General Agreements on Tariffs and Trade


  1. GATT
 

US was dragged into WWI in April 1917 and the war ended in November 1918. After the war, Germany was forced to sign the Versaille treaty (US did not sign it), which was designed to exact war reparation payments by the Allies (Britain, Italy, France, Russia, and the US) from Germany (about $63 billion, but it was reduced to $33 billion later.) The actual payment was less than $5 billion. The payment ended in 2010.) → German hyperinflation (1922 - November 1923)


Versaille Palace

Seventy years ago, the United States became a world leader unwittingly and involuntarily. (Its position has since eroded in recent years.) Americans had been reluctant to get involved in the European war. But Japan's attack on Pearl Harbor on December 7, 1941 changed our attitude toward the European war overnight. The total cost of WWII to the world economy was about $1.1 trillion in 1945. It never occurred to the politicians prior to WWII that the US was expected to be the leader of the world economy.

With the help of Russians (27 million killed or missing), the Allied forces emerged as the victors at the end of WWII. Toward the end of World War II, representatives of the US and its Allied Forces worked out a blueprint for a new world order in the post war era.

Two English-speaking nations, the Unites States and the United Kingdom, were the architects of the postwar world order. They created a new vision of a world government, much like the federation of 50 states of America. (There is no separate executive branch, although International Court of Justice, a part of UN, is located in The Hague, Peace Palace. Major functions of such a "world government" are assumed by different international institutions.)


The Peace Palace, International Court of Justice, in the Hague, Holland

ICJ settles disputes between countries, while International Criminal Court created in 2002, also located in the Hague, punishes people. As a result of these negotiations, the US and its Allies established three important international institutions to liberalize trade and payments. The Soviet Union did not join these efforts, but Russia became a member of WTO in 2012.

Three International Economic institutions + UN


The World Bank

(0) Some countries (Poland, Yugoslavia, Israel, Greece and Soviet Union) demanded payments for war raparations, which ended in 1953). US harvested technological know-how and leading scientists (Werner von Braun, and others.). Greece and Poland still demand for more payments.

(i) International Monetary Fund (IMF) was established to facilitate international payments. December 1945, HQ = Washington, DC.

(ii) International Bank for Reconstruction and Development (initial capital: $10 billion, July 1944, HQ = Washington, DC)

After the War, the US and its Allies were reluctant to provide adequate food supply to the German population for fear of a Nazi uprising, which led to a hunger strike in 1947.

hunger-winter of 1947

Gradually, the attitudes toward Germany changed (e.g., Berlin candy bombing in 1948).

European countries and Japan had to rebuild their factories, which meant that these countries required a large amount of foreign capital. To encourage the free flow of private capital, International Bank for Reconstruction and Development (IBRD, now the World Bank) was also established. New goals: end extreme povery and boost shared prosperity. 1 billion people with $1 per day (in 1995).

(iii) GATT was established in 1947 in order to set up International Trade Organization (ITO), which was to regulate world trade. (HQ = Geneva, Switzerland)

(iv) As a political complement to these institutions, United Nations (HQ = New York city) was also established in October 1945 to replace the League of Nations. (Jan 1920-1945), which did not have a military force to implement UN decisions, which was the main reason for its demise. Japan invaded Manchuria in July 1931. Japan and Germany withdrew from the League in Feb and October 1933. Italy invaded Ethiopia in 1935. LN did nothing.

Weakness of UN : If a permanent member of the Security Council violates a UN resolution (e.g., invading another country), the UN cannot stop it.


Xi Jinping's speech at the General Assembly of the UN, 2015

 What is GATT? GATT was the result of an international conference held at Geneva in 1947 to consider a draft charter for the International Trade Organization (ITO). The US initiated negotiations with 22 other countries that led to commitments to regulate 45,000 tariff rates.

Technically, GATT was viewed as an agreement under the provisions of US Reciprocal Trade Act of 1934, and hence did not require approval of Congress. It was considered a provisional agreement that would be replaced once the ITO became operational to take over its functions.

Thus, GATT began its provisional existence on January 1, 1948, when 23 contracting parties signed the agreement. However, the US Congress refused in 1950 to ratify the treaty establishing the ITO.

