What Was the GATT?

Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.

The General Agreement on Tariffs and Trade (GATT) was the first multilateral free trade agreement. It first took effect in 1948 as an agreement among 23 countries, and it remained in effect until 1995, at which point its membership had grown to 128 countries. It was replaced by the World Trade Organization.

Key Takeaways

• The General Agreement on Tariffs and Trade (GATT) was a treaty created after World War II to help the economies of countries affected by the war.
• This agreement would pave the way for the creation of the World Trade Organization.
• The benefits of the GATT included an increasing interconnection among national economies, which reduced the likelihood of war and bolstered communication.
• The GATT did have drawbacks, including the requirement that countries give up some level of autonomy to adhere to the rules of the free trade agreement.

Definition and Examples of the GATT

The General Agreement on Tariffs and Trade was a free trade agreement that eliminated tariffs and increased international trade. As the first worldwide multilateral free trade agreement, the GATT governed a significant portion of international trade between January 1, 1948, and January 1, 1995. The agreement ended when it was replaced by the more robust World Trade Organization (WTO).

For example, if the U.S. were to trade with one of the other members of the GATT, it would eliminate any tariffs that normally would have been imposed prior to the formation of the trade agreement.

How the GATT Worked

The purpose of the GATT was to eliminate harmful trade protectionism, which likely contributed to the 66% reduction of global trade during the Great Depression. The GATT helped restore economic health to the world after the devastation of the Depression and World War II.

The GATT had three main provisions. The most important requirement was that each member would confer most favored nation status to every other member. All members had to be treated equally when it came to tariffs. The agreement excluded the special tariffs among members of the British Commonwealth and customs unions. It permitted tariffs if their removal would cause serious injury to domestic producers.

Second, the 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

In addition, countries could restrict trade for reasons of national security. These included protecting patents, copyrights, and public morals.

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 the number of middle-class consumers throughout the world, there was an increased demand for trade with developed countries.

Member Countries

The original 23 GATT members were Australia, Belgium, Brazil, Burma (now Myanmar), Canada, Ceylon (now Sri Lanka), Chile, China, Cuba, Czechoslovakia (now the Czech Republic and Slovakia), France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia (now Zimbabwe), Syria, South Africa, the United Kingdom, and the United States.

The membership increased to 128 countries by 1994.

History

The GATT grew out of the Bretton Woods Agreement. The summit at Bretton Woods also created the World Bank and the International Monetary Fund to coordinate global growth.

The summit almost led to a third organization. It was to be the highly ambitious International Trade Organization (ITO). The 50 countries that started negotiations wanted it to be an agency within the United Nations that would create rules, not just on trade, but also on employment, commodity agreements, business practices, foreign direct investment, and services. The ITO charter was agreed to in March 1948, but the U.S. Congress and some other countries' legislatures refused to ratify it. In 1950, the Truman administration declared defeat, effectively ending the ITO.

At the same time, 15 countries focused on negotiating a simple trade agreement. They agreed on eliminating trade restrictions affecting $10 billion of trade, or a fifth of the world’s total. A total of 23 countries signed the GATT deal on October 30, 1947, clearing the way for it to take effect on June 30, 1948.

Unlike the ITO charter, the GATT didn’t require the approval of Congress. That's because, technically, the GATT was an agreement under the provisions of the U.S. Reciprocal Trade Act of 1934.

The details of the GATT were adjusted in the decades that followed its creation. The main goal of continued negotiations was to further reduce tariffs. In the mid-1960s, the Kennedy round added an anti-dumping agreement. The Tokyo round in the 1970s improved other aspects of trade. The Uruguay round lasted from 1986 to 1994 and created the World Trade Organization (WTO).

The GATT vs. the WTO

The GATT lives on as the foundation of the WTO. The 1947 agreement itself is now defunct. However, its provisions were incorporated into the GATT 1994 agreement, which was designed to keep the trade agreements going while the WTO was being set up. Therefore, the GATT 1994 is itself a component of the WTO Agreement.

Pros and Cons of the GATT

• Encourages international trade.
• Reduces the likelihood of war.
• Improves communication.

• Domestic industries may struggle to compete.
• Exposes more of the world to risks within a given domestic industry.
• Governments cede some level of control to an international agreement.

Pros Explained

• Encourages international trade: The GATT reduced tariffs, which boosted trade among countries. As they traded more freely with each other, more countries saw the benefits of free trade and wanted to join the agreement. By the time the GATT was replaced by the WTO, more than 100 countries had joined the original 23 signatories.
• Reduces the likelihood of war: By increasing trade, the GATT promoted world peace. It set the stage for the European Union (EU). Despite the EU's problems, it has helped to prevent wars among its members. The general idea is that, if your economy depends on trade with another country, then you're less likely to go to war with that county. The more countries trade with each other, the less likely war becomes.
• Improves communication: In addition to reducing the chances of war, the GATT provided incentives for countries to better communicate with one another. Even average citizens are more likely to learn a foreign language these days, since it allows them to access larger consumer markets than they have domestically. For instance, many people learn English, the language of the world's largest consumer market, which allows them to work for call centers for companies based in English-language countries.

Cons Explained

• Domestic industries may struggle to compete: Low tariffs can destroy some domestic industries, contributing to high unemployment in those sectors. Governments with more money or policy power can manipulate industries for their benefit more than smaller countries can. A rich country can spend money subsidizing industries to make them more competitive on a global scale. Another example comes from the Nixon administration. When it took the U.S. dollar off the gold standard in 1973, it lowered the value of the dollar, compared to other currencies. That further lowered the international price of U.S. exports. Other countries didn't have the same tools to make their exports more competitive.
• Exposes more of the world to risks within a given domestic industry: By the 1980s, the nature of world trade had changed. The GATT did not address the trade of services that allowed them to grow beyond a single country's ability to manage them. For example, financial services became globalized. Foreign direct investment had become more important. As a result, the collapse of U.S. investment bank Lehman Brothers threatened the entire global economy. Central banks scrambled to work together to address the 2008 financial crisis. They were forced to provide liquidity for frozen credit markets.
• Governments cede some level of control to an international agreement: Like other free trade agreements, the GATT reduced the rights of a nation to rule its own people. The agreement required them to change domestic laws in order to gain trade benefits. For example, India had allowed companies to create generic versions of drugs without paying a license fee. This helped more people afford medicine. However, since other countries had stricter requirements, this also led to disputes with other GATT countries.