIII), and General Elimination of Quantitative Regulations (Article XI) and so on in the “GATT 1947″. Every contracting party should obey these basic principles when they were involved in trade relations, otherwise they would be condemned, even be taken revenge by other parties. Besides this, contracting parties reached quite a little of agreements, and made some rules during pervious multilateral trade negotiations. For instance, Kennedy Round which was started from May 1964 brought about the Anti-dumping Agreement. (WTO). These rules and agreements which were made in the multilateral rounds later become the basic principles which were accepted by all the parties, and stimulated the development of international trade.

Secondly, GATT reduced the tariff on the basis of mutual benefit, accelerate the trade liberalization after the World War II. GATT’s major contribution was to reduce of tariffs by sponsoring “rounds” of multilateral negotiations. (Mike.W.P, 2008) By sponsoring the multilateral negotiations, there was a significant reduce of the tariff. There were about 35% average tariff reductions in both Kennedy Round and Tokyo Round. Future more, in the Uruguay Round which was the most productive in the history of GATT multilateral negotiation, the contracting parties practiced the rules that kept cutting the tariff rate, there was an average tariff cut of 39% in this round of negotiation. (Reck A, 2010) By cutting the tariff rate, there is less trade barriers in doing international business which will mutual benefit the parties which participated, and promote trade liberalization.

Thirdly, GATT reduced the discrimination in tariff and trade which promoted to reduce other trade barriers. As stated in the Article II: schedule of concession in “GATT 1947″, “Each contracting party shall accord to the commerce of the other contracting parties’ treatment no less favorable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.” According to this statement, GATT regulate the contracting parties cannot increase the levels of tariff as their wish, but some countries used other non-tariff barriers to promote their protectionism. Therefore, GATT claimed the contracting parties should not use other barriers to protect their own industries, it requested the reduction of the non-tariff barriers and quantitative restriction to make sure the benefit from the reduction of tariff not be erased by the non-tariff barriers. After Kennedy Round, the multilateral negotiation started to cover non-tariff barriers on goods. In 1968/1969, GATT compiled the “Inventory of Non-tariff Barriers” which listed more than 800 individual trade barriers in several volumes. (Quambusch, L) Codes was one of the six agreements passed in the Tokyo Round, it established new rules on government procurement, technical barriers to trade, customs valuation, import licensing, antidumping, and subsidies and countervailing measures.(Morrison.A.V, 1986) The codes worked towards the goal which to eliminate the non-tariff barriers. Future more, the Uruguay Round also made the progress in decreasing and eliminating non-tariff barriers, especially in agriculture products. All these are good for eliminating the trade barriers, which towards the development of the international trade.

Fourthly, GATT protected the benefits of the developing countries to a certain extent to international trade. One of the basic objectives of GATT was that “raising of standards of living and the progressive development of the economies of all contracting parties, and considering that the attainment of these objectives is particularly urgent for less-developed contracting parties.” (GATT 1947) In order to achieve this objective, GATT established some special measures for less-developed countries, such as provide tariff protect for specific industries, quotas which are with the purpose of balance of payment. With the increasing number of developing countries jointed the GATT, there were more concern in the trade position and benefit of less-developed countries, more over with the developing countries’ flight, so GATT established some measures for developing countries so that will benefit the less-developed countries in export-oriented trade. At the GATT ministerial meeting of 1963, it enabled the Contracting Parties to discharge the responsibilities towards the development objectives of the developing countries which led to add Part IV which entitled “ Trade and Development” to the General Agreement. (Yusuf.A, 1982) The new Part IV provided preferential treatment to the developing countries. In the Uruguay Round which was “an important milestone for developing countries in their integration into the global economy” (Martin.W & Winters.L.A, 1996), the participants agreed a number of rules which would benefit the developing countries, for example, agricultural liberalization, manufacture trade liberalization. There was a significant reduction of non-tariff barriers (especially export subsidies) in agriculture, it converted virtually all agriculture nontariff barriers into tariff. In manufacture trade, the tariff levied on manufacture products which imported from developing countries was reduced by 40 percent on average. All these measurement reduced the burden on the economy of developing countries, and had positives in the development of trade for less developed countries.

Finally, GATT acted as the “court of international trade”, by providing a platform for contracting parties to negotiation and talk to settle disputes in international trade. One of the objectives of GATT was to settle the disputes between two or more parties. When two or more parties are involved in the international trade, it is inevitable that without disputes. Some of the disputes may be solved by the two parties themselves, however, some disputes could not be solved by themselves, without the help of the third party, and the disputes may be remaining unresolved for years. So it needed GATT to solve those disputes which could not solve by parties themselves. Before it was replaced by WTO, in a certain period, GATT had become a legal mechanism to settle trade disputes among contracting parties, it provided a platform for contracting parties to settle disputes so that the trade conflicts and disputes can be solved immediately which would protect the benefit of both parties, and lay the foundation to achieve the main objective of GATT.

