GATT: Purpose, History, Pros, Cons

The First Global Trade Agreement Saved Us From the Depression

GATT
Fruit and vegetable vendor at Kalaw market, Burma. Credit: Jamie Marshall - Tribaleye Images/ Getty Images

Definition: The General Agreement on Tariffs and Trade was the first worldwide multilateral free trade agreement. It was in effect from June 30, 1948 until January 1, 1995. It ended when it was replaced by the more robust World Trade Organization. (Source: "GATT and the Goods Council," WTO.)

Purpose

The purpose of GATT was to eliminate harmful trade protectionism. That had sent global trade down 65 percent during the Great Depression.

By removing tariffs, GATT boosted international trade. It restored economic health to the world after the devastation of World War II.

What Exactly Was Agreed Upon?

GATT had three main provisions. The most important requirement was that each member must confer most favored nation status to every other member. That means 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, GATT prohibited restriction 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.
  • Developing 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. That was because more developing countries joined GATT, and it wished to promote them. Developed countries agreed to eliminate tariffs on imports of developing countries to boost their economies. It was also in the stronger countries' best interests in the long run.

That’s because it would increase the number of middle-class consumers throughout the world. (Source: E. Kwan Choi, "General Agreements on Tariffs and Trade," Iowa State University.)

History

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, too. It was to be the highly ambitious International Trade Organization. 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. Under the name GATT, 23 countries signed the deal on October 30, 1947. It was put into force on June 30,1948.

GATT didn’t require the approval of Congress. That’s because it was technically just an agreement under the provisions of U.S. Reciprocal Trade Act of 1934. It was only supposed to be temporary until the ITO replaced it.

Throughout the years, rounds of further negotiations on GATT continued. The main goal was to further reduce tariffs. In the mid-1960s, the Kennedy round added an Anti-Dumping Agreement. The Tokyo round in the seventies improved other aspects of trade. The Uruguay round lasted from 1986 to 1994 and created the World Trade Organization. (Source: "Understanding the WTO: The GATT Years," WTO.)

GATT and WTO

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.

Then, the GATT 1994 is itself a component of the WTO Agreement. (Source: "Understanding the WTO: The GATT Years," WTO.)

Member Countries

The original 23 GATT members were Australia, Belgium, Brazil, Burma (now Myanmar), Canada, Ceylon, Chile, China, Cuba, Czechoslovakia (now Czech Republic and Slovakia), France, India, Lebanon, Luxemburg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia (now Zimbabwe), Syria, South Africa, the United Kingdom and the United States. The membership increased to 100 countries by 1993. (Source: "Why Is GATT Important?" U.S. Department of Commerce.)

Pros

For 47 years, GATT reduced tariffs. This boosted world trade 8 percent a year during the 1950s and 1960s. That was faster than world economic growth. Trade grew from $332 billion in 1970 to $3.7 trillion in 1993. 

It was seen as such a success that many more countries wanted to join. By 1995, there 128 members, generating at least 80 percent of world trade. (Source: "GATT Members," WTO.)

By increasing trade, GATT promoted world peace. in the 100 years before GATT, the number of wars was ten times greater than the 50 years after GATT. Before World War II, the chance of a lasting trade alliance was only slightly better than 50/50. 

By showing how free trade works, GATT inspired other trade agreements. It set the stage for the European Union. Despite the EU's problems, it has prevented wars between its members. (Source: "Can Trade Prevent War?" Stanford University, May 28, 2014.)

GATT also improved communication by providing incentives for smaller countries to learn English, the language of the world's largest consumer market. This adoption of a common language reduced misunderstanding. It also gave less developed countries a competitive advantage. English gave them insight into the developed country's culture, marketing and product needs. (Source: E. Kwan Choi, "Trade and the Language War: Chinese and English," Iowa State University, September 2001.)

Cons

Low tariffs destroy some domestic industries, contributing to high unemployment in those sectors. Governments subsidized many industries to make them more competitive on a global scale. U.S. and EU agriculture were major examples. In the early 1970s, the textile and clothing industries were exempted from GATT. When the Nixon Administration 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.

By the 1980s, the nature of world trade had changed. GATT did not address the trade of services. That allowed them to grow beyond any one 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 for the first time to address the 2008 financial crisis. They were forced to provide the liquidity for frozen credit markets.

Like other free trade agreements, GATT reduced the rights of a nation to rule its own people. The agreement required them to change domestic laws to gain the 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. GATT required India to remove this law. That raised the price of drugs out of reach for many Indians.

Trade agreements like GATT often destabilize small, traditional economies. Countries like the United States that subsidize agricultural exports can put local family farmers out of business. Unable to compete with low-cost grains, the farmers migrate to cities looking for work, often in factories set up by multi-national corporations. Often these factories can move to other countries with lower-cost labor, leaving the farmers unemployed.

Farmers that stay often grow opium, coca or marijuana, just because they can't grow traditional crops and stay in business. Violence from the drug trade may force them to emigrate to protect themselves and their children. (Source: "CAFTA and the Forced Migration Crisis," Eyes on Trade, September 26, 2014.) 

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