What is GATT and the WTO?

Introduction

Since its establishment in 1995, the World Trade Organization (WTO) has consistently captured global attention. From optimistic headlines highlighting the benefits of freer trade and expanding membership to contentious disputes among member nations, the organization remains a critical pillar of the global trading system. The media often covers key WTO negotiations, while emphasizing the broad economic gains that come with trade liberalization.

However, not all reports are celebratory. Tensions between major economies often dominate the news, fuelled by disagreements over issues ranging from corporate taxation to tariffs on steel and agricultural products. In parallel, skepticism about the benefits of globalization has led environmental and labour groups to stage large-scale protests during international trade meetings. Representatives from developing nations have voiced concerns about uneven trade benefits, pointing out that they have liberalized markets and protected intellectual property without receiving adequate access to agricultural markets in industrialized countries.

A Brief History of the WTO and GATT

The World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), have played a pivotal role in reducing global trade barriers over the past 50 years. Established in 1947, GATT initially included only 23 member nations. By 1995, the organization evolved into the WTO, encompassing 166 member states and covering approximately 98 percent of global trade.[1]

Origins at Bretton Woods and the Birth of GATT (1944–1947)

The roots of GATT can be traced back to the Bretton Woods Conference in 1944, held in the aftermath of World War II.[2] The conference aimed to create a stable international economic system to support postwar reconstruction and global stability. Out of these discussions emerged the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). There were also aspirations to establish a third institution, the International Trade Organization (ITO), designed to oversee international trade and tariff regulations.

Despite drafting a charter for the ITO, support for its creation waned in the U.S. Congress, leading to the abandonment of the effort. However, in 1945, the U.S. president was granted the authority to negotiate a treaty on international trade under the 1934 Reciprocal Trade Agreements Act. This authority laid the groundwork for the creation of GATT in 1947. As a treaty rather than a formal institution, GATT established trade rules among its members, focusing on tariff reductions and promoting a rules-based system for international trade.

Expansion and Success of GATT (1947–1994)

Over the next four decades, GATT expanded its membership and successfully reduced tariffs. Periodic negotiating rounds resulted in substantial tariff reductions and trade growth. By the start of the Uruguay Round in 1986, tariffs on manufactured goods had fallen from a trade-weighted average of approximately 35 percent in 1947 to just 6.4 percent. The volume of trade among GATT members surged, increasing by 25 times between 1950 and 2000.

However, several challenges emerged during the 1980s. Dispute resolution mechanisms were ineffective, and GATT failed to address emerging issues like trade in services, agricultural subsidies, intellectual property protection, and trade-related investment measures. To address these shortcomings, the ambitious Uruguay Round was launched in 1986, aiming for significant reforms in global trade rules.

Establishment of the WTO (1995)

The Uruguay Round culminated in 1994 with the signing of a new GATT treaty, which formally established the WTO in 1995. The WTO inherited GATT’s mandate but introduced a more robust dispute resolution mechanism and expanded its authority to cover new areas such as intellectual property, trade in services, and agricultural trade. The creation of the WTO marked a significant milestone in the evolution of the global trading system envisioned at Bretton Woods.

Principles and Impact of the GATT/WTO System

The enduring success of the GATT/WTO system lies in its core principles of reciprocity and non-discrimination. These principles encourage nations to reciprocally reduce trade barriers and extend trade benefits equally to all members. As a result, the GATT/WTO system has been instrumental in fostering global economic growth, reducing trade restrictions, and facilitating international cooperation.

Today, the WTO remains a critical institution for global trade governance, continuing the legacy of GATT in promoting free and fair trade across the world.

Fundamental Principles of GATT and WTO

The General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have established foundational principles that govern international trade relations and negotiations. These principles are designed to promote fair, predictable, and non-discriminatory trade practices among member countries. Among the most significant of these principles are reciprocity, most-favored-nation (MFN) treatment, and national treatment.

Reciprocity

The principle of reciprocity in the GATT and WTO frameworks plays a critical role in trade negotiations and dispute resolution. This principle manifests in both formal and informal ways:

1. Trade Negotiations: GATT rounds of multilateral trade negotiations typically operated on a reciprocal basis, often involving countries with principal export interests in each other's markets. Although this approach was highly successful, it functioned more as a rule of thumb rather than a formal requirement in the GATT texts.

