International trade refers to the economic transactions made between two countries, engaging in import and export of goods as well as services.  International trade runs the  world economy for it helps in fulfillment of requisites of one nation through importing and letting other countries earn by exporting surplus. It comes with a myriad of challenges as it is not uncomplicated as that of domestic trade. 

The smooth functioning of International trade requires an autonomous body that sets rules and regulations, otherwise nations would focus only on their self interests and would resist any kind of policy that would favour another country by aiding solely in its growth. And the non – existence of any supervening authority to regulate the international trade the oppression of weaker countries by the stronger ones will continue as they will oppose the tariff and non – tariff barriers as it helps in the advancement of smaller countries. These measures if followed will act as hindrance in the liberalisation of trade as well disrupt its development.[1]

During the time of the Great Depression of 1929, international trade was going through a lot of ruckus, and there was a breakdown of International relations as a result of stringent trade regulations which contributed to the outbreak of the 2nd world war. After economic crisis of 1929 and second world war which had virtually dismantled  the world economy, stronger economic countries like the US, Britain took charge to reorganize the post war world and as a result UN was created with specialized organs to control and regulate different economic aspects globally like IMF , ITO as well as GATT. But ITO missed the flurry of support as it was never ratified but consequently GATT( which was not a formal International organization ) was created to govern International trade.[2]

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GATT

GATT ( General Agreement on Tariffs and Trade ), the first multilateral free trade agreement came into existence in 1948 as an agreement between 23 countries. Its main objective was to regulate the contracting parties to achieve the purpose of the agreement which was to reduce tariffs and other barriers for  achieving  liberalisation within the spectrum of  International trade.

GATT’s Role in promotion of International Trade

GATT focused on  following  principles to promote trade :-

1) Most – Favoured Nation Principle – The first principle and crucial article is known as the most favoured nation.  According to this principle, no country should be given any sort of special trading advantage to another or discriminate against it. All the member countries are treated equally and share the benefits of the treaty. This principle aids the weaker countries to grow as now they could not be oppressed by the developed nations . It helps to protect as well as in the survival of the under developed.

2)The second primary step that accelerated trade liberalisation on a large scale was reduction of tariffs on the basis of mutual benefit. Various rounds were sponsored for negotiations across the world. In the Kennedy  Round and Tokyo Round, around 35% of average tariff was reduced and in the Uruguay round it was 39%. The tariff cut helps in promoting International business as it allows free movement of goods and services across the borders.[3]

3) National Treatment Principle – According to Article III of the GATT Treaty, all the commodities in the market should be treated equivalent to the domestically produced goods.

4) Tariff Barrier Principle – The nations could protect their domestic industry through custom tariffs if they feel like that imported products in huge quantities could impact domestic producers egregiously. In cases where national security, public morals, health and other reasons of prime importance are in question then tariffs could be imposed upto certain extent.

5)GATT also protected the interests of developing countries as the ultimate objective lied in the  progressive development of the economies of all contracting parties. The tariff imposed on manufactured products which were imported from developing countries was reduced by 40% on average. All these measures reduced the burden on the economy of developing countries and aid in the development of trade for less developed ones.

6) GATT acted as the Court of International Trade by providing a platform to address and settle disputes globally.. As when two parties are involved, the differences are inevitable. It helps to resolve the disputes amicably and maintains world peace so that the interests of both the parties are protected and the international trade could grow and evolve.

Thus, the major objectives as mentioned in the preamble of GATT are –

1. To raise standard of living;
2. To achieve full employment and growth in real income;
3. To make the optimum use of resources of the world;
4. To expand production and international trade.[4]

Thus, GATT arranges for a mutual and reciprocal arrangement for international trade and thus benefits all the nations through elimination of any discriminatory policy and by reducing tariffs substantially. It also helps in upliftment of the developing countries and help them to enter multilateral trading systems  ensuring world peace by bringing about  economic prosperity and development throughout the world and evolution of trade.

GATT to WTO

After 8 rounds of GATT multilateral negotiations  on January 1, 1995 , WTO was founded as the successor of GATT. Birth of WTO to replace GATT was not merely a new game but it was required. Though GATT has made over 47 years a great success in flourishing world trade, it  had some weaknesses because of which it was unable to achieve its objectives. [5] The major reason was it was not an effective International Covenant nor was any real enforcement mechanism because of which it was not able to supervise and regulate International trade. There was no strict adherence to rules and regulations and GATT also had limitations in the resolving of disputes.

Thus, WTO came into existence when Uruguay Round took effect it was created to overcome the shortcomings of GATT by strengthening the GATT mechanisms and ensuring smoother and free trade. Economic peace and stability in the world trade was to be established so that development of International trade take place.[6]

WTO’s role in development of International trade-

1. It worked to promote the liberalisation of trade and setting up of an integrated world economy. There has been the decline of around 40% in tariff levels. As in the year 1999, the tariff rate of developed nations was reduced from 6.3% to 3.9%.
2. Various agreements relating to agriculture, investment, intellectual property were signed between nations so as to ameliorate the international relations and to provide free market access to all which helped to promote world trade liberalisation.
3. WTO regulations and co-operation have helped to avoid major trade war that was significant during 2008-09 global recession as in 1930’s where trade wars broke out causing a fall in global trade , the average tariff was 50% but in 2000’s  it was 9% which helped to maintain peace and tranquility among the nations.[7]
4. WTO allows settling of disputes constructively as WTO provides a platform to resolve disputes so that countries do not act unilaterally or stick to  acrimonious measures. Countries negotiate and comply with rules instead of declaring war. And WTO has settled more than 300 disputes since its incorporation in 1995.
5.  WTO’s  global system helps to lower down the trade barriers which lead to the reduced costs of production and in turn low prices of the furnished products as well as services. It ultimately leads to a lower cost of living.
6. Trade raises income. It has been seen that cutting down tariffs has led to the boost in trade. And it is seen that the income levels also rose. The EU in 1989-93 calculated that its income increased by 1.1% -1.5% more than they would have done without the single market. And even there is a boost in employment opportunities as about 300,000 – 900,000 more jobs have been created because of free trade.
7. WTO also helped developing countries. Many agreements like TRIPS (Trade related aspects of Intellectual Property) which was signed to protect the intellectual rights of the countries and to promote technological development and TRIMS( Trade Related Investment Measures) as it provides rules and regulations for the foreign investments.