Why GATT was replaced by WTO?

On January 1, 1995, the World Trade Organization was found to replace GATT after the eighth round of GATT multilateral negotiation. WTO to replace GATT was an inevitability of history. The replacement of the General Agreement on Tariffs and Trade (GATT) by the WTO heightened concern among critics because its stronger enforcement powers represent a further shift in power from citizens and national governments to a global authority run by unelected bureaucrats. There are such reasons why GATT was replaced WTO.

Firstly, the major weakness of the GATT was provisional arrangement. It was not an effective international covenant, and it had no real enforcement mechanism. If the bilateral agreement broke by one of another country, GATT has nothing could be done. There are some rules that have been set for enforcement by GATT but it has been dysfunction due to the rule did not have the power to make other countries or parties to follow the rule or agreement set by GATT. Moreover, the GATT created the solution during the emergency moment which is temporary. This will lower down the credibility of GATT and resulted nobody would follow the agreement. According to the WTO.org, in the period of 1948 to 1994, the General Agreement on Tariffs and Trade (GATT) offer the rules for most of world trade and presided over the periods. Within the period, there was some moment of highest growth rates which was over the international commerce. It seemed well-established, but throughout those 47 years, it was a provisional agreement and organization. Beside that, the GATT system can still survived because of taking those sensitive areas of trade outside the rules. There were some rules for enforcement but they were basically has not been functioning. The “rules” were being unnoticed after the member countries internal political pressures or special-interest demands have become overwhelming.

Secondly, the scope on jurisdiction of GATT was limited only in products transaction. However with development of globalization, the transactions in services and technologies, and international investments constitute a high proportion of international trade. Since the GATT only concentrated on the products transaction, there was a gap for GATT to regulate the transactions in services and technologies and international investments. With the increasing proportions of transactions in services and technologies, and international investments in international trade, it is unavoidable that some countries will impose tariff and other trade barrier or non-tariff barriers in these kinds of transitions. Because of the jurisdiction of GATT only limited in products transaction, so in this situations GATT can make nothing on it and leave the burden on trade rampant in the trade, it far block GATT to promote its objective to achieve trade liberalization.

Thirdly, there were some limitations in the disputes settlement systems of GATT. According to the WTO.org, the major weakness of the disputes settlement systems of GATT was it should have a positive consensus in the GATT Council to bring the dispute into a panel, and adoption of the panel report as well. The positive consensus means that all the contracting parties should agree the decision of Council. For example, when the Council decide to the bring the dispute between two or more parties in to panel, if there was objection from one of the contracting parties, the Council can block the establishment of the panel. This weakness of dispute settlement system gives the chance for those countries which have discrimination on the parties involved in the disputes to object the decision. This will make the disputes among parties remain unsolved, and it does not have any positives on the promoting international trade liberalization.

Fourthly, some rules in GATT were not strict enough, it was hard to execute in real economic practices. Some contracting parties would construe the rules of GATT in their self interests, and GATT did not have the necessary means of verification and inspection. In the Article XIX in GATT 1947, there is a statement that “any product is being imported into the territory of that contracting party …… to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products” In this statement, GATT did not provide specific regulations about how to verify the injuries and how to investigate and check the injuries, more over the GATT did not specifically define who was the domestic producers. These made it hard to execute the rules. For example, as stated in the article, “to cause serious injury to domestic producers”, because it was not quite strict, some countries which did not injury seriously may use this article to impose sterner measures to other countries.

Finally, the historical multilateral rounds of GATT were influenced by the policies of some larger countries. From the Geneva Round to Uruguay Round, there was national sovereignty existing in the multilateral negotiation rounds. The multilateral negotiation rounds were influenced by the Western signatory states, the decision making right was major handled by the Western countries, especially United States. (Rieger.E& Leibfried.S, 2003) Although the balance of power has changed by the establishing of European Communities (later known as European Union) and the emergence of Japan, but these countries are all industrial countries, they have the common interest in economic interest. So before the Part IV was add to GATT, there was a long period that GTAA was the place for small number of developed countries to adjust trade policies. With more and more developing countries contracted to GATT, the status of developing counties had improved. Yet still had majority of developing countries did not have common interest with United States and the Western European countries, so did economic interest. So the strong national sovereignty among contracting parties baffled the development of GATT.

All in all, these factors make the GATT was replaced by WTO was needs of the times and follow the tide of development economy.

The purpose and benefit of GATT

Purpose

The main purpose of the GATT was substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.

