How successful have GATT and the WTO been in creating global free trade?

University Degree Business and Administrative studies

William Douglas Familton

8. How successful have GATT and the WTO been in creating global free trade?

The GATT, otherwise known as “the general agreement on tariffs and trade” was established in 1947. It started with 23 founding members including the UK, its goal was to establish free trade between nations, it would do this by eliminating tariffs, subsidies, import quota’s and any other form that would restrict the freedom of trade between any given country within its membership. It would achieve this not in the short term but over a series of eight rounds of discussions between the member countries in which the strategies to dissemble such barriers to trade would be discussed. After the last round of discussions in Uruguay (1986-93) it was decided that clarification and strengthening of GATT ideologies were needed, out of this desire the World Trade Organisation (WTO) was formed. The WTO was a formal organisation with structure, opposed to the agreement that was “The GATT”. This meant it had much more influence and power, especially when it came to intervening in trade disputes and enforcing such rules and regulations it had set out in its attempt to move the World closer to free trade. The successfulness of these organisations has been widely disputed over recent years and in this essay I will be looking at their effectiveness in promoting “Free Trade”.

Many people would argue that there is no doubt that the GATT/WTO has been relatively successful to an extent in creating global free trade. The figures over their existence have shown a massive movement towards the globalisation of markets and thus free trade. Between the introduction of “The GATT” at the Geneva round in 1947 and the completion of Tokyo round of talks in 1979 the average tariff on imports declined 92% in America. The overall figure for average tariffs on imports in industrial countries actually fell from 40% in 1947 to just about 4% at the end of the 1990’s. This was an astounding result, a result to which GATT/WTO will have played a major role. This undoubtedly lead to an increase in the overall levels of trade between nations and moved the world as whole one-step closer to “Free Trade”. The statistics actually show that between 1953 and 1963 world trade grew at a rate of 6.1% per year over that period, whilst World income grew at 4.3% per year. Whilst between 1963 and 1973 both World trade and World income grew at even faster rates, with World trade growing at 8.9% per year on average over the period and World Income growing at 5.1% per year. This again shows that the freedom of trade between nations was increasing and that the falling levels of protectionism and barriers to trade were having a positive effect on economic growth. This growth meant nations were becoming more confident on letting down their barriers and investing in foreign markets, as they were now more confident of a positive return.

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I also believe that the increasing number of countries joining the GATT/WTO and the larger numbers applying to be incorporated into the group is testament to the fact that it was being relatively successful in promoting free trade within its members. Countries outside the GATT/WTO have found themselves at a massive disadvantage, often incurring large trade deficits. This is because companies/consumers within member countries are very unlikely to import/purchase vast amounts of goods from outside the group, as it is likely to be much more expensive due to tariffs still being in place on their goods. Therefore since the creation of GATT in 1947 in which it had 23 members, membership had risen to 120 at the end of the Uruguay round of talks in 1993. In 2000, 7 years after the formation of the WTO we see a membership list of just over 140 countries, with a list of 29 countries negotiating to become members. Most extraordinary is that of these 29 countries negotiating a place within the WTO China is amongst them. Still a country with communistic base it is ready to allow free trade to an extent within its borders, this shows that the GATT/WTO has been quite successful in promoting free trade around the globe. More importantly it shows the extent to which being a member of this organisation is important economically. Therefore the more countries that join the closer the World gets to “Ultimate Free Trade”, as countries join lower barriers and tariffs will exist in these countries.

After the conclusion of the Uruguay round of talks in 1993 the GATT obtained a number of agreements which can only lead the World closer to free trade. This included developed countries reducing tariff rates on imported manufactured goods to fewer than 4%, this is the lowest tariff level on manufactured goods in history, which goes some way to showing the effectiveness of the GATT. It also agreed that tariffs on textile goods were to be seriously reduced over the next ten years, this is quite important as in many lesser-developed countries this an important industry, therefore it will enable them to export more to the developed World, and thus increase income. Therefore again it shows that the GATT has lead countries to a level of freedom of trade not previously seen.

I also believe that the GATT/WTO has been successful in tackling disputes caused by lingering barriers to trade. Therefore if a barrier has been apparent the GATT/WTO has been relatively efficient in dealing with such disputes. “Of the cases brought to the WTO since 1995 over 3/4ths had been solved by 2000”. This goes some way to show that the WTO is monitoring situations carefully, and in most cases the dispute is resolved on orders of the WTO, “In general, the countries involved in a dispute have adopted the WTO’s recommendations”. The speed at which these negotiations are completed is testament to its ability to unite countries in one morale goal. This shows that when barriers are put up the WTO more often than not has knocked them down, thus meaning that we now more than ever enjoy more freedom within international markets an that the maintenance work on ensuring it stays this way is greater than ever.

