Principles of the General Agreement on Tariffs and Trade - Coursework Example

Name: Instructor: Institution: Course: Date: GATT History Before the First World War, international trade thrived and international monetary relations were very healthy. After 1860 trade relationships were governed by a network of bilateral treaties which were based on the most favored nation principles (MFN). Countries had the freedom to revise their tariffs as long as the tariffs were in line with the MFN rules. This introduced trading barrier since most countries would charge high tariffs and import quotas. In 1930 there were discriminatory trade practices which led to the world trade to become stagnant. The trade barriers persisted after the First World War since there was no international organization to ensure order in the world trade. Due to this economic state the General Agreement on Tariffs and Trade (GAAT) was formed in 1947 were 22 nations met in Geneva. GAAT treaty was later replaced by World Trade Organization in 1995. GAAT introduced a rule based multilateral trading for trading in goods and services through several series of negotiation. It was able to reduce the average tariff on manufactured goods from forty percent to five percent. It had three phases; the first phase was from 1947 to 1951 and was held in Geneva, Annecy and Torquay. During the first phase ways on how to freeze tariff levels were discussed. The second phase was from 1960 to 1979 were mechanisms on how to reduce tariffs were the main topic. The last phase was from 1986 to 1994 and focused on intellectual property, agriculture and services. During the third phase is when the World Trade Organization (WTO) was born. The main aim of the WTO was to help producers, importers and exporters of goods grow their business and conduct it easily. Introduction General Agreement on Tariffs and Trade (GATT) is a set of trade agreements which were meant to reduce tariff duties and abolish quotas among signatory countries. It is a treaty whose main objectives was to provide a worldwide forum that would encourage free trade among its member countries by reducing the trade tariffs on goods and provides a common way of resolving trade conflicts. GAAT was as a result of negotiating governments failing to create an international trade organization (ITO). The idea for an organization to regulate international trade began during the Bretton Woods conference after the World War 2. As the governments tried to negotiate on the ITO, fifteen of the negotiating countries started parallel negotiations leading to the failure of the ITO leaving behind the GAAT agreement. GAAT’S main objective was to reduce international trade barriers which were achieved through the reduction of tariff barriers, quantitative limits as well as subsidies on trade through a set of agreements. The treaty was not a free trade organization and its members were not allowed to take part in trade liberalizing negotiation rounds. The member countries had the freedom to protect domestic producers by implementing restrictions on imported products. In order to protect imported goods the member countries were allowed to use tariffs instead of imposing import quotas. Rules/Principles of the GATT Rule 1: Protection of Domestic Industries Using Tariffs Only GATT used to create a complex system to ensure that domestic industries are protected using simple rules. This principle is implemented by provisions which prevent member nations from imposing quantitative restrictions on imports. However, the rule is subject to several exceptions. One of the most crucial exceptions allows nations that are in balance of payments (BOP) challenges to impose import quotas in order to protect their external financial state. This exception offers a greater flexibility to developing countries as compared to the developed ones which are not in a position to use this exception. Developed countries can impose restrictions on imports if the restraints are needed to foresee deterioration in their financial reserves. Non-observation of the rule against Importation Quotas Agricultural Sector Some of the countries have not obeyed the rule on the protection by tariffs. In agriculture some of the developed countries have imposed quantitative limitations which have gone far beyond the stated exceptions stated by GATT. Developed countries especially the members of the European Union have employed variable taxes instead of applying fixed tariffs on imported goods of temperate regions. Products such as wheat, othergrains, and dairy and beef products have been charged varying taxes (Kim 27). The main objective of these levies is to ensure farmers get a reasonable income and ensure that there is some equality of income between farmers and the industrial workers. The taxes payable were determined periodically and were equal to the difference between the land priceof imports and the assured reference domestic price. This varying taxes ensured domestic production was fully protected from foreign competition since the levies counteracted the competitive pricing advantages of overseas suppliers. Textiles and Clothing Sector In the clothing and textile industries most developing countries do not abide by the rule against use of quantitative limitations. There were significant differences between the limitations applied on agricultural sector and those applied in textile industry. The limitations implemented in the agricultural industries were beyond GATT’s rule’s scope. For the textile and clothing sector the limitations were legalized under