These policies help in non- discrimination and equal treatment of the members and help in uplifting the status of developing nations.

• It also encouraged sustainable development which is the need of the hour in today’s world. It is recognised in the preamble of Marrakesh Agreement. [8]

Conclusion

WTO and GATT have played crucial roles in shaping the evolution of International trade. They have always competed with other modes of regulation in International trade, such as regional or preferential agreements in the precise subject of its mandate – trade liberalisation. They have provided a platform for countries to exchange goods and harness their monetary prowess . Both the organisations serve as the mechanism of global governance thereby ensuring global security. [9]

The GATT in 1947 and creation of WTO in 1995 has established a set of trade rules covering agriculture and manufacturing goods, services and intellectual property rights. It promoted transparency of trade policy and helped to gain confidence and thus, increased the trade. It has been seen that the world’s GDP has grown to 32% by 2010 from 20% in 1990’s. This unequivocally implies that as the global economy has developed, the trade linkages have constantly increased. As of 2019 , WTO has 164 members with 22 other countries currently negotiating their presence, 75% of world merchandise trade and that too on a non – discriminatory most – favoured nation (MFN) basis.

Recently using non- parametric methods report a large and positive effect of GATT/WTO memberships on trade ( between 74% to 277% for countries). Extensive magnitude of exports has increased by 25%. On average GATT/WTO membership have increased trade between members by 172% and between member and non- member countries by 88%.[10]GATT and WTO worked for similar objectives that are primarily world peace, integrity and trade liberalisation but their methodologies are different .Though WTO emanated from GATT it however played a major role to help International trade grow by leaps and bounds.  As world trade volumes today are roughly 41 times the level recorded in the early days of GATT (4116% growth from 1950 to 2019 ). And even world trade values today have snowballed by over 304 times from 1980 levels. And the tariff stood at 9% as of 2019 that is 19% lower than that recorded in 1996.[11]

And today, WTO is the single most effective International agency. With the pending inclusion of China, governments that represent 85% of the world’s population and about 95% of world trade have chosen to bind to WTO’s rules and procedures. For all the success of WTO today foundations lie in GATT.

And thus, it could be concluded that WTO and GATT have acted as the moonlight throwing focus on International business which acted for easy settlement of world trade disputes and is a ray of hope for developing economies to have an access and maintain cordial relationship with developed countries. It has reduced trade barriers, ended discrimination and works towards providing equal treatment to all the countries. Both the organisations have fastened multinational trade and helped in its overall trajectory of development.[12]

References

[1] International trade – Types, Importance, Advantages and Disadvantages, available at :https://efinancemanagement.com/international-financial-management/international-trade (last visited on 20 October,2020).

[2] General Agreement on Trade and Tariffs (GATT), available at: https://www.thecanadianencyclopedia.ca/en/article/general-agreement-on-tariffs-and-trade#:~:text=Why%20Was%20GATT%20Created%3F,trade%20tariffs%2C%20quotas%20and%20subsidies (last visited on 20 October,2020).

[3] Role of GATT in promoting International trade, available at: https://www.lawteacher.net/free-law-essays/international-law/role-of-gatt-in-promoting-international-trade-international-law-essay.php (last visited on 22 October, 2020).

[4] The GATT years from Havanna to Marrakesh, available at: https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm (last visited on 23 October,2020).

[5] WTO the successor of GATT, available at:https://www.lawteacher.net/free-law-essays/international-law/wto-the-successor-of-gatt-international-law-essay.php (last visited on 23 October,2020).

[6] From GATT to WTO : An Overview, available at: https://www.lawteacher.net/free-law-essays/international-law/wto-the-successor-of-gatt-international-law-essay.php (last visited on 24 October , 2020).

[7] H Radha Krishnan and V Nivetha , Vol 120 Role of promoting International Trade after Marrakesh Agreement , (International Journal of Pure and Applied Mathematics , 2018).

[8] KR Gupta , WTO Successor to GATT & India (Atlantic Publishers & Dutt , New Delhi , 2008).

[9]  Difference between GATT and WTO, available at: https://keydifferences.com/difference-between-gatt-and-wto.html (last visited on 25 October ,2020).

[10] Trade Effects of WTO, available at: 

https://voxeu.org/article/trade-effects-wto  (last visited on 25 October ,2020).

[11] Evolution of Trade under WTO : handy statistics, available at:

https://www.wto.org/english/res_e/statis_e/trade_evolution_e/evolution_trade_wto_e.htm#:~:text=Trade%20Growth&text=World%20trade%20volumes%20today%20are,growth%20from%201950%20to%202019 (last visited on 25 October, 2020).

[12] Effects of world trade organization WTO on India’s foreign trade, available at: http://hdl.handle.net/10603/52836 (last visited on 26 October ,2020).

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BY PRANJALI AGGARWAL | UNIVERSITY INSTITUTE OF LEGAL STUDIES, PUNJAB UNIVERSITY