Strategy ConsultingTax AdvisorySeptember 16, 2022by fieconThe Genesis and Evolution of Trade Agreements


To promote and enforce fair trade practices between countries, the World Trade Organization (WTO) headquartered in Geneva, Switzerland was formed in 1995. Currently, WTO has 164 member states with 25 other countries negotiating for membership. The institution which currently has oversight on 98% of global trade; is the successor of the General Agreement on Tariffs and Trade (GATT) that coordinated trade relations between countries from 1948 until 1995.

Trade Agreements & Global Peace

Historically, nations have sought bilateral and multilateral trade agreements for their economic good and to maintain or establish peaceful relations. During the Han Dynasty (206 BCE – 220 CE), China leveraged on its military and economic might to maintain open trade with other nations in Central Asia along the Silk Road. In 1941, The United States and The British drafted a charter called the Atlantic Charter that had eight common principles with one of them being the liberalization of international trade.

Further, the importance of trade relations towards attaining peace and global economic growth is seen through the Havana Charter that was negotiated in 1948 for an International Trade Organization (ITO); which was being used as a way of attaining global peace. The beginning sentences of the Charter’s Articles of Agreement read: “Recognizing the determination of the United Nations to create conditions of stability and well-being which are necessary for peaceful and friendly relations among nations, the parties to this Charter undertake in the fields of trade and employment to co-operate with one another and with the United Nations”.

Origin of the General Agreement on Tariffs and Trade (GATT)

GATT was established in 1947 on a provisional basis originally with 23 countries and it was expected that it would be replaced soon by a specialized agency of the United Nations called International Trade Organization (ITO). ITO was finally agreed upon in 1948 by over 50 countries at a UN Conference on Trade and Employment. However ratification at the national legislatures proved difficult, with the United States announcing in 1950 that it would not seek Congressional ratification of the Havana Charter. This was a death blow to the ITO; and the GATT despite being provisional, remained as the only multilateral structure governing international trade.

The main objective behind GATT was to eliminate harmful trade protectionism that greatly reduced global trade during the great depression. Countries such as the United States came up with the Hawley-Smoot Tariff Act of 1930 that raised already high tariff rates on imports in order to protect American businesses and farmers. The British Empire on the other hand had an imperial preference economic policy (has the same working principles as a Generalized System of Preference). The policy was negotiated at the Imperial Economic Conference in Ottawa in 1932, and was based on the principle of home producers first, empire producers second and foreign producers last. Ideally this policy prioritized goods from British colonies above all other imports and even extended lower import tariffs to such products; as opposed to those from third parties.

The basic principles that guided GATT in order to ensure free movement of goods between the member states included the following:

  1. Most Favored Nation Treatment

Most Favored Nation (MFN) is a principle that applies even to the WTO whereby countries are not allowed to give preferential treatment when it comes to tariff reductions to specific countries. Under GATT all contracting parties were expected to treat all other contracting parties as the “most favored nation” on a nondiscriminatory and reciprocity basis. Tariff preferences that resulted from bilateral trade agreements were to be extended to all other contracting parties; and this was to prevent countries from granting new trade concessions unless they were agreed upon at a multilateral level. Part of Article 1 that guided MFN under GATT read: “any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties”.

  1. Tariff Negotiations and Tariff Reductions

GATT did not allow non-tariff restrictions on trade but understood that at times countries may impose import tariffs in order to protect their own local industries. This would still slow the growth of international trade and GATT was cognizant of this. Article 2 of GATT requires that all concessions given by member states should be entered in a ‘Schedule of Concessions’. A contracting party would offer lower import levies on certain products or commodities, and once these concessions were entered into the schedule, the products were exempt from ordinary customs duties and all other charges or duties that are in excess of those listed in the schedule. The article read: “The products described in Part 1 of the Schedule relating to any contracting party, which are the products of territories of other contracting parties, shall on their importation into the territory to which the Schedule relates, and subject to terms, conditions and qualifications set forth in the Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein. Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with the importation in excess of those imposed on the date of this Agreement or those directly and mandatorily required to be imposed thereafter by legislation in force in the importing territory on that date”.

When it comes to negotiations on tariffs, GATT adopted a bilateral-multilateral approach. Contracting parties would first discuss on the concessions that they would like to extend to one another on a reciprocal and mutually advantageous basis. Once they are in agreement, the concessions would then extend to all other contracting parties under GATT (multilaterally); based on the principle of most favored nation. These negotiation approach had its drawbacks. For example countries that already had low import rates did not have much to offer in exchange of concessions being offered by other contracting parties, and hence had a lower bargaining power. In addition, Least Developed Countries (LDCs) had weak bargaining power when compared to developed countries; and hence the terms of trade tended to be unfavorable for them as they only produced primary products. It is because of these complexities on bilateral negotiations that GATT and subsequently WTO moved to only multilateral tariff reduction negotiations.

  1. National Treatment on Internal Taxation and Regulation

GATT was cognizant of the fact that countries may impose other quantitative restrictions on trade that are not tariff-related, such as import quotas or higher taxes; in order to protect their domestic economies. Article 3 of the agreement stipulated that imports are to be treated equally to similar products that are produced domestically. That is, if higher taxes were imposed on the imported products the same was to be applied to the products produced domestically. Part of the article reads: “The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

However, in some cases, these quantitative measures were allowed as per procedures laid down by GATT. For example, in order for LDCs to protect their domestic industries they could impose import quota restrictions; and when it came to agricultural and fisheries products the quotas could be applied if domestic production was subjected to the same controls. In order to counter the dumping practice that countries would employ due to low export prices, countries were also allowed to impose import quotas to counter this.

  1. Subsidies and counter veiling duties

Export subsidies were offered by countries in order to stimulate their local industries to export more, and GATT recognized that these were alternatives to tariffs. These subsidies that were offered by manufacturing/producing countries would enable their products to be cheaper to import in contracting countries, and allow dumping to the detriment of local industries. To counter this dumping behavior as a result of the export subsidies, countries were allowed to impose counter veiling duties to counter the dumping. LDCs were allowed to offer subsidies to exports as their exports were mainly primary products.

Before a country resulted to counter veiling duties, they are to inform the exporting country of the measure they will take; and the duties were expected not to be higher than what was needed to offset the margin of dumping, hence they should not acquire a net additional protection. Part of article 6 of GATT reads: “In order to offset or prevent dumping, a contracting party may levy on any dumped product an anti-dumping duty not greater in amount than the margin of dumping in respect of such product. For the purposes of this Article, the margin of dumping is the price difference determined in accordance with the provisions of paragraph 1.

 Author: David Kageenu