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General Agreement On Tariffs And Trade (GATT)

Updated on January 29, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is General Agreement On Tariffs And Trade (GATT)?

The General Pact on Tariffs and Trade (GATT) is a multilateral commerce agreement that was signed by 23 different nations to encourage free trade in a global arena. GATT’s day-to-day operations are overseen by the World Trade Organization’s (WTO) Council for Trade in Goods, a subsidiary body of the WTO.

GATT

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The GATT has been a very important reform leading to the end of a protectionism era. It, directly and indirectly, solved various issues, including agriculture, access to the market, incentives, anti-dumping measures, state trading enterprises, and other related themes. The agreement aimed to facilitate more international commerce by lowering or doing away with taxes, charges, and quotas on imports and exports.

Key Takeaways

  • GATT was signed after World War II; in October 1947, 23 countries joined together to sign the General Agreement on Tariffs and Trade, ratified as a legal document on January 1, 1948.
  • It was created to simplify the process of international trade.
  • Between April 1947 and December 1993, the General Agreement on Tariffs and Trade conducted a total of eight rounds, 
  • GATT was superseded in 1995 by the World Trade Organization (WTO), which both incorporates the ideals of the GATT and is better positioned to carry them out.

GATT Explained

GATT agreement was reached among the 23 nations on October 30, 1947, and was signed in Geneva on the same day. However, it did not become effective until January 1, 1948. Once 23 nations signed the General Agreement on Tariffs and Trade in Geneva in 1947 (with the effective date of January 1, 1948), it was understood to be a temporary solution before establishing a United Nations body that would replace it. However, because such an agency did not materialize, GATT was expanded and strengthened during the subsequent discussions. After then, it became the most successful tool of international trade liberalization.

It played a significant part in the tremendous development of world commerce in the second half of the 20th century. By the time the General Agreement on Tariffs and Commerce (GATT) was superseded at the World Trade Organization (WTO) in 1995, 125 nations had signed onto its provisions, which had evolved into a code of conduct that governed 90 percent of global trade by that point.

The GATT’s most significant concept was trade without discrimination, which stated that every member country was required to open its markets equally to all other general agreements on tariffs and trade members. This indicated that when a nation and its main trade partners had consented to decrease a tariff, the fee cut was immediately applied to all other GATT nations. This was made possible by the obligatory most-favored-nation provisions that were a component of the GATT. In addition, the General Agreement on Tariffs and Trade featured a comprehensive schedule of particular tariff reductions for each signatory nation. These concessions represented each nation’s tariff rates committed to extending to others.

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History

Between April 1947 and December 1993, the GATT convened for a total of eight sessions of talks. There were major accomplishments and results obtained from all of the meetings. The inaugural gathering occurred in Geneva, Switzerland, and representatives from 23 nations attended it. Tariffs were a topic that was discussed extensively throughout this conference. As a result, the members agreed to tax breaks that affected over 10 billion US$ worth of commerce globally.

The second round started in April 1949 and took place at Annecy, which is located in France. Once more, tariffs were the principal issue of discussion. At the second summit, there were thirteen different nations, and together, they accomplished an extra 5,000 tax incentives that reduced tariffs.

The third set of GATT meetings took place in Torquay, England, beginning in September 1950. These sessions took place over three years. This time around, there were 38 nations engaged, and 9,000 tariff concessions were approved, which reduced tax levels by up to 25%.

During the fourth GATT conference, which took place in 1956, Japan participated for the first time with 25 other countries. As a result, the committee again lowered global tariffs, this time by an amount equal to $2.5 billion in US dollars, and the meeting took place in Geneva, Switzerland.

When the GATT was signed in Geneva in 1947, the average tariff rate was over 22%; but, by the time the Uruguay Round was through, it dropped to 5%. As the years went by, the countries continued to work together to address global concerns, such as resolving disagreements about agriculture and making efforts to preserve intellectual property.

