The Role of the GATT in Reducing Barriers to Trade

Reducing Barriers to Trade

As you know, tariffs are taxes that governments place on imported goods for a variety
of reasons. Some of these reasons include protecting sensitive industries, for
humanitarian reasons, and protecting against dumping. Traditionally, tariffs were
often used as a political tool to protect certain vested economic, social, and cultural
interests.

At the beginning of the Great Depression in 1930, the U.S. Congress passed the
Smoot-Hawley Tariff Act to protect American jobs and industries from foreign
competition. This act raised U.S. tariffs on dutiable imports to nearly 60%. U.S. trading
partners retaliated by raising their own tariffs on U.S. exports, with the result that
international trade between the [warring] nations declined by half. The consensus
among economists is that the Smoot-Hawley tariffs contributed significantly to the depth
and length of the Great Depression.

At the end of World War II, there was a consensus that tariffs were too high worldwide,
and that tariff reductions could stimulate international trade and return the world to a
thriving, peacetime economy. In the years after the Great Depression and World War II,
there was a worldwide push to build institutions that would tie the nations of the world
together. The United Nations officially came into existence in 1945. The World Bank,
which assists the poorest people in the world, and the International Monetary Fund,
which addresses issues raised by international financial transactions, were both created
in 1946. The third planned organization was to be an International Trade Organization,
which would manage international trade. The United Nations was unable to agree to
this. Instead, the General Agreement on Tariffs and Trade (GATT), was established
in 1947 to provide a forum in which nations could come together to negotiate reductions
in tariffs and other barriers to trade. In 1995, the GATT was transformed into the World
Trade Organization (WTO).

The GATT process was to negotiate an agreement to reduce barriers to trade, sign that
agreement, pause for a while, and then start negotiating the next agreement. The
rounds of talks in the GATT, and now the WTO, are shown in Table 1. Notice that the
early rounds of GATT talks took a relatively short time, included a small number of
countries, and focused almost entirely on reducing tariffs. Since the 1970s, however,
rounds of trade talks have taken years, included a large number of countries, and an
ever-broadening range of issues.
 Place or Number of
Year Name of Main Subjects Countries
Round Involved

1947 Geneva Tariff reduction 23

1949 Annecy Tariff reduction 13

1951 Torquay Tariff reduction 38

1956 Geneva Tariff reduction 26

1960– Dillon
Tariff reduction 26
61 round

1964– Kennedy Tariffs, anti-dumping

62
67 round measures

1973– Tokyo
Tariffs, nontariff barriers 102
79 round

Tariffs, nontariff barriers,

services, intellectual
1986– Uruguay
property, dispute settlement, 123
94 round
textiles, agriculture, creation
of WTO

Agriculture, services,
intellectual property,
Doha
2001– competition, investment, 147
round
environment, dispute
settlement

Table 1. The Negotiating Rounds of GATT and the World Trade

Organization

The sluggish pace of GATT negotiations led to an old joke that GATT really stood for
Gentleman’s Agreement to Talk and Talk. The slow pace of international trade talks,
however, is understandable, even sensible. Having dozens of nations agree to any
treaty is a lengthy process. GATT often set up separate trading rules for certain
industries, like agriculture, and separate trading rules for certain countries, like the low-
income countries. There were rules, exceptions to rules, opportunities to opt out of
rules, and precise wording to be fought over in every case.
Trade Policy: Organizations and Agreements

How Trade Policy Is Enacted: Globally, Regionally, and Nationally

Nations participate in global and regional trade agreements. They also develop their
own national trade policies. The purpose of these agreements is to define what
constitutes fair trading practices in different contexts.

World Trade Organization

The World Trade Organization (WTO) was established in 1995, as the successor to
the General Agreement on Tariffs and Trade (GATT), which was discussed in the last
section. The WTO is committed to lowering barriers to trade. The world’s nations meet
through the WTO to negotiate how they can reduce barriers to trade, such as tariffs.
WTO negotiations happen in “rounds,” where all countries negotiate one agreement to
encourage trade, take a year or two off, and then start negotiating a new agreement.
The current round of negotiations is called the Doha Round because it was officially
launched in Doha, the capital city of Qatar, in November 2001. In 2009, economists
from the World Bank summarized recent research and found that the Doha round of
negotiations would increase the size of the world economy by $160 billion to $385 billion
per year, depending on the precise deal that ended up being negotiated.
In the context of a global economy that currently produces more than $30 trillion of
goods and services each year, this amount is not huge: it is an increase of 1% or less.
But before dismissing the gains from trade too quickly, it is worth remembering two
points.
 First, a gain of a few hundred billion dollars is enough money to deserve attention!
Moreover, remember that this increase is not a one-time event; it would persist
each year into the future.
 Second, the estimate of gains may be on the low side because some of the gains
from trade are not measured especially well in economic statistics. For example, it
is difficult to measure the potential advantages to consumers of having a variety of
products available and a greater degree of competition among producers. Perhaps
the most important unmeasured factor is that trade between countries, especially
when firms are splitting up the value chain of production, often involves a transfer
of knowledge that can involve skills in production, technology, management,
finance, and law.
Low-income countries benefit more from trade than high-income countries do. In some
ways, the giant U.S. economy has less need for international trade, because it can
already take advantage of internal trade within its economy. However, many smaller
national economies around the world, in regions like Latin America, Africa, the Middle
East, and Asia, have much more limited possibilities for trade inside their countries or
their immediate regions. Without international trade, they may have little ability to benefit
from comparative advantage, slicing up the value chain, or economies of scale.
Moreover, smaller economies often have fewer competitive firms making goods within
their economy, and thus firms have less pressure from other firms to provide the goods
and prices that consumers want.
The economic gains from expanding international trade are measured in hundreds of
billions of dollars, and the gains from international trade as a whole probably reach well
into the trillions of dollars. The potential for gains from trade may be especially high
among the smaller and lower-income countries of the world.

Like the GATT before it, the WTO is not a world government, with power to impose its
decisions on others. The total staff of the WTO in 2013 is 629 people and its annual
budget (as of 2012) is $196 million, which makes it smaller in size than many large
universities.

Regional Trading Agreements

There are different types of economic integration across the globe, ranging from free
trade agreements, in which participants allow each other’s imports without tariffs or
quotas, to common markets, in which participants have a common external trade
policy as well as free trade within the group, to full economic unions, in which, in
addition to a common market, monetary and fiscal policies are coordinated. Many
nations belong both to the World Trade Organization and to regional trading
agreements.
The best known of these regional trading agreements is the European Union. In the
years after World War II, leaders of several European nations reasoned that if they
could tie their economies together more closely, they might be more likely to avoid
another devastating war. Their efforts began with a free trade association, evolved into
a common market, and then transformed into what is nearly a full economic union,
known as the European Union. (The EU, as it is often called, has not included a
common fiscal policy.) The EU has a number of goals. For example, in the early 2000s
it introduced a common currency for Europe, the euro, and phased out most of the
former national forms of money like the German mark and the French franc, though a
few have retained their own currency. Another key element of the union is to eliminate
barriers to the mobility of goods, labor, and capital across Europe.
For the United States, perhaps the best-known regional trading agreement is the North
American Free Trade Agreement (NAFTA). The United States also participates in
some less-prominent regional trading agreements, like the Caribbean Basin Initiative,
which offers reduced tariffs for imports from these countries, and a free trade agreement
with Israel.

The world has seen a flood of regional trading agreements in recent years. About 100
such agreements are now in place. A few of the more prominent ones are listed in Table
2. Some are just agreements to continue talking; others set specific goals for reducing
tariffs, import quotas, and nontariff barriers. One economist described the current trade
treaties as a “spaghetti bowl,” which is what a map with lines connecting all the
countries with trade treaties looks like.
There is concern among economists who favor free trade that some of these regional
agreements may promise free trade, but actually act as a way for the countries within
the regional agreement to try to limit trade from anywhere else. In some cases, the
regional trade agreements may even conflict with the broader agreements of the World
Trade Organization.

Trade Participating Countries

Agreements

Australia, Brunei, Canada, Chile, People’s

Asia Pacific Republic of China, Hong Kong, China, Indonesia,
Economic Japan, Republic of Korea, Malaysia, Mexico, New
Cooperation Zealand, Papua New Guinea, Peru, Philippines,
(APEC) Russia, Singapore, Chinese Taipei, Thailand,
United States, Vietnam

Austria, Belgium, Bulgaria, Cyprus, Czech

Republic, Denmark, Estonia, Finland, France,
European Union Germany, Greece, Hungary, Ireland, Italy, Latvia,
(EU) Lithuania, Luxembourg, Malta, Netherlands,
Poland, Portugal, Romania, Slovakia, Slovenia,
Spain, Sweden, United Kingdom

North America
Free Trade
Canada, Mexico, United States
Agreement
(NAFTA)

Latin American Argentina, Bolivia, Brazil, Chile, Columbia,

Integration Ecuador, Mexico, Paraguay, Peru, Uruguay,
Association (LAIA) Venezuela

Association of Brunei, Cambodia, Indonesia, Laos, Malaysia,

Southeast Asian Myanmar, Philippines, Singapore, Thailand,
Nations (ASEAN) Vietnam

Southern African Angola, Botswana, Congo, Lesotho, Malawi,

Development Mauritius, Mozambique, Namibia, Seychelles,
Community South Africa, Swaziland, Tanzania, Zambia,
(SADC) Zimbabwe

Table 2. Some Regional Trade Agreements