General Agreement on Tariffs and Trade (GATT)

Agreement formed in 1947 to reduce barriers to merchandise trade. The General Agreement on Tariffs and Trade (GATT) was later absorbed into and eventually [Page 282]replaced in 1995 by the World Trade Organization (WTO).

The GATT was established at the Bretton Woods Conference after World War II, the same conference at which the International Monetary Fund (IMF) and the World Bank were also founded. All three institutions were intended to ensure free trade and a stable global economic environment, and they remain officially committed to international economic cooperation.

The purpose of GATT was to reverse protectionist measures that had existed since the early 1930s. Following World War II, conventional wisdom held that the cause of the Great Depression of the 1930s was a decline of world trade that brought about irresponsible trade and monetary policies. Seeking to ensure a favorable balance of trade, nations frequently devalued their currencies to make their own goods cheaper in other countries, thus increasing exports.

Other nations retaliated against such measures by devaluing their own currencies, making imported goods more expensive. This vicious circle eventually slowed trade to a trickle because nations feared running trade deficits with their neighbors. Reducing barriers to trade and capital flows, it was reasoned, would generate a cycle of economic growth and a sustained attack on poverty.

After World War II, Great Britain and the United States submitted proposals for an international trade body to the Economic and Social Council of the United Nations. This body was to be known as the International Trade Organization (ITO). The GATT was originally part of a draft charter for the ITO.

As part of its charter, the ITO included not only the GATT, but also rules relating to employment, commodity agreements, restrictive business practices, international investment, and services. Because of opposition in the U.S. Congress, the ITO charter was never ratified. However, the GATT survived as a separate agreement.

Although the GATT succeeded in lowering tariffs significantly, it was always provisional. That is, the participating nations were not bound by a formal accord. To make the provisions of the GATT permanent and binding, the WTO was created in 1995. The WTO is a permanent institution with offices in Geneva, Switzerland. Despite its wider agenda and greater powers of enforcement, it is markedly different from its sister organizations, the IMF and the World Bank. Unlike these other two institutions, the WTO does not lend money or stipulate conditions for its use. It deals with trade negotiations, monitors trade agreements, and tries to ensure that member nations abide by negotiated trade agreements.

Two basic principles that underlie the GATT are most-favored-nation status and nondiscrimination. Most-favored-nation status requires that a country cannot selectively restrict or promote imports of certain goods. All imports of all countries must receive the same treatment. Nondiscrimination rules demand that once a good has entered a country, it must be treated no differently than similar goods produced domestically.

Since its inception, the GATT has conducted eight rounds of negotiation, and, by the time the WTO was created in 1995, it had expanded its original group of 23 contracting parties to 128 nations. The substance of the GATT negotiations has dealt primarily with tariff reduction and the struggle to produce rules governing international trade. Among the most notable negotiations were the Kennedy Round and the Tokyo Round.

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