The General Agreement on Tariffs and Trade (GATT) was the first multilateral free trade agreement. It first took effect in 1948 as an agreement between 23 countries, and it remained in effect until 1995—at which point its membership had grown to 128 countries. It was replaced by the World Trade Organization.
Here's what you need to know about the GATT.
What Was the GATT?
The General Agreement on Tariffs and Trade was a free trade agreement that eliminated tariffs and increased international trade. As the first worldwide multilateral free trade agreement, the GATT governed a significant portion of international trade between January 1, 1948, and January 1, 1995. The agreement ended when it was replaced by the more robust World Trade Organization (WTO).
- Acronym: GATT
The purpose of the GATT was to eliminate harmful trade protectionism. Trade protectionism likely contributed to the 66% reduction of global trade during the Great Depression. The GATT helped restore economic health to the world after the devastation of the Depression and World War II.
How Did the GATT Work?
The GATT had three main provisions. The most important requirement was that each member must confer most favored nation status to every other member. All members must be treated equally when it comes to tariffs. It excluded the special tariffs among members of the British Commonwealth and customs unions. It permitted tariffs if their removal would cause serious injury to domestic producers.
Second, the GATT prohibited restrictions on the number of imports and exports. The exceptions were:
- When a government had a surplus of agricultural products
- If a country needed to protect its balance of payments because its foreign exchange reserves were low
- Emerging market countries that needed to protect fledgling industries
In addition, countries could restrict trade for reasons of national security. These included protecting patents, copyrights, and public morals.
The third provision was added in 1965, addressing developing countries joining the GATT. Developed countries agreed to eliminate tariffs on imports from developing countries to boost those economies. Lower tariffs had benefits for developed countries, as well. As the GATT increased middle-class consumers throughout the world, there was an increased demand for trade with developed countries.
The original 23 GATT members were Australia, Belgium, Brazil, Burma (now Myanmar), Canada, Ceylon (now Sri Lanka), Chile, China, Cuba, Czechoslovakia (now the Czech Republic and Slovakia), France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia (now Zimbabwe), Syria, South Africa, the United Kingdom, and the United States. The membership increased to 128 countries by 1994.
The GATT grew out of the Bretton Woods Agreement. The summit at Bretton Woods also created the World Bank and the International Monetary Fund to coordinate global growth.
The summit almost led to a third organization. It was to be the highly ambitious International Trade Organization (ITO). The 50 countries that started negotiations wanted it to be an agency within the United Nations that would create rules, not just on trade, but also employment, commodity agreements, business practices, foreign direct investment, and services. The ITO charter was agreed to in March 1948, but the U.S. Congress and some other countries' legislatures refused to ratify it. In 1950, the Truman Administration declared defeat, ending the ITO.
At the same time, 15 countries focused on negotiating a simple trade agreement. They agreed on eliminating trade restrictions affecting $10 billion of trade or a fifth of the world’s total. A total of 23 countries signed the GATT deal on October 30, 1947, clearing the way for it to take effect on June 30, 1948.
Unlike the ITO charter, the GATT didn’t require the approval of Congress. That's because, technically, the GATT was an agreement under the provisions of the U.S. Reciprocal Trade Act of 1934.
The details of the GATT were tweaked in the decades that followed its creation. The main goal of continued negotiations was to further reduce tariffs. In the mid-1960s, the Kennedy round added an Anti-Dumping Agreement. The Tokyo round in the '70s improved other aspects of trade. The Uruguay round lasted from 1986 to 1994 and created the World Trade Organization.
GATT vs. WTO
|GATT vs. WTO|
|Paved the way for the WTO||Took over in place of GATT|
|A component of the WTO||Enforces aspects of GATT|
The GATT lives on as the foundation of the WTO. The 1947 agreement itself is defunct. But, its provisions were incorporated into the GATT 1994 agreement. That was designed to keep the trade agreements going while the WTO was being set up. Therefore, the GATT 1994 is itself a component of the WTO Agreement.
Pros and Cons
Encourages international trade
Reduces the likelihood of war
Domestic industries may struggle to compete
Exposes more of the world to risks within a given domestic industry
Governments cede some level of control to an international agreement
- Encourages international trade: The GATT reduced tariffs, which boosted trade between countries. As countries traded more freely with each other, more countries saw the benefits of free trade and wanted to join the agreement. By the time the GATT was replaced by the WTO, more than 100 countries had joined the original 23 signatories.
- Reduces the likelihood of war: By increasing trade, the GATT promoted world peace. It set the stage for the European Union (EU). Despite the EU's problems, it has helped to prevent wars between its members. The general idea is that, if your economy depends on trade with a country, then you're less likely to go to war with that county. The more countries trade with each other, the less likely war becomes.
- Improves communication: In addition to reducing the chances of war, the GATT provided incentives for countries to better communicate with one another. Even average citizens are more likely to learn a foreign language these days since it allows them to access larger consumer markets than they have domestically. For instance, many people learn English, the language of the world's largest consumer market, which allows them to work for call centers for companies based in English-language countries.
- Domestic industries may struggle to compete: Low tariffs destroy some domestic industries, contributing to high unemployment in those sectors. Governments with more money or policy power can manipulate industries for their benefit more than smaller countries. A rich country can spend money subsidizing industries to make them more competitive on a global scale. Another example comes from the Nixon Administration. When it took the U.S. dollar off the gold standard in 1973, it lowered the value of the dollar compared to other currencies. That further lowered the international price of U.S. exports. Other countries didn't have the same tools to make their exports more competitive.
- Exposes more of the world to risks within a given domestic industry: By the 1980s, the nature of world trade had changed. The GATT did not address the trade of services that allowed them to grow beyond a single country's ability to manage them. For example, financial services became globalized. Foreign direct investment had become more important. As a result, when U.S. investment bank Lehman Brothers collapsed, it threatened the entire global economy. Central banks scrambled to work together to address the 2008 financial crisis. They were forced to provide liquidity for frozen credit markets.
- Governments cede some level of control to an international agreement: Like other free trade agreements, the GATT reduced the rights of a nation to rule its own people. The agreement required them to change domestic laws to gain trade benefits. For example, India had allowed companies to create generic versions of drugs without paying a license fee. This helped more people afford medicine. However, since other countries had stricter requirements, this also led to disputes with other GATT countries.
- The General Agreement on Tariffs and Trade (GATT) was a treaty created after World War II to help the economies of countries affected by the war.
- This agreement would pave the way for the creation of the World Trade Organization.
- The benefits of the GATT includes an increasing interconnection between national economies, which reduces the likelihood of war and bolsters communication.
- The GATT did have drawbacks, including the requirement that countries give up some level of autonomy to adhere to the rules of the free trade agreement.