General Agreement on Tariffs and Trade Summary

  • Last updated on November 10, 2022

The ambitious General Agreement on Tariffs and Trade was designed to facilitate free trade and increase exports worldwide. The agreement led to the creation of the World Trade Organization and contributed to the growing globalization of the international economy.

Summary of Event

On December 1, 1994, the U.S. Senate joined the House of Representatives in voting overwhelmingly in favor of what was widely considered to be the most far-reaching trade agreement reached up to that time. The General Agreement on Tariffs and Trade (GATT) slashed tariffs (taxes on imports) by an average of 40 percent in the 124 participating countries. Cuts in tariffs were expected to bring a boom in U.S. exports, leading to more jobs. In addition, American consumers would have access to cheaper imported goods. GATT, which had taken eight years to negotiate, represented a huge leap toward free trade worldwide. General Agreement on Tariffs and Trade (1994) Trade agreements [kw]General Agreement on Tariffs and Trade (Dec. 1, 1994) [kw]Agreement on Tariffs and Trade, General (Dec. 1, 1994) [kw]Tariffs and Trade, General Agreement on (Dec. 1, 1994) [kw]Trade, General Agreement on Tariffs and (Dec. 1, 1994) General Agreement on Tariffs and Trade (1994) Trade agreements [g]North America;Dec. 1, 1994: General Agreement on Tariffs and Trade[09010] [g]United States;Dec. 1, 1994: General Agreement on Tariffs and Trade[09010] [c]Trade and commerce;Dec. 1, 1994: General Agreement on Tariffs and Trade[09010] [c]Business and labor;Dec. 1, 1994: General Agreement on Tariffs and Trade[09010] [c]Diplomacy and international relations;Dec. 1, 1994: General Agreement on Tariffs and Trade[09010] [c]Economics;Dec. 1, 1994: General Agreement on Tariffs and Trade[09010] Clinton, Bill [p]Clinton, Bill;General Agreement on Tariffs and Trade Dole, Bob

A version of GATT had governed most international trade since 1948, but negotiations to expand the agreement began only in 1986. The new GATT was governed by a new organization, the World Trade Organization, World Trade Organization located in Geneva. This organization had more power over signatory nations than its predecessor, the GATT Secretariat, and had the authority to enforce agreements through the imposition of trade penalties.

The votes of the U.S. Senate and House of Representatives in favor of GATT sounded a rare note of unity between Democrats and Republicans. They were brought together by their confidence that the agreement would revitalize the economy. President Bill Clinton’s administration estimated that the agreement would create half a million new jobs. The administration also predicted an annual increase of $150 billion in U.S. economic growth when the agreement was fully implemented, after ten years. The Organization for Economic Cooperation and Growth estimated that, worldwide, GATT’s lower tariffs and higher import quotas (limits on amounts of goods permitted to be imported) would increase world income by $270 billion per year.

Tariffs have long been used by almost all nations in the world to protect their own farmers and native industries against competition from cheaper foreign goods. Increasingly, however, many economists have come to oppose such self-protectionist measures. They believe that free trade, without the barriers of tariffs, is the key to worldwide economic growth. The principles of free trade that inspired GATT hold that a country that is good at producing a given product will profit from exporting it to countries that are less efficient at producing that product. In return, a country can use the wealth it gains from exports to buy goods and services that are produced more efficiently elsewhere. It is theorized that, when each country focuses on what it does best, market forces of supply and demand organize distribution for maximum economic growth and consumers benefit from lower prices. However, governments have interfered with these market forces by imposing tariffs and strict quotas limiting the amounts of a product that can be imported, giving the product a false scarcity value that pushes up its price.

Not all economists are convinced that promoting free trade through initiatives such as GATT is the answer to the world’s economic problems. Some argue that free trade benefits developed nations more than developing nations, since the richer nations can import goods from countries where labor and materials are cheaper. Critics of this view cite the Asian nations as proof of the benefits of free trade for developing nations. During the early 1960’s, these countries were in serious economic trouble. Those that favored free trade (Hong Kong, Taiwan, South Korea, and Singapore) experienced more growth than countries that did not (India, North Korea, and Vietnam). Manufacturing did tend to flow toward sources of cheap labor, but this tendency helped develop the local economy and raise the standard of living.

After the Senate overwhelmingly passed legislation supporting the General Agreement on Tariffs and Trade’s plan to cut tariffs in December, 1994, President Bill Clinton addressed top leaders of Congress outside the White House.

(AP/Wide World Photos)

Concerns over the possible negative effects of GATT are not restricted to economics. Cultural conflicts have arisen from the agreement, such as a disagreement between the United States and Japan over rice. The Japanese have always banned the import of rice to protect their own rice crop, which occupies a central position in their culture and religion, but under GATT the Japanese agreed to allow the import of some rice. Although the conflict was resolved, the episode presented an important challenge to advocates of free trade: How far should a country’s cultural traditions be compromised to facilitate world trade?