Major functions of a world government (opinion)

 

 organization  Functions
WTO/GATT, 1948  regulate trade and investment 
 IMF (1944) regulates currency practices, created at Bretton Woods conference. 
IBRD (World Bank, 1944) allocates capital to developing countries (assets = $23 billion, 1999, smaller than Wells Fargo,
$262 billion. HSBC = $191 billion. China has 5/10 of the richest banks.)
national governments retain diplomatic rights
United Nations (June 1945)

maintain international peace and prevent World War III.

territorial disputes (e.g. Spratlys, Paracels in South China Sea.

source of war: Territorial waters = 12 nautical miles or 22.2 km from the baseline)

Internatioinal Court of Justice (a branch of UN)

located in The Hague. Its decisions are usually not enforced by the Security Council, except for using military forces.

The Hague rejected China's claim to the islands in South China Sea.

 WIPO
(world intellectual property organization)
copyrights, trademarks (a UN agency, established 1967)
  migration? (e.g., migration is the main cause of Brexit)

 

  2. Major Provisions of GATT
 1. Tariff

(i) GATT obligates each country to accord nondiscriminative, most favored nation (MFN) treatment to all other contracting parties with respect to tariffs.

(ii) MFN treatment does not mean free trade or national treatment. Imports from contracting parties are subject to tariffs or quotas. MFN treatment means that no other countries with some exceptions receive better treatment or lower tariffs.

 Exceptions to MFN (i) Existing tariff preferences such as those between British Commonwealth member states. (53 member states)

(ii) GATT/WTO allows the formation of Customs Union, which causes a significant erosion to the MFN principle.

(iii) An escape clause allows any contracting party to withdraw or modify tariff concessions, if it threatens a serious injury to domestic producers.

2. Quantitative Restrictions GATT in general prohibits the use of quantitative restrictions on imports and exports.
 Exceptions

(i) agriculture - when government needs to remove surplus of agricultural and fisheries products. Important to US

(ii) balance of payments - to safeguard balance of payments. If a country's foreign exchange reserve is low.

(iii) Developing countries - LDCs may use import quotas to encourage infant industries.

(iv) National Security- Strategic controls on certain exports. Patents, Copyrights, Public Morals

 3. Developing Countries Special Provisions to promote the Trade of Developing Countries.  
 


Varanasi today. Buddhism was founded here around 528 BC

In 1965, the contracting parties added Part IV (Trade and Development) to GATT.

(i) Developed economies will give high priority to reduction/elimination of tariffs on products of LDCs.

(ii) refrain from introducing tariffs and NTBs to such imports.

(iii) refrain from imposing internal taxes to discourage consumption of primary products from LDCs

(iv) not expect reciprocal commitments from LDCs.

China may soon become the largest economy in the world.

China refuses to give up its status as a developing country.

Rules on graduation from LDC list are complex.

Other provisions

Provisions to eliminate concealed protection such as customs valuation. For example, American Selling Price valuation. By ASP, an ad valorem tariff is imposed on the domestic price.

procedural matters: each member is entitled to one vote, decisions are made by majority vote. 2/3 majority is required to waive obligations. settlements of disputes.

   

 

  3. Achievements and Problems of GATT [Opinion]
 Achievements of GATT

GATT has enjoyed a membership of over 100 countries and generated about 85-90% of world trade.

(i) trade liberalization in industrial products (Kennedy Round, tariff cut = 34%)

(ii) Adopted codes on Non-Tariff Barriers (Tokyo Round, 1979). Before this round, foreign firms had to jump through a lot of hoops to export their products in the importing countries.

(iii) No world wars since 1948

(iv) replaced by WTO on January 1, 1995.

 Major Achievements of WTO

Dispute Settlement body settled small disputes.

For the period 1995 - 2009, 400 cases were brought to the dispute settlement body.

Each year about 27 new disputes arose. About half of these disputes were resolved directly between the parties by mandatory consultation.

186 cases went into litigation, and 169 cases were subjected to the dispute settlement mechanism.

US was a complainant in 93 cases, and a respondant in 107 cases. (Other countries tend to file more complaints against the US)

Difference between GATT and WTO

 


World Trade Organization - Organisation Mondiale du Commerce in Geneva

(i) GATT was a provisional agreement by contracting parties with no teeth, i.e., no legal enforcement power.

