Founded in 1948 by two dozen industrialized countries, the objective of the General Agreement of Tariffs and Trade (GATT) is to reduce barriers to international trade. By 1994,. GATT had nearly 120 member countries, and another 30 countries applied GATT rules to their trade. Over 90% of world trade is carried out by countries who are signatories to GATT. Unlike agencies such as the World Bank and the IMF, the GATT is not as much a physical institution as it is a comprehensive set of agreements and rules on world trade, administered and governed by a small secretariat in Geneva, Switzerland. Parties to GATT are governed by voluntary acceptance of its jurisdiction, and the organization does not have any formal enforcement powers. In other words, GATT is nothing more than an “agreement” among signatory countries to follow a collectively agreed upon set of rules.
The workings of GATT are based on five underlying principles, which form the basis for almost all of its rules:
Non-discrimination: This principle states that countries should not grant preferential treatment to anyone group of member countries over other member countries. This is the basis for the “most favored nation” (MFN) rule, which simply means that every member country will be treated alike by all GATT members. In other words, MFN does not imply preferential treatment: rather it implies that every country should be treated as favorably as every other country.
Reciprocity: This means that if one country lowers its tariffs against another country, the other country should do likewise; any concession that is made will be reciprocated. Combined with the idea of MFN, it is the means by which GATT tries to get all members to lower their tariffs to each-other.
Transparency: This principle asks countries that do impose protection to do so through tariffs, and not non-tariff barriers or quantitative restrictions. Even if there are non-tariff barriers, GATT urges their “Tariffication” so that they can be made more transparent, and subsequently reduced through the principle of reciprocity.
Dispute Settlement: GATT members are expected to use the dispute settlement mechanisms of GATT. There is, however, no enforcement mechanism in the event that a member country refuses to abide by GATT rules in dispute settlement.
Exceptions: Countries are granted exceptions of GATT rules under special or emergency circumstances. These exceptions include special treatments for regional trading arrangements, for developing countries, for trade in certain industries such as agriculture and textiles, for dumping, for domestic firms seriously injured by imports and for balance-of-payments difficulties.
Despite some criticisms of the rules and GATT’s apparent lack of enforcement authority these rules have combined to work remarkably well for world trade in the past few decades, at least in reducing tariff barriers worldwide. In 1947, the average tariffs on imported products worldwide stood at about 40% by 1990, they had declined to about 5%. It was estimated that, by the year 2000, the average tariff will have fallen to about 2%. These tariff reductions have been achieved through various “rounds” of negotiations among the member countries. The earliest round of negotiations was the “Geneva” round, in 1947, more recently, the sixth and seventh rounds of negotiations, the “Kennedy” round (1964-67) and the “Tokyo” round (1973-79) were particularly effective in achieving tariff reduction agreements.