The World Bank recommended the establishment of an International Trade Organization (ITO). Instead of ITO, General Agreement on Tariff and Trade (GATT) was formed in 1948.
Objectives of GATT
The General Agreement on Tariff and Trade was a multilateral treaty that laid down rules for conducting international trade. The preamble to the GATT can be linked to its objectives.
1. To raise the standard of living of the people,
2. To ensure full employment and a large and steadily growing volume of real income and effective demand.
3. To tap the use of the resources of the world fully.
4. To expand overall production capacity and international trade.
Principles of GATT
For the realization of the above mentioned objectives, GATT adopted the following principles.
- Non Discrimination,
- Protection through tariffs,
- A stable basis of trade, and;
1. Non Discrimination
The international trade should be conducted on the basis of nondiscrimination. No member country shall discriminate between the members of GATT in the conduct of international trade. On this basis, the principle “Most favored Nation” (MFN) was enunciated. This means that “each nation shall be treated as good as the most favored nation”. All contracting parties should regard others as most favorable while applying and administering import and export duties and charges. As far as quantitative restrictions are concerned, they should be administered without favor.
Exceptions to the principle of non-discrimination: However, certain exceptions to this basic rule are to be allowed. There is no objection to form free trade areas or custom unions. Such integration should facilitate consistent trade between the constituent territories. They should not raise barriers to the trade of other parties. GATT allows its members to follow measures to counter dumping and export subsidies. However, such measures should be applied only to offending countries.
2. Protection through tariffs only
GATT rules prohibit quantitative restrictions. Domestic industries should be protected only through customs tariffs. Restrictions on trade should be limited to the less rigid tariffs.
Exceptions: exceptions to this principle is given to the countries which suffer from unfavorable balance of payments position. Developing countries also enjoy this exception. Import restrictions may be applied to agricultural and fishery products if their domestic production is subject to equally restrictive production.
3. A stable basis of trade
GATT seeks to provide a stable and predictable basis for trade. It binds the tariff levels negotiated among the contracting countries. Binding of tariffs prevents the unilateral increase in tariffs, But still there is a provision for renegotiation of bound tariffs. A return to higher tariffs is discouraged by the requirement that any increase is to be compensated for.
The member countries should consult one another on trade matters and problems. The members who feel aggrieved that their rights under GATT are withheld can call for a fair settlement. Panels of independent experts have been formed under the GATT council. Panel members are drawn from countries which have no direct interest in the disputes under investigation. They look into the trade disputes among members. The panel procedure aims at mutually satisfactory settlement among members.