General Agreement on Tariffs And Trade

The General Agreement on Tariffs and Trade (GATT) is a trade agreement signed in 1947. With the signing of the GATT by 23 countries on October 30, 1947, a formal agreement to reduce barriers to international commerce through the elimination or reduction of quotas and tariffs and major restrictions was established. The goal of the GATT was to help the world economy recover from the adverse impact of World War II by rebuilding and liberalising international trade.

It was improved upon in the years that followed until the World Trade Organisation (WTO) was established on January 1st, 1995, which absorbed and expanded it. Around 90 percent of world trade was covered by the 125 countries that signed the agreement.

Pre-war protectionist measures, including trade controls and quotas, were the primary motivation for establishing the General Agreement on Tariffs and Trade (GATT). Commercial conflicts between nations could be settled by arbitration, and this framework facilitated several international tariff-reduction agreements. Following World War II, the GATT was hailed as a significant accomplishment.

The GATT was also a major step forward in the fight against racial and ethnic discrimination in international trade. The agreement mandated equal treatment of every GATT signatory member. The World Trade Organisation (WTO) later adopted the most-favoured-nation principle. With this agreement, tariff cuts would automatically be applied to all GATT members once a country has negotiated a tariff reduction with other countries (typically its most important trading partners). In the past, governments had the option of negotiating exceptions to tariff decreases if their domestic producers were impacted.

Objectives of GATT and its Functions

Global trade fell by 66 percent during the Great Depression because of trade protectionism, which the GATT eliminated. The impact of the Great Depression and World War II on the global economy was curbed by the GATT to some extent.

There were three significant stipulations of the GATT. They were:

• All members had to agree to give each other the most favoured nation status. 
• Tariffs were to be applied evenly to all members. Special tariffs between British Commonwealth and customs union members were not included in the agreement.
• Tariffs were allowed if removing them would seriously harm domestic producers.

Exports from developing countries will no longer be taxed due to an agreement reached by developed countries. Developed countries benefited from lower tariffs as well. Demand for trade with industrialised countries increased as the number of middle-class customers grew due to the GATT.

The GATT is still in place as the cornerstone of the WTO. The accord of 1947 has long since expired.  However, its terms were integrated into the GATT 1994 agreement, designed to keep trade accords in place while the WTO was being established. As a result, the GATT of 1994 is an integral part of the WTO pact.

Reasons for Adopting GATT

The likelihood of war being sparked has decreased. The GATT contributed to world peace by promoting global trade. Because of this event, the European Union was born (EU). Despite its flaws, the EU has played a significant role in preventing hostilities between its members. Generally speaking, a country’s economy is less likely to go to war with another country if commerce with that country is important to it. To reduce the risk of war, more countries should trade.

The GATT offered incentives for countries to better communicate with one another and minimise the likelihood of war. These days, even the typical person is more likely to pick up a foreign language skill than they used to be because it gives them access to wider markets for their products abroad. Many people are fluent in English to work in call centres for companies based in English-speaking nations.

Other Important Aspects

Domestic industries may have difficulty competing: Some domestic industries can be destroyed by low tariffs, resulting in substantial unemployment in that industry. Governments with more significant financial or policy clout can influence sectors to their advantage more effectively than smaller nations. A wealthy country can spend money subsidising industries to boost its worldwide competitiveness.

The nature of global trade had shifted by the 1980s. The GATT failed to deal with the trade in services, which allowed it to grow beyond the ability of a single government to manage it. Financial services, for instance, underwent a globalisation process. There has been an increase in the importance of foreign direct investment. Lehman Brothers’ bankruptcy put the entire global economy in jeopardy as a result. The 2008 financial crisis necessitated a concerted effort by the world’s central banks. Because of blocked credit markets, they were forced to supply liquidity.

Conclusion

Following World War II, the General Agreement on Tariffs and Trade (GATT) was drafted to aid war-torn countries’ sagging economic fortunes. The World Trade Organisation was created as a result of this agreement. As a result of the GATT, there was a decrease in the chance of war and increased contact between countries.

The most-favoured-nation principle has superseded quotas in establishing tariffs in most countries. Trade barriers were gradually reduced throughout several rounds of negotiations. Tariff agreements among GATT members are governed by the most-favoured-nation concept, which the GATT established. Through the General Agreement on Tariffs and Trade, international trade was opened up, and tariffs were abolished.