The disastrous state of the global economy - especially the collapse of trade markets - contributed to the belief that the international system required greater management along liberal lines. It also convinced policymakers everywhere that a prosperous national economy was impossible without a well-designed international system. In an effort to give an early boost to trade liberalization after the World War II, and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s because of the Great Depression, tariff negotiations were opened among the 23 founding GATT contracting parties in 1946. The tariff concessions and rules together became known as the GATT and entered into force in January 1948.
Throughout its 48-year history, the GATT provided the structure for a global process of steady trade liberalization through eight “rounds” of multilateral trade negotiations sponsored by its Contracting Parties. In the first six Rounds, the focus was on the reduction of tariffs. The last two Rounds have covered wider areas (see table below).
The seeds of the Uruguay were sown in November 1982 at a Ministerial meeting of GATT members in Geneva. Though the meeting stalled on the issue of agriculture, the work program formed the basis of the Uruguay negotiation agenda. With four more years of exploring and clarifying issues and painstaking consensus-building, Ministers met again in September 1986, in Punta del Este, Uruguay. The negotiation was expected to be completed in four years. In December 1990, however, disagreement on the nature of commitments to future agricultural trade reform led to a decision to extend the round. For the following three years, the negotiations lurched continuously from impending failure to predictions of imminent success. Several deadlines came and went; farm trade was joined by services, market access, anti-dumping rules and the proposed creation of a new institution as the major points of conflict. It took until 15 December 1993 for every issue to be finally resolved. On 15 April 1994, the deal was signed by Ministers from most of the 125 participating governments at a meeting in Marrakesh, Morocco. The agreements of the Uruguay came into force on 1 January 1995.
There is popular belief, that the WTO replaces the GATT. In fact, the WTO did not replace the GATT. An amended GATT remains as one of the legal pillars of the world’s trade and, to a lesser extent, investment systems. The other pillars, set up in the Uruguay Round’s Marrakesh agreement of 1994, include the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). So, what has been replaced is not the GATT as an international agreement but the GATT as an international organization. In other words, GATT as an international agency no longer exists. It has been replaced by the WTO. But, GATT as an agreement still exist, and has been updated. The updated GATT is called GATT 1994, and the replaced GATT is called GATT 1947. The GATT always dealt with trade in goods, and it still does. It has been incorporated into the new WTO agreements, living alongside the GATS and the TRIPs.
As a matter of fact, the 1986 Ministerial declaration of Punta del Este, containing the agenda and objectives for the Uruguay negotiation, did not include any explicit call for a new charter or organization. Despite this hesitancy, however, by 1990 there was considerable discussion of the need for an improved organizational structure for effective implementation of the Uruguay results. The first public call for a world trade organization to be established was a proposal by the Canadian Government in early 1990. The Canadian proposal built on the work of Professor John Jackson (Hessel E. Yntema Professor of Law at the University of Michigan) and others at an informal meeting in Geneva in 1989. It was then incorporated into the “Dunkel Text” of 1991 (Arthur Dunkel was then the GATT Director General), which eventually became the final text of the Uruguay Round adopted at Marrakesh in April 1994. In approving the Uruguay Round on its “fast track” system, the United States insisted on the name World Trade Organization, rather than the European Community’s preference for Multinational Trade Organization.
The GATT has undertaken eight “rounds” of multilateral trade negotiations, which have achieved major cuts in tariffs and, since the 1970s, some reductions in related non-tariff barriers to trade. The latest round, the Uruguay Round, lasted seven years, as its agenda broadened to include trade in services and intellectual property, and a revised system of dispute settlement mechanisms.
In spite of the remarkable success during its nearly five decades of history, the GATT system was being increasingly challenged by the changing conditions of international economic activity, including the greater ‘interdependence’ of national economies, and the growth in trade in services. Anxiety developed that the GATT was too handicapped to play the needed role of complementing the Bretton Woods system as the “third leg”, alongside the IMF and World Bank. Problems and ‘birth defects’ included.
Provisional application and Grandfather rights exceptions embraced by the Protocol of Provisional Application. The GATT was designed to be a multilateral trade and tariff agreement and would depend on the ITO for its organizational context and secretariat services. The GATT never definitively came into force; instead it was legally applied by a Protocol of Provisional Application originally designed to last until the ITO came into force. Grandfather clause provided that the rules in Part III of the GATT 1947, which essentially dealt with non-tariff trade measures, need be applied only to the extent that they were not inconsistent with legislation in effect when a country acceded to the GATT.
There were exceptions from GATT rules for textiles, agriculture, regional trading groups, developing countries and safeguards to prevent serious injury to domestic producers.
Another reason for the need to reform GATT was ambiguity about the powers of the Contracting Parties to make certain decisions. The GATT dispute settlement process had two major weaknesses. The first was the ability of a Contacting Party to veto the process at numerous stages. A dissatisfied party could block the creation of a panel, block adoption of the report by the Council or fail to undertake the obligations outlined in the report. The second problem was that even if the country accepted a panel report in question, it could choose to keep the offending policy, leaving the injure party to suspend benefits in kind. The dispute then fell back on to unilateral action by the aggrieved party. The party which had its complaint supported by a panel would have to undertake retaliation through its own domestic legislation. This could take the form of tariffs or suspension of trade benefits to the offender. Offenders were not sanctioned; they just had benefits of equal value withdrawn by the complaint. The unilateral nature of the process raised serious problems for the whole system. The countries able to take unilateral measures tended to be the economically powerful such as the US, Japan and the EU. Smaller states were less likely to take action against the giants because they feared a trade war that would cost them dearly. One of the purposes of having an international legal framework for trade is to facilitate relations based on rules rather than power. Law should restrain powerful states from abusing their economic power to the cost of smaller states. Since the GATT process relied so heavily on unanimity, this goal was difficult to achieve.