Resistance to GATT also came from within the United States. Critics expressed fears that the World Trade Organization could attack U.S. consumer protection laws(such as the labeling of food product ingredients), worker protection laws, and environmental regulations as trade barriers. Among those who raised questions about the power of the World Trade Organization were Republican senator Bob Dole, consumer advocate and 2000 presidential candidate Ralph Nader, Nader, Ralph and various environmental lobby groups. Critics have presented many scenarios to back up their arguments. For example, if the United States decided on ethical grounds to ban the import of South Asian rugs made using child labor, countries that suffered from the decision could take their case to a panel of three World Trade Organization judges. If the judges ruled against the United States, then Congress or the state whose regulation was under challenge would have to decide whether to change that regulation. If the lawmakers refused, trade sanctions could be imposed against U.S. exports. As another example, environmentalists have expressed concern that under GATT, the United States could not impose its own stringent environmental laws on other nations. In 1991, under existing GATT rules whose enforcement provisions were far weaker than those ratified in 1994, the United States lost a case brought against one of its federal laws banning the importation of tuna caught in nets that also trapped dolphins. A GATT panel ruled that the United States could not impose its environmental restrictions on the rest of the world. Otherwise, the panel said, the United States could use those restrictions to keep out foreign competitors. In an attempt to allay fears about the World Trade Organization and its possible threat to U.S. sovereignty, President Clinton reached an agreement with Senator Dole to create a commission in the United States to review judgments that the organization makes against the United States.

Significance

The main areas of trade affected by GATT and its stipulations are as follows. In agriculture, U.S. GATT negotiators were at odds for years with the European Community over agricultural issues. The Europeans wanted to maintain subsidies to their farmers, but the United States wanted subsidies eliminated because they gave an unfair advantage in the marketplace at high cost to consumers. GATT produced a compromise that stipulates that agricultural tariffs be reduced by 36 percent in industrial nations and 24 percent in developing nations.

Regarding intellectual property, GATT required all member countries to respect patents, trademarks, and copyrights. This requirement was expected to eradicate the pirated computer programs, records, videocassettes, and prescription drugs rampant in developing nations.

Regarding automobiles, restrictions on auto exports, such as those that the United States imposed on Japan, were eliminated. The agreement also banned the widespread practice of requiring high local content in some products, such as cars, a practice that protects local jobs but discourages imports. The agreement also limited the ability of countries to favor domestically owned factories at the expense of foreign-owned ones.

Finally, richer nations were required to phase out quotas on clothing imports over a ten-year period. Quotas were to be replaced by less restrictive tariffs. Some of the strongest opposition to GATT in the United States had come from textile states such as North Carolina and South Carolina, which feared that their industries would suffer as a result of cheap foreign imports.

It seemed inevitable that GATT would continue to provoke conflicts of nationalistic self-interest, but there is also hope that its ratification marked the beginning of a new era of increased global cooperation and trust between its signatory nations. General Agreement on Tariffs and Trade (1994) Trade agreements

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Barton, John H., Judith L. Goldstein, Timothy E. Josling, and Richard H. Steinberg. The Evolution of the Trade Regime: Politics, Law, and Economics of the GATT and the WTO. Princeton, N.J.: Princeton University Press, 2006. Presents a political economic history of the development of GATT and the World Trade Organization. Includes illustrations, tables, bibliography, and index.
  • citation-type="booksimple"

    xlink:type="simple">Boskin, Michael J. “Pass GATT Now.” Fortune, December 12, 1994, 137-138. A Republican economist states the reasons he believes members of his party in Congress should put politics aside and approve the trade agreement.
  • citation-type="booksimple"

    xlink:type="simple">Dentzer, Susan. “A New Tapestry of Protectionism.” U.S. News & World Report, December 5, 1994, 83. Points out the protectionist potholes built into GATT by some of the agreement’s signatory nations.
  • citation-type="booksimple"

    xlink:type="simple">Harbrecht, Douglas. “GATT: Tales from the Dark Side.” BusinessWeek, December 19, 1994, 52. Cautions that global trade promoted by GATT may cause protectionist backlash in some nations as a result of trade moving to pools of cheap labor elsewhere in the world.
  • citation-type="booksimple"

    xlink:type="simple">Mavroidis, Petros C. The General Agreement on Tariffs and Trade: A Commentary. New York: Oxford University Press, 2005. Explains how GATT works in the context of international law and clarifies what nations gain and lose by joining the World Trade Organization.
  • citation-type="booksimple"

    xlink:type="simple">Nader, Ralph. “Drop the GATT.” The Nation, October 10, 1994, 368-369. Consumer advocate Nader warns against the power of the World Trade Organization, which he believes is undemocratic and a threat to U.S. sovereignty.
  • citation-type="booksimple"

    xlink:type="simple">Thomas, Rich. “Tempest over Trade.” Newsweek, December 5, 1994, 50. Presents answers to various objections to GATT, including the issue of U.S. sovereignty and the power of the World Trade Organization.

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