Question

What characteristics of the GATT/WTO system allowed it to rapidly reduce tariffs after 1947 (make sure your answer includes MFN status, uniformity of treatment, etc.). Why did that process accelerate in the 1960s? How did “MFN status” eventually become a problem for the GATT/WTO?

Answer 1

From 1948 to 1994, the General Agreement on Tariffs and Trade (GATT) provided the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce. It seemed well-established, but throughout those 47 years, it was a provisional agreement and organization.

The original intention was to create a third institution to handle the trade side of international economic cooperation, joining the two “Bretton Woods” institutions, the World Bank and the International Monetary Fund. Over 50 countries participated in negotiations to create an International Trade Organization (ITO) as a specialized agency of the United Nations.

The draft ITO Charter was ambitious. It extended beyond world trade disciplines, to include rules on employment, commodity agreements, restrictive business practices, international investment, and services. The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba in 1947.

This first round of negotiations resulted in a package of trade rules and 45,000 tariff concessions affecting $10 billion of trade, about one fifth of the world’s total. The group had expanded to 23 by the time the deal was signed on 30 October 1947.

The tariff concessions came into effect by 30 June 1948 through a “Protocol of Provisional Application”. And so the new General Agreement on Tariffs and Trade was born, with 23 founding members (officially “contracting parties”).

The Havana conference began on 21 November 1947, less than a month after GATT was signed. The ITO Charter was finally agreed in Havana in March 1948.

• The General Agreement on Tariffs and Trade was a treaty created after World War II to help the economies of countries affected by the war.
• This agreement would pave the way to the creation of the World Trade Organization.
• With countries becoming increasingly integrated economically, war between member countries dropped.
• GATT did have drawbacks when it came to the amount of autonomy some countries gave up, with global goals prioritized over local ones.

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.

Second, 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

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.

MFN status is critically important for smaller and developing countries for several reasons:

• It gives them access to the larger market.
• It lowers the cost of their exports since it lowers trade barriers as much as possible.
• As a result, their products become more competitive and businesses have more opportunities for growth.

But,

The downside of MFN status is the country must also grant the same trade benefits to all other members of the agreement or the World Trade Organization.

This means they cannot protect their country's industries from cheaper goods produced by foreign countries. Some industries get wiped out because they just can't compete. It’s one of the disadvantages of free trade agreements.

Countries sometimes subsidize their domestic industries. That allows subsidized companies to export at incredibly cheap prices. This unfair practice will put companies out of business in the trade partner's country.

Once that happens, the country reduces the subsidy, prices rise, but now there's a monopoly—no other companies remain in the industry to keep prices competitive. This can get a country in trouble with the WTO.

Many countries in the past were excited to get MNF status and begin cheaply exporting goods to the U.S., only to find they lost their local agricultural industry.