Also, murky legal status leading to misunderstanding by the public, media, and even government officials lead to negotiating a new solution – establishment of an international institution. As described above, there were certain serious defects in the dispute settlement procedures, there was lack of institutional provisions generally, so constant improvisation was necessary. All these contributed to the reform of GATT system and creation of the WTO.
1. Explain the reasons for trade restrictions. What are trade restrictions and what do you think about them?
2. Why are the following three arguments fallacious or questionable?
a) Trade restrictions are needed to protect domestic labour against cheap foreign labour.
b) Scientific tariff rates could make the price of imports equal to domestic prices and allow domestic producer to meet foreign competition.
c) Protection is needed to reduce domestic unemployment and to cure a deficit in the nation’s Balance of Payments or trade deficit.
3. Outline the major results of the Uruguay Round. Why should the GATT and the WTO be established?
4. What is the relationship between GATT 1947 and GATT 1994?
5. What happened to the ITO?
6. Was the GATT/Is the WTO an international organization?
1. Robert H. Folsom, International Trade and Investment in a Nutshell (2nd ed., St. Paul, Minn.: West Pub. Co., 2000)
2. Jackson, World Trade, Principles, IV EPIL (2000), p. 1529-1542
3. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p.. 32-36, 82-84, 103-105.
4. Trading into the Future – WTO, 3rd edition, Revised August 2003. p. 7-20.
The objectives of the WTO include the followings:
- To raise standards of living
- To ensure full employment of members’ economies
- To promote the steady growth of real incomes and effective demand in their markets
- To expand the production of and trade in goods and services
- Sustainable development and environmental protection
- To ensure developing countries, and especially the least developed to secure a share in the growth in international trade commensurate with the needs of their economic development
There are five main functions of the WTO:
To facilitate formulation, implementation, administration and operation of the covered Agreements
Modern market economy must rely on international regulations or standardized global economic operations. Who should be the one to formulate these regulations? Should it be the US simply because of its strong economy? No single country is appropriate to make the rules. Only an international organization, like the GATT in the past and now in the form of the WTO, should formulate rules through many rounds of negotiations. Once the regulations and rules are set, there must be an organization to supervise and facilitate the implementation, administration and operation of these regulations and rules.
To provide the forum for negotiations on multilateral trade
The WTO provides the forum for negotiations on multilateral trade relations in matters covered by its various agreements. It may also, on decision by the Ministerial Conference, provide a forum for further negotiations, and a framework for the implementation of their results, on other issues arising in the multilateral trade relations among its Members. To put it simply, this is a matter of opening up the market. The founding of GATT in 1948 was based on the historical lessons of World War I and II, with the purpose of avoiding fighting for resources and market shares as a result of countries being divided up by different groups and because of closed markets. It was believed that opening market to each other could avoid the breakout of new wars. So far, this opening process has been extended from trade in Goods to trade in Services (finance, banking, insurance, securities, telecommunications, air shipment, accounting, law, and tourism), trade-related aspects of intellectual property rights, and trade-related investment measures or mutual opening of the investment market. The WTO is the direct result of multilateral negotiations, and will provide the forum for further negotiations on multilateral trade.
To administer the integrated dispute settlement system.
Along with increasing international exchanges, countries cannot avoid frictions in their trade business, and disputes will also become more frequent. For a long time, the situation was that big countries bullied the small ones that had no means to go to court to win their cases. This is why the US often used the “special clause 301”and “super-301”(introduced in 1988, under which the US could unilaterally find other countries’ trade practices as ‘unfair’ and impose trade sanctions if the offending country did not reach a satisfactory settlement with the US Trade Representative) to solve disputes. Now, the WTO has provided a more effective dispute settlement system.
To review national trade policies (see p.14. TPRM).
To achieve greater coherence in global economic policy-making by cooperating with the IMF and with the World Bank
The World Bank is the world’s biggest development bank, providing finance, research and policy advice to developing countries, with an annual turnover in new loan commitments to developing nations of over 20 billion $US. The Bank loans are primarily for specific development projects. Like the World Bank, the IMF emerged from the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, in July 1944. According to its constitutional instrument, the Fund exists:
(a) to promote international monetary cooperation;
(b) to facilitate the expansion and balanced growth of international trade;
(c) to promote foreign exchange stability;
(d) to create a multilateral system of payments between members;
(e) to assist in the correction of maladjustments in members’ balance of payments; and
(f) to reduce the duration and severity of disequilibria in members’ balance of payments.
During the first quarter-century after it started operations in 1945, the Fund was mainly concerned to establish and manage the international regime of fixed (but adjustable) exchange rates. Its interventions were mainly restricted to monetary and trade policy measures. The IMF lost much of its old role with the end of the dollar-centered fixed-rate system in 1971; however, the rapid globalization of money and finance since the 1960s has prompted the Fund to reinvent itself with an expanded agenda: First, the Fund has since the late 1970s exercised comprehensive and detailed surveillance, both of the economic performance of individual member states and of the world economy as a whole. Second, the Fund has since the 1970s intervened more intensely in many countries by designing for them not only traditional stabilization measures for short-term corrections of the balance of payments, but also structural adjustment packages for medium- and long-term economic reconstruction. Third, the ‘second-generation’ IMF has undertaken major training and technical assistance activities, largely in order to provide poorly equipped states with staff and tools that can better handle the policy challenges of contemporary globalization. Fourth, the IMF has pursued various initiatives to restore stability to global financial markets. The IMF has its membership risen from 62 states in 1960 to 182 states in 1998.
WTO establishes the following key principles, which occur in all agreements under the umbrella of WTO. These are: