GATT After Uruguay: The Last Round?

March 1 st 1994

The General Agreement on Tariffs and Trade (GATT) has become out-dated. GATT's Uruguay Round of negotiations for reductions in tariff and other trade barriers took seven years to complete. The obsolete character of GATT results from difficulties in its adaptation to the world trade environment that is now emerging. In the face of these adjustment difficulties, the Canadian government proposed in 1990 that GATT be replaced by a new international trade institution. However, if the structural changes in the world economy that have caused GATT to become out-dated were addressed, a revitalized GATT would fill a needed role in world trade of the twenty-first century.

GATT was created immediately after the Second World War to prevent a recurrence of the collapse of international trade that had occurred in the 1930s. In 1944, the Allies started to develop institutions for the post-war international economy that would avoid international trade and financial warfare. International financial warfare, conducted by unilateral exchange rate devaluations or restrictions on financial flows, was made far less likely by the articles of agreement of the International Monetary Fund (IMF). International trade warfare, through tariff increases and unfair trade practices, was to be made far less likely by the articles of agreement of the International Trade Organization (ITO).

The IMF has been a vital international economic institution since its creation in 1944. The ITO, which was to share responsibility with the IMF for harmonious international economic relations, miscarried when the legislation for American membership was defeated in the United States. GATT is a downsized version of the ITO, which codifies trade policies and conducts periodical negotiating ' 'rounds," such as the Uruguay Round, to reduce trade barriers.

Liberalizing world trade

As an institution, GATT was designed for the world economic structure that had developed in the early decades of the twentieth century. A vital aspect of this structure was that industrial production of manufactured output was a major source of wealth creation in developed market economies. International trade was trade in manufactured commodities, and the original GATT articles were limited to the liberalization of trade in commodities by tariff reductions and codification of tariff practices. GATT has liberalized world commodity trade through eight successive rounds of tariff reductions. The first round occurred in Geneva in 1947 and the last round began in Uruguay in 1986 and was concluded in late 1993.

GATT sponsored negotiations for tariff reductions use a specialized commodity-by-commodity arrangement. The tariff concessions on commodities whose trade is to be liberalized are negotiated in a round between two countries. The country that is the largest importer and the country that is the largest exporter negotiate a percentage concession in their respective import tariffs. The percentage reductions in tariffs that are finally agreed on by the negotiators are then automatically granted to all other GATT-member countries. This arrangement reduces the negotiations required to reduce tariff barriers from over 100 individual negotiations to one negotiation. However, this convenience works because all the participating countries restrict their trade with the same kind of barrier, which is a charge imposed on the price of the import at the port of entry.

Despite GATT's success in reducing tariff barriers, a new problem has emerged in the form of an expanded use of nontariff barriers (NTBs). Such barriers consist of imposed restrictions that operate on aspects of international transactions other than the price. Most NTBs are quotas that restrict the amount of a commodity that can be imported. Quota barriers do not violate the GATT, which is limited to reducing tariffs.

International trade in agricultural products was excluded from the original GATT articles, because of its political sensitivity. Also, regional trading blocs, such as the European Union (EU), were excluded from adherence to the GATT articles in their internal trade policy. They were excluded because it was believed that regional trade liberalization was a partial move toward freer world trade, in keeping with the objective of GATT.

It is now recognized, however, that the formation of regional trade blocs can be a move away from freer world trade. Reducing trade barriers within a bloc can lead to more efficient producers and exporters outside the bloc being replaced by less efficient ones within the bloc. For example, before Britain became a member of the EU, it was a major importer of Canadian agricultural commodities. When it became a member, more efficient Canadian exporters of agricultural commodities to Britain were replaced by less efficient European producers. The exports of Canadian agriculture were diverted by less efficient producers within the EU.

A changing world

The world economic structure on the eve of the twenty-first century has undergone far-reaching changes since the formation of GATT. Developed market economies are being revolutionized. In the same way that the industrial revolution changed these economies in the past, the service revolution is changing the major source of wealth creation from industrial production to the provision of services.

The changing economic structures of these countries means that their international trade will also change.

GATT was established in a global trading environment where international trade was concentrated in trading manufactured outputs and other commodities. As we enter the twenty-first century, world trade will shift from trade in commodities to trade in services. Yet trade in services is restricted by NTBs, such as differences in licensing requirements or product safety standards. These types of NTBs differ from conventional ones, which were specifically designed to restrict trade (as an alternative to tariffs), but the effect is the same.

The world trading system has accommodated the growth of service trade by the rise of regional trade blocs, such as the North American Free Trade Agreement and the European Union. Since membership in these regional blocs is limited, negotiations to reduce NTBs can be achieved more effectively than GATT's negotiating arrangement, which works best for tariff reductions. Thus, regional trade blocs seem likely to increase since they can accommodate the need to reduce both barriers to international trade in services and conventional NTBs.

Regional trade blocs may have the means for dealing with the problems that threaten GATT's current functions within the world trade system. Nonetheless, trade relations between blocs will become more and more significant. The agricultural policies of the EU came close to destroying the Uruguay Round of tariff reductions. GATT could fulfil a vital role by shifting from international to inter-bloc trade relations.

If there is to be another round of world trade liberalization there must be an international institution with a mandate to oversee inter-bloc relations. Revitalizing GATT to fill this urgent need would include shifting its focus from the economic consequences of tariff protection to the economic consequences of trade diversion. A revitalized GATT would accommodate the growth of international trade by reducing the dangers of inter-bloc economic warfare.

 

Derek Chisholm is an economist with the Ontario government.

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