the Multi - Fiber Arrangement (MFA) provision which was negotiated by GATT. MFA allowed countries to impose import limitations and detract from their obligations as long as they met the conditions provided by GATT (Edwards 17). Enactment of discipline against the use of quantitative limitations The WTO system brought a big change in the implementation of quantitative limitations affecting imports. WTO members got rid of quantitative limitations by introducing tariffs. The tariff charges are determined by calculating the incidence of quantitative limitations and other measures on the imported goods prices and summing it up with the current prevailing tariffs (Edwards 27). After tariffication nations can be able to protect their agricultural goods by using tariffs. In the clothing and textile industry countries which were imposed quantitative restriction had to abolish them. In 1994 GATT encouraged its member countries not to implement quantitative limitations to protect their balance of payment circumstances. GATT urged its country members to use price based measures instead of quantitative restrictions since their impact on the price of imported goods could be measured. Rule 2: Tariffs Should Be Reduced and Bound Against Further Increases Tariffs and other measures that nations abide by in order to protect their domestic production should be minimized and where possible the tariffs can be abolished by the countries negotiating with other member countries. If the tariffs are reduced member countries should be limited from further increasing the tariff rates. The tariff rates agreed upon during negotiations by member countries are listed in the concession schedules. Every member of the WTO has their own schedule and has a duty not to enforce excess charges on tariffs as to those listed in WTO schedule. Member countries also have an obligation not to impose quantitative restrictions which decrease the tariff concession value. The tariff rates listed in the schedule are meant to bind the tariff rates (Cass and Haring 67). Principle of Reciprocity and Mutual Advantage In order for countries to agree to the reduction of trade tariffs they follow the principle of reciprocity and mutual exchange to bind them from further increasing the trade barriers and remove other trade barriers (Lawton and McGuire 31). If a country requests for better access to the market of other nations it must reduce trade tariffs or abolish other trade barriers such as quantitative restrictions, that country must be prepared to make concessions in tariffs. It must be also ready to concede in other areas that it considers being of advantage and of reciprocal value to the concessions it is made. This principle does not apply to negotiations between developed and developing nations. Developing nations can only make concessions by reducing tariffs based on relative reciprocity since it is considered that developing countries are not in a position to make concessions as the same as developed countries. The reciprocity rule however identifies that developing countries do not have the same level of development. Some are more developed as compared to others which have not reached higher development stages. Developing nations that have reached higher levels of economic growth are required to give larger contributions and concessions in the form of reduced tariffs and bindings as compared to the developing countries which are at a lower level of development. This code of reciprocity and mutual advantage is also referred to as ‘graduation’ since it envisions that as third world nations develop they graduate to a higher status and are in a position to make tariff concessions and are ready to accept the disciplines in all other areas as the same as other developed countries. Greater Contributions from Developing Countries in the Uruguay Round During the Tokyo round and previous negotiation rounds only a few developed countries were able to make tariff concessions (Kim 34). The countries that were able to make allowances were only to make the concessions on a few products. During the Uruguay round this situation changed and most of the developing countries were ready to make concessions by reducing trade tariffs by a certain percentage. However, the developing countries make a lower percentage of the concessions as compared to developed countries. During the Uruguay round two factors led to developing countries to be willing to make concessions (Kim 39). One of the factors is that most of the developed countries had progressed in their economic development. Also the second factor is because there was an intense change in the trade policies in most of the developing countries. Before developing countries followed import substitution policies, had high tariff walls and protected domestic production from foreign competition thus it was a challenge for them to make concessions by tariff reduction. These nations are now abiding by the policies that promote export growth and are abolishing plethora of licensing and other ways they were used to restrict imports. These trade policies have enabled the developing countries to be able to improve their bargaining position when negotiating with other developed countries. Rule3: trade according to the MFN Clause This principle embraced the clause called the most favored nation (MFN) which ensured there was no discrimination among member countries. Obedience to MFN clause depoliticized trade and ensured countries to purchase its imports from the cheapest overseas source. The MFN clause included some exceptions for free trade areas (Blyth 38). Each member countries were equally allowed to open their markets as other member nations. If a country and its biggest trading partners decided to reduce its tariffs, the tariff reduction applied to all GAAT members. However the duty to abide by the MFN rule was not only confined to tariffs alone but also applied charges imposed on importation and exportation, method of taxing tariffs and other charges, rules applied on imports and exports and the laws and requirements affecting the sales of imports and exports. By abiding to this principle member countries implied that they were not ready to discriminate other countries or treat them in a less favorable as compared to others in matters concerned with foreign trade products. Exceptions to the MFN Clause The GATT rules recognize that trade barriers and tariffs can be reduced by depending on the regional arrangement between member countries. The reduction of tariff rates or duty free rates between member regions cannot be extended to other nations. For such arrangements to be formed GATT outlines certain conditions that must be followed so as to guard trade interests of non-member nations. These conditions are: Member countries participating in regional arrangements must abolish tariffs and other trade barriers that affect trade among themselves. The regional arrangements should not impose new trade barriers to other countries that are not part of the regional arrangements. Regional arrangements are in the form of customs unions or free trade regimes. Trade among member countries occurs on a duty free basis while trade with other countries has to abide by the MFN tariff rates. For customs unions, tariff rates for member nations have to correspond and are uniformly applied to goods which are imported from other countries. Member countries which operate in free trade regions continue to use tariffs which outlined in their own national schedules. The preferential arrangements are over a hundred and this number is increasing over the years. Most of the world trade is occurring on the regional basis. The advantage of using regional preferences is that it gives the countries a chance to market their goods in other nations in the region. However preferential arrangements may a cause a competitive disadvantage to other countries outside the region since they still have to pay the tariffs based on the MFN rates. Additionally preferential arrangements have enabled developed countries to be in a position to introduce one way free trade arrangements. This one way arrangement allows developed nations to import goods into their markets from developing countries on a duty free basis. Countries which benefit from the preferential arrangements cannot extend this preferential treatment to goods imported from developed nations. These arrangements are non-reciprocal thus they can only be applied to certain regions of the country. Examples of the one way treatment arrangement are: The generalized preferences (GSP) which allow developed nations to accept imports from developing nations on a duty free basis. The Lomé Convention under which member countries belonging to the European Union to accept imports from developing on a duty free basis. The Caribbean Basin Initiative which allows the United States to import their products from Caribbean on a duty free basis. The extension and legalization of the preferential treatment by developed countries under the GSP was provided by the full participation of developing countries, reciprocity and the decision on more favorable treatment. GATT adopted this decision in 1979 and was commonly referred to as the general enabling clause. For the Lomé Convention and the Caribbean Basin Initiative there was no defined legal basis provided by GATT. However these arrangements are permitted by waivers given to the preference given to the developed nations from their duties to spread the MFN treatment. The disadvantage of the restricted arrangements is that they lead to imports from developing countries (which do not gain advantage from the preferences) being discriminated thus the preferences should be made to conform to the GATT rules. Rule 4: Principle of Non-discrimination/National Treatment Approach was based on 2 non-discriminatory principles. One of the most important principles was trade without discrimination. The second element of non-discrimination principle is national treatment which abolished discrimination for imports and domestic goods if the goods have entered the nation. National treatment principle complements the principle of most favored nations. According to the national treatment principle any product that has passed the country border after the disbursement of custom duties and other costs should not be treated in a less favorable way as compared to domestic products. In short this principle requires member nations to treat imported goods the same way they would have treated domestically manufactured products. Thus it is not fair for a nation to tax imported goods after its entry into the country after it has incurred custom duty payments at the border and internal taxes that are higher as compared to the ones charged on domestically produced products. Rules that affect the selling and buying of a product in the domestic market should not be applied more strictly on imported goods. Other elements in non-discrimination principle included identical customs rules and the duty of each contracting country to negotiate on tariff reduction if the other requested so. In the agreement GAAT include an escape clause to allow contracting nations to change the agreements in case their domestic producers suffered extreme losses due to trade concessions. GAAT also recognized identical customs regulations and ensured it eliminated import quotas. GAAT also supported treaties that reduced tariffs such as the one contracted in Uruguay in 1994. GATT Business Implications The latest set of rules covering the agricultural and textile sectors developed during the Uruguay round will assist in ensuring that GATT’S main rules which are against the implementation of quantitative limitations are followed by all nations. Exporting companies or businesses prefer tariffs as compared to quantitative limitations. This is because the prices of tariffs can be predicted and the fact that they are transparent. Quantitative restrictions inflict uncertainties in trade since the administering authorities are not in a position to change the quota sizes after a certain time. For one to implement quota restrictions one has to have a license as compared to businesses which operate on tariffs which allow them to export goods if the overseas buyer is in a position to get a license. The Uruguay round led to significant improvement of tariff binding by all nations. The guarantee that because of this binding the low rates agreed upon will not be raised to nations to which the goods are exported to gives enterprises the morale to implement other measures to grow their trade, invest their funds in manufacturing plants and supply networks. The binding also assures enterprises that payable tariffs on raw materials and imported inputs will not be increased by their governments. The national treatment principle rule guaranteed businesses that once their goods had entered the importing marketplace after being charged the custom duty and other charges the goods would not be charged internal taxes that are higher than domestically produced products. The national treatment rule not only applied to internal levies but also to rules applicable on sales and distribution of goods and regulations that governed compulsory standards for goods. As much as the governments impose taxes and product regulations in order to protect consumers and the environment, the law that such taxes should be implemented on domestically produced and imported products without discrimination is of great significance to exporting enterprises. General Impact of GATT In order to discuss how countries that joined GATT changed the way they traded I will discuss its impact based on the structural break tests and a research done by Kennedy Rose. According to Andrew Rose (2004) member countries of GATT did not have increased trade as compared to countries who were not GATT members. Before The Rose research there were assumptions that countries that had joined GATT had increased trade. According to Rose countries that had joined the treaty did not benefit much in terms of trade. However he overlooked a big proportion of countries who were GATT members thus he underestimating the effect of GATT on trade. According to Rose he wasn’t sure of his findings and described them as a mystery. In order to show that GATT had any effect on its member countries I will have to look at all countries who were GATT members. After accounting for all countries who participated in the GATT treaty the analysis shows that countries that were member and nonmember countries who had participated in the treaty had substantial growth on trade. Generally GATT had a positive impact on international trade as compared to countries who failed to participate in the treaty. By using the break tests I found out that most nations experienced structural break tests on their trading patterns. However the post-break average to the pre-break ratios was higher thanthat of the actual ratio. For most of the countries the post-break patterns of the trade quotient had dropped. For countries that had grown by joining GATT were scattered widely in 1972. Works Cited General Agreement on Tariffs and Trade: The Torquay Protocol to the General Agreement on Tariffs and Trade and the Torquay Schedules of Tariff Concessions. Geneva: GATT, 1951. Print. International Trade. Geneva: Contracting Parties to the General Agreement on Tariffs and Trade, 1952. Print. Douglas, Paul H. America in the Market Place: Trade, Tariffs and the Balance of Payments. New York: Holt, Rinehart and Winston, 1966. Print. Bhagwati, Jagdish N. Trade, Tariffs, and Growth: Essays in International Economics. Cambridge, Mass: M.I.T. Press, 1970. Print. International Trade. Geneva: Contracting Parties to the General Agreement on Tariffs and Trade, 1952. Print. Kim, Myeong H, Dongsoo Kim, and Yongseung Han. "The Impact of International Institutions on Bilateral Trade: Economic and Political." Global Economy Journal. 8.4 (2008). Print. Blyth, Mark. "The Ghosts of Corporatism's Past and Past Corporatisms: Commentary on Three Articles." Capitalism and Society. 5.3 (2011). Print. Lawton, Thomas C, and Steven M. McGuire. "Adjusting to Liberalization: Tracing the Impact of the Wto on the European Textiles and Chemicals Industries." Business and Politics. 7.2 (2005). Print. Edwards, Terence H. "Tariffs, Horizontal Regulatory Standards and Protection against Foreign Competitors." Global Economy Journal. 9.2 (2009). Print. Cass, Ronald A, and John R. Haring. "Domestic Regulation and International Trade: Where's the Race? - Lessons from Telecommunications and Export Controls." Journal Des Economistes Et Des Etudes Humaines. 11.4 (2001). Print. Read More