2. Commitment Renegotiations: Once a country commits to opening its market, reciprocity becomes a formal rule if it seeks to backtrack on those commitments. There are two primary scenarios where reciprocity becomes relevant:

• GATT/WTO Legal Procedures: When a country raises its import tariffs above the bound commitments made during previous negotiations, adversely affected trading partners are permitted to negotiate reciprocal market access changes. This rebalancing often takes the form of either additional trade liberalization in another sector or a limited retaliatory market closure.
• Non-Compliance with GATT/WTO Legal Frameworks: If a country backs away from its commitments without following legal procedures, affected trading partners can use the dispute settlement process to obtain legal rulings. These rulings may allow for reciprocal adjustments to market access obligations to compensate for the breach.

Reciprocity remains a crucial principle, particularly in disputes where compensation needs to be allocated to exporters adversely affected by legal breaches.[3]

Most-Favored-Nation (MFN) Treatment

MFN treatment is a cornerstone of the GATT/WTO system, ensuring non-discrimination by importers across different foreign export sources.[4] This principle has the following implications:

1. Negotiations and Renegotiations: During trade negotiations, when a member country offers to lower its tariff to benefit exporters from another member country, the same lower tariff must be extended to all other GATT/WTO members on a non-discriminatory basis. This ensures equitable treatment among trading partners.

2. Membership Benefits: The MFN principle provides significant incentives for countries to join the GATT/WTO. Even if a country does not actively engage in tariff liberalization negotiations, membership ensures that its exporters benefit from the best market access terms available to any other country in the agreement.

However, exceptions to the MFN principle are permitted under the GATT/WTO framework, such as:

• Preferential Trade Agreements (PTAs): Members can sign PTAs that offer lower-than-MFN tariff rates to preferred partners, provided that these agreements cover substantially all trade.
• Generalized System of Preferences (GSP): Members are encouraged to offer lower-than-MFN tariff rates to developing country exporters, fostering their participation in global trade.

National Treatment

The national treatment principle is the second key non-discrimination rule under the GATT/WTO framework. This principle ensures that once a foreign-produced good has entered a market and paid the applicable import tariff, it must be treated the same as a domestically produced good.[5] Key aspects include:

1. Equal Treatment: Imported goods cannot be subjected to additional taxes, regulatory barriers, or discriminatory policies that differentiate them from domestically produced goods.
2. Preventing Policy Manipulation: This rule prevents policymakers from undermining the market access achieved through tariff reductions by introducing other domestic policies, such as taxes or subsidies, that could negate the benefits of the tariff cuts.
3. Dispute Settlement: The national treatment principle is at the core of many formal WTO disputes. Issues typically arise when a member country is accused of unfairly differentiating between domestic and foreign-produced goods. Such cases often involve discriminatory tax codes, subsidies, or regulatory barriers motivated by environmental or consumer safety concerns

Why GATT Changed to WTO?

The transition from GATT to the WTO was driven by a range of limitations within the GATT framework and the need for a more comprehensive and institutionalized approach to international trade. Below are the key reasons for this significant shift:

1. Lack of a Coherent Institutional Structure

GATT was a treaty-based framework with no permanent institutional structure. It functioned more as a temporary arrangement to reduce tariffs and establish trade rules. The WTO resolved this by creating a formal and structured organization with its headquarters in Geneva, Switzerland, providing an institutional foundation for trade agreements and negotiations.

2. Provisional and Ad Hoc Nature of GATT

GATT was never formally ratified by the parliaments of its member countries and remained a provisional agreement. In contrast, the WTO, established in 1995 through the Marrakesh Agreement, has a permanent and legal foundation. All member countries have formally ratified the WTO agreements, granting it stronger legitimacy and legal authority.

3. Broader Scope of Trade Coverage

GATT primarily dealt with trade in goods, neglecting other crucial areas of global commerce. The WTO addressed this limitation by covering services, intellectual property rights (under the TRIPS Agreement), and trade-related investment measures. This broader scope allowed the WTO to adapt to the evolving dynamics of global trade and address issues that were not previously covered.

4. Improved Dispute Settlement Mechanism

GATT's dispute settlement process was often slow and lacked enforcement power, as member countries could block rulings. The WTO introduced a more structured and legally binding dispute resolution mechanism. Its rulings are faster, more transparent, and cannot be blocked by member states, ensuring compliance and maintaining the credibility of trade rules.

5. Permanent Legal Basis

The WTO agreements have a strong legal foundation, offering greater predictability and stability for international trade. This permanence reduced the uncertainties associated with GATT's provisional status and encouraged more countries to engage in trade liberalization confidently.

Dispute Resolution in the WTO

The WTO provides a structured and effective mechanism for resolving trade disputes between member countries. This mechanism is crucial to maintaining a stable and predictable international trade environment, where countries voluntarily adhere to agreed rules and obligations.

Mechanism for Dispute Resolution

When disputes arise between WTO member countries over trade rules or obligations, they are encouraged to resolve the issue through consultations. If consultations fail, the dispute can be escalated to a formal adjudication process.

