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GATT: Purpose, History, Pros, Cons

Definition: The General Agreement on Tariffs and Trade was the first worldwide multilateral free trade agreement. It was in effect from June 30, 1948 until January 1, 1995. It was replaced by the World Trade Organization.

Purpose: The purpose of GATT was to eliminate harmful trade protectionism, which had contributed to the Great Depression. GATT encouraged international trade by removing tariffs on goods.

What Exactly Was Agreed Upon?

GATT had three main provisions.

  • GATT required all its members to confer “most favored nation” status to each other. That means all members must be treated equally when it comes to tariffs.
  • GATT prohibited restriction on the number of imports and exports. A few restrictions were allowed as exceptions: if a government had surplus agricultural products, if a country’s foreign exchange reserves were low, if a developing country needed to protect its young industries, and if reasons of national security outweighed economic factors.
  • A later provision intended to help developing countries that joined GATT. Developed countries agreed to eliminate tariffs on imports from developing countries to help boost the latters' economies.

Pros

By reducing tariffs, GATT boosted world trade 8 percent a year during the 1950s and 1960s. Trade grew from $332 billion in 1970 to $3.7 trillion in 1993. 

More countries wanted to join GATT. By 1995, it had 128 members, generating at least 80 percent of world trade.

By increasing trade, GATT promoted world peace. Before World War II, a trade alliance had a 50 percent chance of succeeding. GATT’s success led to other trade agreements. Notably it led to the European Union, which has prevented wars between its members.

GATT also improved communication by providing incentives for smaller countries to learn English, the language of the world's largest consumer market. Understanding English gave them a competitive advantage through insight into the developed countries' cultures, marketing practices, and product needs.

Cons

Low tariffs can ruin some domestic industries, leading to high unemployment in those sectors. Governments need to subsidize many industries and agriculture to make them more competitive on a global scale.

By the 1980s, world trade was changing to include services, but GATT did not cover the trade of services. So globalized services spread, and no single country could manage them. For example, financial services became globalized. When U.S. investment bank Lehman Brothers in 2008 collapsed, it threatened the entire global economy.

GATT sometimes required a nation to change its domestic laws in order to gain trade benefits. This requirement reduced the rights of the nation to rule its own people. For example, India allowed companies to create generic drugs without paying a license fee. GATT required India to remove this law. Drug prices rose so much that many Indians could no longer afford them.

Trade agreements like GATT often destabilize small, traditional economies. For example, countries that subsidize agricultural exports can put local family farmers out of business. The farmers migrate to cities looking for work, often in factories set up by multi-national corporations. These factories might be relocated to other countries with lower labor costs, and the farmers become unemployed.

Some local farmers who can no longer make a living from traditional crops turn to growing opium, coca or marijuana. Violence related to the drug trade sometimes forced the farmers to flee for safety.


Source: GATT: Purpose, History, Pros, Cons
Copyright © Kimberly Amadeo, The Balance

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