Evaluation of the GATT (General Agreement on Tariffs and Trade). Regarding the Free Trade Concepts according to David Ricardo

Hausarbeit, 2021

24 Seiten, Note: 1,3



Index of figures

Index of tables

List of abbreviations

1 Introduction
1.1 Problem
1.2 Objective and approach

2 Historical Background

3 General Agreement on Tariffs and Trade
3.1 Control mechanisms
3.1.1 Most - favored - nation principle
3.1.2 National principle
3.1.3 Reduction of tariffs and non - tariff trade barriers
3.2 General exceptions
3.3 Establishment World Trade Organization

4 Free trade according to David Ricardo

5 Compatibility GATT - David Ricardo

6 Conclusion


Index of sources

Index of figures

Figure 1: Development of average tariffs in the United States 5

Figure 2: Production growth through trade cooperation 10

Index of tables

Abbildung in dieser Leseprobe nicht enthalten

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

Historically, free trade is still a relatively new concept. Between the 16th and 18th centu­ries, in the age of mercantilism, the idea of protectionism still predominated. The inter­state exchange of goods is based on the assumption that the own country could make profits at the expense of its trading partners through import quotas and import tariffs. At the same time, attempts are made to support the country's own exports through promo­tional measures. This protectionist approach has left its mark until today in form of pro­tective tariffs for example.1

Mercantilism is followed by the idea of liberalism and therefore the idea of free trade. Adam Smith is considered the founder of free trade theory. His model of absolute cost advantage is later developed into the model of comparative cost advantage by the econo­mist David Ricardo.2

Considering the progressing globalization, which means nothing else than "worldwide intercontinental interdependence", the free world trade and thereby the basic idea of Ri­cardo gains more significance. By growing together, of all important submarkets the pos­sibilities given by the international division of labor are used more intensively, so that the world-wide usage of resources improves constantly.3

But under which conditions can international world trade work? The answer is the GATT (General Agreement on Tariffs and Trade): a multilateral trade agreement that contains the legal framework for international trade to which belong 161 countries at the moment.4 As the UK (United Kingdom) is no longer part of the EU (European Union) and therefore not part of the customs union, the GATT would have been the legal framework under which trade would take place between the EU and the UK from January 1st 2021, unless no other deal was negotiated.

1.1 Problem

It is obvious that Ricardo's theory still determines the principles of free world trade today. However, the question arises to what extent the rules of the GATT are consistent with the rules of Ricardo. Can the assumptions developed in Ricardo's model be implemented in a real economy under the effectiveness of the GATT?

1.2 Objective and approach

This thesis aims to present the GATT and its historical background in its main features and to examine what extent the GATT corresponds to the free trade conception according to Ricardo. To ensure the achievement of this goal, chapter two at first explains what international trade agreements are and where its origins lie. This is followed by a discus­sion of the GATT up to the founding of the WTO (World Trade Organization). In the course of this, the basic principles of the GATT are discussed, and the general exceptions are illustrated.

To determine whether the GATT is consistent with Ricardo's concept, the next chapter focuses on the comparative cost advantage model developed by Ricardo. After the model is explained, some assumptions the model is based on are selected and compared to the GATT. At the end, a conclusion is made on the guiding question whether the GATT is in line with Ricardo's idea of free trade. The thesis concludes with an outlook on the future relevance of the GATT.

2 Historical Background

US tariffs raise significantly in response to the enforcement of the Smoot Hawley Tariff Act in 1930, which has the goal of protecting the United States from foreign competition. This tariff law is responsible for raising US tariffs on over 20,000 products to its peak. As a result, there is less trade. Europe, for example, take countermeasures, which result in world trade declining to about 33% of its volume from 1930 to 1932.5 As compensa­tion, a few years later the US government decides to implement a tariff reduction. To implement this idea, the tariff reduction must be linked to concrete advantages for export­ers. If this were not the case, companies producing competing goods would be disadvan­taged.6

In order to achieve the desired benefits ofboth contracting parties, it is agreed on the so- called bilateral tariff negotiations. The subject of these tariff negotiations are two con­tracting parties each. Assuming the US government lowers its tariffs on sugar against Germany, Germany must also lower its tariffs on a certain US export to ensure that a win­win situation is the result of the bilateral agreement. The US is able to more than reduce its average import tariffs by half through bilateral tariff negotiations shortly after World War II.7

For international trade, bilateral negotiations are not an appropriate approach, as benefits granted to one country can spill over to other countries that were not part of the negotia­tions. To solve this problem, multilateral negotiations take place, taking plenty countries into account. During the Bretton Woods Conference in 1944, whose goal is to establish exchange rate stability, the participating countries did not agree on the conference point to establish an ITO (International Trade Organization). Since the ITO does not come into existence, the participating countries developed a separate set of agreements, laying down rules, which come into force in Geneva on 1st of January 1948: the GATT. 23 countries are involved in this agreement: Australia, Belgium, Brasil, Burma, Ceylon, Chile, China, France, Great Britain, India, Canada, Cuba, Lebanon, Luxembourg, New Zealand, Neth­erlands, Norway, Pakistan, Southern Rhodesia, South Africa, Syria, Czechoslovakia, and theUS.8

3 General Agreement on Tariffs and Trade

The GATT represents an agreement between 23 countries on standard regulations for international trade. The aim is to promote global economic development and prosperity by reducing trade barriers such as tariffs and subsidies and to achieve full employment. In addition, the aim is to achieve a high and steadily increasing real income. According to the preamble of the GATT agreement, the following goals are also set: the optimal exploitation of resources and the increase of production through the exchange of goods.9 In order to constantly improve the liberalization of trade, groups of countries meet in various trade rounds in the following years. In a total of nine rounds of negotiations, tar­iffs and other trade barriers are eliminated gradually.10

The first five rounds of negotiations are intended to reduce tariff barriers, especially tar­iffs. Since round six, the so-called Kennedy Round (1964-1967) an increasing number of topics is included in the discussion. In addition to the agreement of a linear tariff reduc­tion of 50 percent by the major industrialized countries (except some non-affected indus­tries), this agreement includes anti-dumping measures to protect domestic industries and an attempt to promote developing countries.11

The seventh round, the Tokyo Round (1973-1979), results in even more extensive tariff reductions than those already achieved in the Kennedy Round. The reason for this is that tariff reductions are also granted on industrial and agricultural goods. In addition, codes are introduced to reduce non-tariff trade barriers.12

The most important result of the eighth round, the Uruguay Round (1986-1994), is the establishment of the WTO and the associated changes, which will be discussed in more detail in this paper later.13 The GATT, first created as provisional arrangement, becomes part of a world trade organization.14

The ninth round of negotiations takes place in Hong Kong, Doha from 2001 - 2005. The target is to take the developing countries problems into account. They request better mar­ket access for the agricultural sector for products in industrialized countries in form of a reduction of import quotas and tariffs as well as a reduction of subsidies in the agricultural sector.15

As seen in Figure 1, the achieved measures in those various rounds of negotiations show up, that tariff rates in the US decline steadily follow the sharp increase in 1930 during the Great Depression as result of GATT's introduction.

Abbildung in dieser Leseprobe nicht enthalten

3.1 Control mechanisms

3.1.1 Most - favored - nation principle

The most-favored-nation principle is set down in Article 1 of the GATT and states that „any advantage, favor, privilege, or immunity granted by any contracting party to any product originating 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.“16 Therefore, trade advantages and special conditions granted to one contracting party must be made available to all other contracting parties to the GATT without delay and compensation.17

Intention of this principle is to realize the basic objective of the GATT, which is to limit protectionist behavior through tariff measures, and to generate equal treatment among all countries. The result would increase international competition, which promotes general welfare. There are exceptions to this rule for developing countries, customs unions, and free trade areas.18

3.1.2 National principle

The national principle, which refers to the non - discrimination principle, states that for­eign and domestic goods must be treated equally in both tax and economic terms. There­fore, this principle is an extension of the most - favored - nation clause. According to the national principle, domestic goods may not be favored over foreign goods. The decisive factor here is the similarity of the goods. In addition to substitute goods, goods that are in direct competition with each other are considered to be similar. The aim of this principle is to minimize non - tariff barriers to trade and to equalize competitive opportunities.19

3.1.3 Reduction of tariffs and non - tariff trade barriers

The principle of eliminating tariffs and non - tariff trade barriers focuses on liberalizing trade. On one hand, tariffs are to be eliminated or reduced as far as possible. On the other hand, non - tariff trade barriers should be eliminated. Non - tariff trade barriers are defined as protective foreign trade restrictions that make market access more difficult for foreign suppliers. They include, for example, quantitative restrictions, technical standards, dis­criminatory safety regulations, environmental and health regulations, excessive adminis­trative regulations, and subsidies. These trade barriers are to be eliminated, as they can cause imbalances in trade volume and the composition of goods.20

A distinction is made between direct and indirect trade barriers. Direct trade barriers, which include import quotas, for example, have a direct effect on the quantity or price of a good. Indirect trade barriers, on the other hand, include the principle of transparency. According to this principle, all regulations and restrictions on foreign trade must be trans­parent. This means that transparent action and notification notes, in case of changes, are required from the contracting parties. In addition, it is stipulated that the framework con­ditions agreed in the agreement negotiations - for example certain tariff rates - must be balanced and based on reciprocity. Developing countries are an exception to this princi­ple. They should not demand equivalent concessions from industrialized countries.21

3.2 General exceptions

If measures from the areas listed below are affected, Article 2 GATT allows exceptions concerning the application of existing GATT law:

- Measures for the protection of public morals
- Measures to protect the environment and health
- Measures concerning the import and export of gold and silver
- Measures for the protection of patents, trademarks and copyrights, provided there is no violation of the general GATT agreement
- Measures concerning goods produced in prisons
- Measure for the protection of cultural and natural resources with archaeological value
- Measures that result in restrictions on the export of domestic raw materials if the domestic price has fallen below the world market price and only for the period required for stabilization
- Measures necessarily for the acquisition or distribution of general shortage goods
- Members of customs unions or free trade zones

These exceptions must be applied in a way that excludes discrimination between countries with the same circumstances. Furthermore, the application of the exceptions should not lead to a restriction of international trade.22

3.3 Establishment World Trade Organization

1994, the WTO is established as a result of the Uruguay Round. However, the GATT rules remain in place and are integrated into the WTO rules as modified version, so that the basic logic of the system remains the same.23 The difference between the GATT and the WTO is that the GATT is a provisional agreement and the WTO is an international organization. In addition, the WTO agreement is expanded to include rules for services (GATS - General Agreement on Trade in Services). Moreover, the WTO is an institu­tional framework for economic relations of member states based on the new GATT and other concluded agreements at the end of the Uruguay Round.24

The most important new aspect represented by the WTO is that it acts as an adjudicator of disputes. If a country accuses another country of violating the rules of the trading sys­tem, an objective jury evaluates the dispute. If they conclude that there is indeed a viola­tion, and the complaint is therefore legitimate, the country that filed the complaint can be granted the right to retaliate without itself violating WTO rules. This is done by imposing countermeasures in the form of punitive tariffs.25


1 See Yuskel,A. S., GATT - WTO - Welthandelssystem, 1996, p.16.

2 See Yuskel,A. S., GATT - WTO - Welthandelssystem, 1996, p,16f.

3 See https://www.springerprofessional.de/wirtschaftspolitik/expansion/was-meint-globalisierung-der- wirtschaft-/16762416 , accessed on 14/01/2021.

4 See https://www.bmwi.de/Redaktion/DE/Artikel/Aussenwirtschaft/wto-abkommen.html , accessed on 14/01/2021.

5 See Senti, R., Allgemeines Zoll- und Handelsabkommen als System der WHO, 1986, p.4.

6 See Krugman, P. et al., International Economics, 2006, p.225.

7 See Krugman, P. et al., International Economics, 2006, p.225.

8 See Send, R., Allgemeines Zoll- und Handelsabkommen als System der WHO, 1986, p.40.

9 See, Hauser, H. et al., Das neue GATT, 1995, p.20ff.

10 See https://www.bmwi.de/Redaktion/DE/Artikel/Aussenwirtschaft/wto-abkommen.html , accessed on 14/01/2021.

11 See Krugman, P. et al., International Economics, 2006, p.239f.

12 See Krugman, P. et al., International Economics, 2006, p.239f.

13 See Krugman, P. et al., International Economics, 2006, p.240.

14 See Yuskel,A. S., GATT - WTO - Welthandelssystem, 1996, p.39.

15 See Krugman, P. et al., International Economics, 2006, p.240.

16 See https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm , accessed on 19/01/2021.

17 See Senti, R., Allgemeines Zoll- und Handelsabkommen als System der WHO, 1986, p.106.

18 See https://www.bmwi.de/Redaktion/DE/Textsammlungen/Aussenwirtschaft/wto.html7cms_ar- tId=235022 , accessed on 10/.02/2021.

19 See https://www.bmwi.de/Redaktion/DE/Textsammlungen/Aussenwirtschaft/wto.html7cms_ar- t.Id 235022. accessed on 10/02/2021.

20 See Herdegen, M., Internationales Wirtschaftsrecht, 2014, p,161ff.

21 See Herdegen, M., Internationales Wirtschaftsrecht, 2014, p,168ff.

22 See https://www.wto.org/english/tratop_e/region_e/region_art24_e.htm , accessed on 17/01/2021.

23 See Krugman, P. et al., International Economics, 2006, p.226.

24 See Herdegen, M., Internationales Wirtschaftsrecht, 2014, p.152.

25 See https://www.bundesregierung.de/breg-de/service/welthandelsorganisation-wto-615792 , accessed on 17/01/2021.

Ende der Leseprobe aus 24 Seiten


Evaluation of the GATT (General Agreement on Tariffs and Trade). Regarding the Free Trade Concepts according to David Ricardo
FOM Essen, Hochschule für Oekonomie & Management gemeinnützige GmbH, Hochschulleitung Essen früher Fachhochschule
ISBN (eBook)
ISBN (Buch)
GATT, Handelsabkommen, Freihandel, Free Trade, David Ricardo
Arbeit zitieren
Carolin Wemhoff (Autor:in), 2021, Evaluation of the GATT (General Agreement on Tariffs and Trade). Regarding the Free Trade Concepts according to David Ricardo, München, GRIN Verlag, https://www.grin.com/document/1025316


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