In the historical view, GATT was formed to inherit International Trade Organization. In 1945, United States invited its alliances in the war-time to negotiate an agreement which to reduce the tariff in goods. Later on, the United Nation proposal to have a conference to draw a charter for an International Trade Organization; however the Charter never enter into force. (Bossche.P.V.D, 2005) Almost at the same time, the first round of GATT negotiation took place in Geneva to salvaged from the aborted attempt to create the ITO.(WTO) In 1947, eight out of twenty three countries signed the GATT original text, “GATT 1947″. In the absence of an international organization for trade, the only existed international organization for trade, GATT took over to handle the problems in international trade. (Bossche.P.V.D, 2005)

Another purpose of GATT was to reduce tariff. Before the GATT was formed, the tariff of each country was very high. The result of setting high tariff was because after the Second World War the economy of every country was suffering from depression. So the countries had to set high tariffs to protect their domestic producers and manufactures so that they could also protect their currency’s value. The high tariffs managed to cut down all the imports and exports between countries. As we can see that after the formed of GATT, they manage to keep on reduce the tariffs between countries to help international trade to encourage more imports and exports to go on again. They managed to reduce in all the 8 rounds of the multilateral negotiations.

Future more, reduce discriminatory treatment was also a purpose that the GATT was formed. Discriminatory treatment happened in a lot of countries that they tend to be bias to the country that they favored. This issue was quite serious in the 1980’s. (Tovias. A) It sometimes caused the less favor countries not to invest anymore in that country. Their choices of export and import to a country would be reduced. Both countries stopped export and import to each other would suffer some lost in the economic because there was no cash flow movement between them. If without discriminatory treatment, every country would feel be respected and continue to do business with each other so that a large and steadily growing volume of real income and effective demand.

Benefits

The over 50 years’ history of GATT, it had promoted prosperity and development of it contracting members, and had positives in the development of world economic after the World War II. There are such benefits of GATT in its 50 years’ history:

Firstly, GATT has reduced the tariff and boosted to the economy after the Second World War ended by encourage the imports and exports among countries again. After the Second World War ended, the tariffs level set by each country were very high. After the forming of GATT, it actively act perform is role in international trade, it reduced the tariffs by holding several rounds of multilateral negotiations which held for months or even years for each rounds. In the significant rounds prior Uruguay Round, there were a more than 21% tariff cut achieved in each round. In the Uruguay Round, the participants had made an agreement which included 550 pages of tariff reduction on 85 percent of world trade. (McEachern.W.A, 2009) The reduction of tariff had reduced the trade burdens lied on the countries which involved in international trade, so that promoted the trade liberalization and boosted the economics of contracting parties.

Secondly, GATT was formed to help developing country to work well in the international trade. With the increasing number of developing countries contracted to GATT, the position of developing countries in the multilateral negotiation rounds had improved. The addition of Part IV ‘Trade and Development’ to the agreement in 1968 had provided a lot of benefit to the less developed countries. “It includes requirements on the concept of non-reciprocity in trade negotiations between developed and developing countries which means when developed countries grant trade concessions to developing countries they should not expect the developing countries to make matching offers in return.” (WTO) It benefits the developing country in trade transaction with developed countries. In Uruguay Round, the GATT further reduced the tariff on developing countries. There was a significant reduction of average tariff rate on less-developed countries after Uruguay Round. For instance, the average tariff rate in India was 71.4% before Uruguay Round, and there was a big drop in the percentage after the Uruguay Round, it was 32.4%. (Carbaugh.R.J, 2009) By reducing the tariff and other trade barrier on developing countries, and promote the development of economic of developing countries, it has reduced the economic gap between industrial countries and developing countries.

GATT was also created to reverse the commercial policies of the 1930s that involved greater restrictions on and discrimination in the world trade. This objective is to stop the countries sought to insulate themselves from the Great Depression through what become as “beggar-thy-neighbour” policies (Irwin D, 2008) so here comes these anti trades to arise in part. GATT is to help countries to make more imports and exports by reducing the tariff so before these countries have been blocking imports and is proved to be a futile method of increasing domestic employment due to the economic slump. Since exports and imports will increase the number of job vacancies because of new investments from the other countries. These help to push up countries economy.

The purpose and benefit of WTO

Purpose

GATT was replaced by WTO which is the world’s global leading body in the year of 1995, in the day when Uruguay round took effect. The purpose why WTO was created was to ensure that global trade start and go on smoothly, freely, and predictably. In order to ensure that the global trading go on smoothly, freely, and predictably, WTO creates and embodies the legal ground rules for global trade among WTO members and also offers a system for international commerce. (Heakal. R) In this way WTO can supervise its members’ behavior while trading among nations, and also to prevent misunderstanding nations.

