Supplemental Notes on the General Agreement on Tariffs and Trade [GATT] & The World Trade Organization [WTO]
2. Although the world was already in a depression, in 1930 the US enacted the Smoot-Hawley tariff, which created significant import tariffs on foreign goods. As other nations took similar steps and the depression deepened, world trade fell further.
3. After WWII, the US and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). The approach of GATT was to gradually eliminate barriers to trade.
4. Over 100 countries became members of GATT, and worked together to further liberalize trade..
5. During the 1980s and early 1990s the world trading system as “managed” by GATT underwent strains. First, Japan’s economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan’s perceived protectionist (neo-merchantilist) policies created intense political pressures in other countries. Second, the persistent trade deficits by the US, the world’s largest economy, caused significant economic problems for some industries and political problems for the government. Thirdly, many countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT.
6. Against the background of rising protectionist pressures, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs (called the Uruguay Round). This was the most ambitious round to date, as the goal was to expand beyond the regulation of manufactured goods and address trade issues related to intellectual property, agriculture, services, and enforcement mechanism.
7. The agreement, however, left several important matters unaddressed: financial services, broadcast entertainment, environmental matters, worker’s rights, and foreign direct investment. These were left to further negotiations under the auspices of the World Trade Organization.
8. When the WTO was established, its creators hoped the WTO’s enforcement mechanisms would make it a more effective policeman of the global trade rules than the GATT had been. The WTO has handed down a number of rulings that have led to changes in governmental policies that restricted trade, and in other cases governments have made changes in advance of WTO rulings.
9. Under the WTO, 68 countries that account for more than 90% of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications. The WTO has also made headway in liberalizing trade in financial services, although the current agreement still includes a number of exceptions.
10. Substantial work still remains to be done on the international trade front. Environmental policies are one area of concern, as are regulations regarding foreign direct investment.
2. Even if specific quotas, tariffs, local content, etc. regulations do not specifically require that certain actions be taken, a firm may choose to locate facilities or buy from certain suppliers in order to reduce the threat of mandatory and more punitive governmental intervention.
3. Certain trade barriers may even make some operations no longer viable, and force a firm to give up particular markets or production sites.
4. In general international firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies. While there may be short term benefits to having governmental protection in some situations, in the long run these can back fire and other governments can retaliate.