WTO is a binding permanent agreement by members.

(ii) GATT only included trade in goods.

WTO additionally includes trade in services, international investments and intellectual property rights.

(iii) GATT had no provisions to settle trade disputes . WTO set up a dispute settlement body and disputes are quickly resolved.

The General Council is the Dispute Settlement Body.

 Problems

(i) WTO failed to liberalize trade in agricultural products to any significant degree. This was one of the major goals of the Uruguay Round. Intellectual Property Rights is another problem.

(ii) steady erosion of MFN principle by the EU, and to a lesser extent by the NAFTA.

Article XXIV permits member countries to form a CU or FTA. The EU adopted VILs to keep out agricultural products, lowered duties to many African and Mediterranean countries, which are not extended to other GATT contracting parties.

GATT was an organization that has no teeth. No enforcement power to discipline parties that violate the rules, much as the League of Nations had no power to discipline rogue nations. (e.g., Japan withdrew from the League of Nations in 1933) While the League of Nations fell apart, GATT has been functioning for more than four decades, and eventually was replaced by WTO.

(iii) Lack of discipline of nonmembers (25 observers + 14 others). WTO has not done anything to eliminate pirate activities in Africa. It has no military force to discipline rogue nations that disrupt trade.

(iv) Developing countries are unhappy with WTO rules, and violate intellectual property rights.

people protesting against shops selling counterfeit goods in Firenze.

(v) WTO does not regulate currency manipulation as a protective instrument to restrict imports . Currency manipulation falls under the IMF's jurisdiction.

(vi) No provisions to expel rogue members.

Developing country status: Only a declaration, "our nation is a developing country," is required. No examination or investigation required.

Mei Xinyu, Ministry of Commerce, China: remove the US from the WTO (China Daily). Xia Yeliang: WTO should impose sanctions on China instead.

solution: EU and the US exit from WTO. Establish a new trade organization with strict rules that can (i) limit DC membership, (ii) exclude rogue nations, (iii) regulate currency manipulation. If developing countries disagree with reorganization, EU and the US can continue bilateral FTA agreements with desired countries.

DC Membership

US tries to remove DC member status of countries that fail to provide "equitable and reasonable access."

South Korea declares it is not a DC.

China does not. Reason: its income is lower. China treats it as birthright.

Investment outside national territories (territorial disputes): WTO or UN issue?

There will be more disputes concerning the use of maritime resources outside territorial waters (12 nautical miles from coastal states).

UN allows exclusive economic zones (EEZ: 200 nautical miles from one's coast): sovereign rights below sea, no right to deny freedom of navigation, No military installations.)

South China Sea Map

   

 

  4. Trade and Diminishing National Sovereignty (Opinion)
 Sovereignty in autarky A country is presumed to have full sovereignty over its citizens within its territory. Any foreign governments or entities that say any negative things on domestic regulations or problems have been criticized for meddling with internal or domestic politics. This was so at least until GATT was formed in 1948, and GATT was transformed into WTO in January 1995.
International Organizations encroach on national sovereignty Members of WTO are agreeing to abide by the rules of WTO, and hence allowing WTO to monitor domestic laws that may be in conflict with trade rules set by the WTO. Similarly, members of International Monetary Fund also allow the Fund’s surveillance of their exchange rate practices. Thus, increased trade is gained only through reduced national sovereignty. Gains from trade often forces member countries to sacrifice some national sovereignty.
   

 

  New Problems
Bilateral/Regional agreements

WTO round of negotiations is at an impasse.

It takes too long to complete a round of tradenegotiations.⇒ Trading nations are pursuing a bilateral approach. Bilateral and regional agreements have become popular.

copyright/trademarks

For example, India’s patent laws allowed the production of generic drugs without requiring license fees, which made Indian drugs available at low cost to the mass. Now India overturned its Patent Laws for all medicines invented since 1995. This shows India’s attempt to make their internal laws consistent with the rules of WTO.

 Greece' problem EU monitors Greece's economic policies, and encourages the Greek government to reduce its budget deficit. 

 

China and the GATT/WTO