A panel of three independent experts is appointed to hear the case and make an initial ruling. If a party is dissatisfied with the panel's decision, it can appeal to the WTO's Appellate Body, which delivers a binding verdict. This two-tiered system ensures that disputes are resolved impartially and transparently.

Compliance and Enforcement Options

When a country is found in violation of its WTO obligations, it has three options:

1. Compliance through Legal Amendments: The country may amend its laws or regulations to align with WTO rules.
2. Appeal: If a country disputes the initial ruling, it can seek an appeal before the WTO Appellate Body.
3. Facing Retaliatory Measures: If the country refuses to comply, the aggrieved trading partner is authorized to impose "measured retaliation."

Measured retaliation involves imposing trade sanctions, such as higher tariffs on selected goods, equivalent in economic value to the harm caused by the violation. This ensures that the retaliation is proportionate and maintains fairness in the trading system.

Importance of Measured Retaliation

Measured retaliation is a practical and innovative approach that keeps the multilateral trading system functional. Historically, treaty violations left aggrieved parties with limited choices, either to accept the breach or withdraw from the treaty altogether. The WTO's measured retaliation mechanism allows parties to maintain treaty benefits while addressing violations in a controlled and mutually agreed manner.

Effectiveness of the Dispute Settlement System

The increasing number of disputes brought before the WTO may seem concerning at first glance. However, it is a testament to the effectiveness of the system. Countries view the WTO's dispute settlement process as a reliable and impartial avenue for resolving trade conflicts, preventing unilateral and potentially harmful measures outside the WTO framework.

Challenges and Future Improvements

Despite its strengths, the dispute resolution system faces challenges. Political and economic pressures often hinder compliance and reform. For instance, antidumping duties and safeguard measures frequently become contentious issues in WTO negotiations. Discriminatory applications of these measures have led to numerous disputes.

The Doha Round negotiations offer an opportunity to reform some of these rules. Closing loopholes and clarifying the language in safeguard agreements can help pre-empt future disputes. Additionally, liberalizing trade in agricultural commodities, where developing countries often have a comparative advantage, remains a critical area for potential progress.

Conclusion

The evolution from the General Agreement on Tariffs and Trade (GATT) to the World Trade Organization (WTO) has been a transformative journey in international economic relations. One of the most significant achievements of these frameworks is the dramatic reduction in tariff barriers among developed economies since the Great Depression of the 1930s. This multilateral success has fundamentally shaped the modern global trade landscape.

The enduring principle of reciprocity has played a critical role in facilitating cooperation among nations. By ensuring a balanced exchange of trade commitments, this principle has encouraged countries to lower trade barriers and maintain these reductions over time, fostering stability and growth in international markets. The WTO's robust dispute settlement mechanism has further strengthened this balance by providing a structured and enforceable platform for resolving trade conflicts.

The shift to the WTO has not only institutionalized trade rules but also expanded their scope to cover services, intellectual property, and investment measures, reflecting the evolving dynamics of global commerce. This comprehensive approach has enabled countries to address more complex trade issues and adapt to an increasingly interconnected world economy.

As the global trade environment continues to face challenges, the WTO remains a cornerstone for maintaining cooperation and dispute resolution. The lessons from GATT and the WTO's negotiation history highlight the importance of mutual collaboration, legal certainty, and adaptability in sustaining a rules-based trading system. Moving forward, understanding these principles will be essential as the international community navigates new trade dynamics and seeks innovative solutions to emerging economic challenges.

[1] WTO webpage at www.wto.org

[2] Jackson (1997) and Hoekman and Kostecki (1995) provide good histories of the post-WWII world trading system.

[3] Unlike the principles of nondiscrimination (most-favored-nation treatment and national treatment) described in the next two subsections, there is no article of the GATT 1947 that clearly identifies reciprocity as a foundational principle. Nevertheless, the articles in the GATT 1947 that govern how countries are to renegotiate concessions—in particular Articles XXVIII and XIX—if one country seeks to amend the initial bargain, do contain explicit language about reciprocity that therefore arguably feeds back to how initial negotiations are conducted. See the economic modeling framework in Bagwell and Staiger (1999, 2002) and also the discussions in Bown (2002a, 2002b).

[4] The principle of MFN treatment is found in Article I of the GATT 1947. For a legal and economic discussion of the MFN rule, see Horn and Mavroidis (2001).

[5] The principle of national treatment is found in Article III of the GATT 1947. Horn (2006) provides a recent theoretical treatment of the national treatment principle on which the GATT/ WTO are modeled as an incomplete contract.