The other purpose of WTO was formed was to strengthening the GATT mechanism of settling trade disputes. Any issue that happens between nations will be bringing up to WTO to be solved. First case settled by WTO was the issue between US and several other countries in 1994. US government adopted a regulation imposing certain conditions on the quality of the gasoline sold in US; the purpose was to improve air quality by reducing pollution cause by gasoline. This action was challenged by Venezuela and Brazil by saying that the action of US was discrimination. When this issue appealed to WTO, US was told to cease its discriminatory actions against imported gasoline. (Carbaugh. R. J, 2009)

To create economic peace and stability in the world especially those who are WTO members through a multilateral system that had adopted the rules that enforced by WTO into their own nations was another purpose of WTO was formed. In this case, it also means that every member of WTO have to apply WTO rules as a part of their nation’s legal system. For example, if a company decides to start a business or invest abroad, the rules of WTO will govern the whole process of the business of how it will be done. If a country is the member of WTO, its local legal system cannot contradict with the WTO rules and regulations. ( Heakal. R)

Benefits

Since WTO took effect in 1995, it serves as an international organization that deals with the trading process has eventually created some benefits toward the world in such aspects:

First of all, WTO promotes the establishment of world trade liberalization and economy globalization. After WTO was established, the world market has experienced decline in tariff levels, WTO members experienced an average of 40% decline in tariff rate. For example, in the year of 1999, tariff rate of developed countries dropped from 6.3% to 3.9%, imported duty-free manufactured goods from increased from 20% to 43%, while high tariffs of imported manufactured goods reduced to 5%. In addition, in the agriculture, textile trade, security measures, anti-dumping and countervailing, investment, trade in services, intellectual property and other aspects of the operation mechanism, has made for the advantageous development of trade by the WTO. All of these agreements improved all of WTO members’ market access, and greatly promoted world trade liberalization and global economic integration.

Next benefit is the WTO system actually creating peace among countries. WTO created system that helps the trade process to go on smoothly and providing countries a constructive and fair outlet for dealing with disputes between countries over trade issues. There was a trade war that happens in 1930s where countries competed to raise trade barriers in order to protect domestic producers and end up war against each other. This war actually worsened the great depression and one of the reasons of the happening of World War 2.

Lastly, the possibility to decrease in cost of living is one of the benefits of WTO. It is because protectionism increases the cost of the goods, in terms of production, raw material, and so on. WTO system lower trade barriers through negotiation and brought up the principle of non-discrimination. Lower trade barriers mean less or no tariff will be imposed to the goods, therefore price of the goods will be cheaper, and it leads to decrease the cost of living.

Creation of WTO has provided several benefits to developing countries as well. First of all, a rule-based system actually governs the international trade that these developing countries involved, and ensure that they would get the greatest benefits throughout the international trade. Unlike developed countries, developing countries don’t have the negotiating power in the market and only have to follow the price that using by those developed country. Therefore these rules of trade are very important for them. WTO came out with a Most Favored Nation (MFN) principle, which was market liberalization between any two members was extended to all members of WTO.(WTO). According to Mike Moore, the secretary general of WTO, developing countries demanded improvements in market access for agricultural products of actual and potential interest to them. (Moore. M, 2001). It has been one of the most important achievements of WTO which strengthen the merchandise sector such as agriculture, textile and apparel. Besides that, it strengthens the multilateral framework for rules and agreement. Furthermore, it also tightens the rules that use to measure the export of developing countries, such as subsidies, anti-dumping duties, and safeguard measures.

Secondly, the benefit to developing countries is intellectual property rules. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) offers a benefit for developing countries by creating a policy framework that helps in promote technology transfer and foreign direct investment.(WTO). The purpose is to include non-discrimination and equal application by all members of minimum standard of protection of intellectual property rights. This agreement also protects developing countries as the owner of Intellectual property rights, especially those with high technology sector. This new rules have many complex effects, the higher the protection, the more significantly positive impact will be on bilateral flow in non-fuels goods trade.(Fink and Primo Braga – World bank, 1998)

The third benefit is the preferential treatment for the developing country. Most of the developing country relied on the special preferential access to larger developed country market under the Generalized System of Preferences (GSP). Generalized system of preferences (GSP) is the enabling clause of WTO legal basis, its purpose is to ensure developed countries offer non-reciprocal preferential treatment to developing countries, and sometimes this non-reciprocal preferential treatment offer better access to developed countries market than MFN tariff rates.

Lastly, benefit is that the flexibility for developing country. WTO has ensured that developing countries may need more time to implement new obligations especially those who are adopted in the Uruguay round. For example, developing countries have been given more time to in order to implement their TRIPS obligation.