There is despite the positive results over the past 55 years many claims that the GATT/WTO has not been quite as successful in creating free trade as it would appear. It has been argued that countries have found ways around the GATT agreement, ways to cheat the system. The main way to cheat the system appeared to be voluntary export restraints (VER’s) defined as “ A quota on trade imposed from the exporting countries side, instead of the importers, at the request of the importing government”. This meant that a country would put a quota on the amount they could export to a country because the importer had asked it to, this was usually undertaken in return for something else (e.g. a VER on one of its own goods.). This meant that both countries had no reason to call “foul play”, thus they would not make a complaint, without a complaint the GATT was powerless to do anything. This meant that there were indeed certain restrictions between such countries. Although the governments may have been agreed on such quota’s, this may have still had a major effect on companies within these countries. Therefore “Free Trade” was definitely not apparent in these relationships. The most obvious example of this was the VER agreed between Japan and the U.S., in which Japan would restrict its imports of cars into the U.S. in order to ease growing unease and resentment between the two. This was due to a massive trade deficit in the U.S. and growing unemployment caused by cheap imports pre-dominantly from Japan.

Also the major argument against the successfulness of GATT/WTO is that although trade figures have improved amongst the developed nation since its existent, the performance of the lesser-developed countries within international trade has not hit the dizzy heights of the developed nations. From 1950 to 1980 Africa has seen very little change in the levels of foreign direct investment moving into the continent, and certainly no change in the levels at which foreign direct investment is being exerted elsewhere. Also more worryingly a number of developing countries have expressed concerns over the development of the GATT/WTO over recent years of hidden barriers set by developed nations, such as Labour/ Environmental standards to trade. Therefore if a certain standard is not met, restrictions are placed on the amount they can export. “They claim this as being a way of keeping out cheap imports”. Therefore again we see that there is claims of getting round the system, begging yet more questions on the efficiency of the WTO.

It could also be argued that even without the GATT/WTO we might have still found that there was integration of global economic markets. The figures used previously in depicting growth in World trade and World income were taken in the 20 years after W.W.II. Therefore there is an argument which suggests there was obviously going to be a general increase in World Trade after such a horrendous World war, which virtually brought trade to a stand still, these were recovery years. Thus the end of end of the war itself lead to economic recovery and thus in both World trade and World output we saw an increase. Therefore it is hard to distinguish how much of a role the GATT really played in integrating economies, we may have found that after the war protectionism would have fell anyway, as people felt safer with others.

There are also factors to which GATT and the WTO may have differed in performance over the years, despite the fact that the WTO is a direct descendent of the GATT. In previous years although GATT encouraged countries to exhibit free trade, as described previously, it was only a “Gentleman’s agreement”, an agreement between countries in order to progress the international economy. But it had no real substance; there was no power within it, as depicted in the above paragraphs. Thus only the pressure of the members of the group could lead to real change, thus they could not enforce rulings upon countries, even those within the group. Therefore was GATT really responsible for total change with the international economy? Countries within the group may have placed extra tariffs on countries, which did not comply. But wouldn’t this of happened regardless of the GATT, collusion’s would have formed eventually in the after-math of W.W.II, I would suggest. Therefore the success GATT actually had maybe minimal. Maybe in fact the GATT was merely an official formation of already colluded groups. This is merely an open view of the situation.

The WTO on the other hand does have power; it does have the power to impose sanctions. This is a much sharper organisation. Whose power extends that of GATT? Although from the figures it is hard to judge the success of the WTO in the few years since its formation, except for the problems between countries it has already solved. There is no doubt that the organisation should prove in the long run to increase free trade within the nations.

We could also argue that the improvement in free trade within nations could be the result of technological advances, in the years since 1950 we have seen the development of a world wide airline network, the internet, fax’s, telephone communications, satellite and also telex’s. All these advances in technology encourage free trade. These are not factors enforced by GATT, but they do have a massive effect on encouraging free trade. Countries could communicate with each other like they could never before. Ventures in foreign countries became less adventurous; there was less of a risk element. These new communication capabilities enabled countries to control trade away from home with much more efficiency. Therefore I believe this is yet another factor which runs alongside the development of GATT/WTO which would also have played a huge part in the development of free trade. It is very hard to trade with another country if you can not communicate with them.

Also the fall of the levels communism in many countries including much of the Soviet Union and China would have also played a huge part in the development of free trade. Before the fall of communism in many of these countries, levels of protectionism were high, and receptivity was low. Therefore the fall of communism led to lower levels of protectionism and higher receptivity of foreign trade

Drawing the subject to a conclusion. I think we see that it is very hard to determine how successful the GATT/WTO have been in creating free trade. As it is shown there are number of other factors which have also lead the world towards an era closer to free trade, such as the advances in technology, the improvement in the money exchange system and the fall of communism to name but a few. All of these factors would in some part been responsible for moving the world towards globalisation. The problem is determining the importance of each factor and this includes WTO and GATT. There is no doubt that WTO/GATT has been successful in reducing tariffs, barriers to free trade as the figures have shown. But are we really that close to total free trade, I’m sure the developing world would have some comment on that matter. The WTO/GATT also seemed to find it very hard to halt the invisible barriers to trade, “the ways of getting round the system” Thus although GATT/WTO has now been existent in 55 years, I think that it is very difficult to determine its success over this period.