Purpose

The purpose and function of general agreement on tariffs and trade were to do away with detrimental tariff barriers. These barriers had been one of the factors of the Great Recession. In addition, by eliminating tariffs on various items, the GATT increased the growth of international commerce.

The GATT was established to do away with detrimental tariff barriers. During the great depression, this resulted in a decline of 65 percent in world trade. After the economic damage caused by the depression and world war, the GATT was able to restore global economic health. GATT was the global community’s method to boost world trade by removing trade barriers, especially tariffs. GATT was required to improve the standard of life, reach maximum work opportunities, and enhance the real GDP.

Principles

Some General Principles that the GATT made for general conduct are as follows:

GATT Principles

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Non-discrimination; According to the concept of national treatment, after commodities have been legitimately imported into a country, they must be treated the same as items produced inside that country. They are not to be given any less favorable treatment than others, such as taxes, consumer rights, rules, and obligations in trade or commerce, offering for sale, transit, delivery, and usage of the product in question.

MFN stands for Most Favoured Nations. It means that all state parties to the GATT must apply the same tariffs on imported products, regardless of their origin. Therefore, any added benefit, preference, or protection given to an item that originates in or is destined for any other country must be conferred instantly and irrevocably to the like item that originates in or comes from regions of all other representatives.

Only tariffs; trade constraints should be implemented in the form of tariffs. This is done to make them apparent. They ought to be able to be referenced in terms of a percentage of the total worth of the items. In theory, they can be utilized while simultaneously referring to another measurement.

State governments must respect the idea of openness. The norms, laws, and practices of individual states must be made public globally so exporters may comply. In addition, they must make an effort to streamline the import and export paperwork.

Taxes on sales and consumption, regulations, and regulatory requirements could all be implemented at the state level. However, they cannot be designed to place a higher burden on imported products than on domestic items.

GATT vs. WTO

The General Agreement on Tariffs and Trade stands for GATT, while The World Trade Organization is abbreviated WTO. The World Trade Organization (WTO) is a permanent entity whose authority has been accepted by its numerous member states. Whereas the General Agreement on Tariffs and Trade is an international treaty with a transitory international life.

The GATT was a temporary agreement. Moreover, the General Agreement did not include the conditions for establishing an organization. This contributed to its failure to be adopted in any of the member parliaments.

The World Trade Organization and its accords are permanent. WTO has a solid legal foundation as an international body because its members have signed related agreements. The agreements themselves explain how the WTO is supposed to operate.

The WTO is comprised of “members.” The term “contracting parties” was used in GATT, highlighting that the organization was intended to be a legal text.

The GATT was concerned with the trading of products. In addition to goods and raw materials.

The old GATT system is being replaced by a newer, more efficient one known as the WTO Dispute Settlement System. Its decisions cannot be challenged in any way.

Frequently Asked Questions (FAQs)

The general agreement on tariffs and trade was replaced by?

The World Trade Organization (WTO) succeeded GATT as an international organization. Still, the General Agreement remains the WTO’s overarching instrument for goods trade, modified as a consequence of the Uruguay Round discussions.

General agreement on tariffs and trade definition?

The General Agreement on Tariffs and Commerce is a legal pact that many nations came to encourage world commerce by lowering or doing away with trade obstacles such as tariffs and quotas. This was the overarching goal of the agreement.

When was the general agreement on tariffs and trade established?

At the Palais des Nations in Geneva on October 30, 1947, 23 countries signed the General Agreement on Tariffs and Trade (GATT).

Why is GATT important?

If the GATT had not existed, the world we live in today would look quite different. Its ideology of trade liberalization halted a low chapter of protectionism and economic misery that led to World War II, clearing the way for years of economic prosperity and expanded globalization.

This article is a guide to General Agreement On Tariffs And Trade (GATT). Here, we explain its meaning in detail, history, purpose, principles, and its comparison with WTO. You can also go through our recommended articles on corporate finance –

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