Reasons for replacing the GATT by the WTO

 

There is popular belief, that the WTO replaces the GATT. In fact, the WTO did not replace the GATT. An amended GATT remains as one of the legal pillars of the world’s trade and, to a lesser extent, investment systems. The other pillars, set up in the Uruguay Round’s Marrakesh agreement of 1994, include the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). So, what has been replaced is not the GATT as an international agreement but the GATT as an international organization. In other words, GATT as an international agency no longer exists. It has been replaced by the WTO. But, GATT as an agreement still exist, and has been updated. The updated GATT is called GATT 1994, and the replaced GATT is called GATT 1947. The GATT always dealt with trade in goods, and it still does. It has been incorporated into the new WTO agreements, living alongside the GATS and the TRIPs.

As a matter of fact, the 1986 Ministerial declaration of Punta del Este, containing the agenda and objectives for the Uruguay negotiation, did not include any explicit call for a new charter or organization. Despite this hesitancy, however, by 1990 there was considerable discussion of the need for an improved organizational structure for effective implementation of the Uruguay results. The first public call for a world trade organization to be established was a proposal by the Canadian Government in early 1990. The Canadian proposal built on the work of Professor John Jackson (Hessel E. Yntema Professor of Law at the University of Michigan) and others at an informal meeting in Geneva in 1989. It was then incorporated into the “Dunkel Text” of 1991 (Arthur Dunkel was then the GATT Director General), which eventually became the final text of the Uruguay Round adopted at Marrakesh in April 1994. In approving the Uruguay Round on its “fast track” system, the United States insisted on the name World Trade Organization, rather than the European Community’s preference for Multinational Trade Organization.

The GATT has undertaken eight “rounds” of multilateral trade negotiations, which have achieved major cuts in tariffs and, since the 1970s, some reductions in related non-tariff barriers to trade. The latest round, the Uruguay Round, lasted seven years, as its agenda broadened to include trade in services and intellectual property, and a revised system of dispute settlement mechanisms.

In spite of the remarkable success during its nearly five decades of history, the GATT system was being increasingly challenged by the changing conditions of international economic activity, including the greater ‘interdependence’ of national economies, and the growth in trade in services. Anxiety developed that the GATT was too handicapped to play the needed role of complementing the Bretton Woods system as the “third leg”, alongside the IMF and World Bank. Problems and ‘birth defects’ included.

Provisional application and Grandfather rights exceptions embraced by the Protocol of Provisional Application. The GATT was designed to be a multilateral trade and tariff agreement and would depend on the ITO for its organizational context and secretariat services. The GATT never definitively came into force; instead it was legally applied by a Protocol of Provisional Application originally designed to last until the ITO came into force. Grandfather clause provided that the rules in Part III of the GATT 1947, which essentially dealt with non-tariff trade measures, need be applied only to the extent that they were not inconsistent with legislation in effect when a country acceded to the GATT.

There were exceptions from GATT rules for textiles, agriculture, regional trading groups, developing countries and safeguards to prevent serious injury to domestic producers.

Another reason for the need to reform GATT was ambiguity about the powers of the Contracting Parties to make certain decisions. The GATT dispute settlement process had two major weaknesses. The first was the ability of a Contacting Party to veto the process at numerous stages. A dissatisfied party could block the creation of a panel, block adoption of the report by the Council or fail to undertake the obligations outlined in the report. The second problem was that even if the country accepted a panel report in question, it could choose to keep the offending policy, leaving the injure party to suspend benefits in kind. The dispute then fell back on to unilateral action by the aggrieved party. The party which had its complaint supported by a panel would have to undertake retaliation through its own domestic legislation. This could take the form of tariffs or suspension of trade benefits to the offender. Offenders were not sanctioned; they just had benefits of equal value withdrawn by the complaint. The unilateral nature of the process raised serious problems for the whole system. The countries able to take unilateral measures tended to be the economically powerful such as the US, Japan and the EU. Smaller states were less likely to take action against the giants because they feared a trade war that would cost them dearly. One of the purposes of having an international legal framework for trade is to facilitate relations based on rules rather than power. Law should restrain powerful states from abusing their economic power to the cost of smaller states. Since the GATT process relied so heavily on unanimity, this goal was difficult to achieve.

Also, murky legal status leading to misunderstanding by the public, media, and even government officials lead to negotiating a new solution – establishment of an international institution. As described above, there were certain serious defects in the dispute settlement procedures, there was lack of institutional provisions generally, so constant improvisation was necessary. All these contributed to the reform of GATT system and creation of the WTO.

Questions

 

1. Explain the reasons for trade restrictions. What are trade restrictions and what do you think about them?

2. Why are the following three arguments fallacious or questionable?

a) Trade restrictions are needed to protect domestic labour against cheap foreign labour.

b) Scientific tariff rates could make the price of imports equal to domestic prices and allow domestic producer to meet foreign competition.

c) Protection is needed to reduce domestic unemployment and to cure a deficit in the nation’s Balance of Payments or trade deficit.

3. Outline the major results of the Uruguay Round. Why should the GATT and the WTO be established?

4. What is the relationship between GATT 1947 and GATT 1994?

5. What happened to the ITO?

6. Was the GATT/Is the WTO an international organization?

 

References

 

1. Robert H. Folsom, International Trade and Investment in a Nutshell (2nd ed., St. Paul, Minn.: West Pub. Co., 2000)

2. Jackson, World Trade, Principles, IV EPIL (2000), p. 1529-1542

3. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p.. 32-36, 82-84, 103-105.

4. Trading into the Future – WTO, 3rd edition, Revised August 2003. p. 7-20.