This paper addresses the reasons why it was necessary to replace GATT 1947, the main differences between GATT 1947 and the WTO as an improvement of GATT 1947. These issues are discussed in detail beginning with a brief history of GATT 1947, its functions, achievements and failures.
The General Agreement on Tariffs and Trade (GATT) was first negotiated in Geneva, Switzerland in 1947 with the intention of increasing global trade by reducing tariffs and nontariff trade barriers. The GATT provides a code of conduct for global commerce and a framework for occasional multilateral negotiations on trade liberalization and growth. The Uruguay Round Agreement that resulted from negotiations which stretched from 1986 to 1993 among more than 100 nations established the World Trade Organization (WTO) to replace the GATT.The WTO formally took the place of the GATT on January 1, 1995. The WTO governs the GATT 1947, the amendments in GATT resulting from the Uruguay Round negotiations, conflict resolution among WTO member countries, and a range of agreements resulting from other prior multilateral trade negotiations.
Over the subsequent 40 years following GATT formation, its membership increased and so did its success at limiting barriers to trade. GATT members met on a regular basis in what came to be known as negotiating rounds. These rounds mainly concentrated on negotiating further reductions in the tariffs that nations could impose on imports from other GATT members. The success of these rounds was evident. Tariffs on manufactured products fell from a trade-weighted average of approximately 35 percent before the creation of GATT to about 6.4 percent at the start of the Uruguay Round in 1986. Over the same time period, the volume of trade among GATT members increased.
Given its interim nature and restricted field of action, the success of GATT in supporting and securing the liberalization of world trade over 47 years is undeniable. Persistent reductions in tariffs alone helped stimulate very high rates of world trade growth (approximately 8 per cent annually) during the 1950s and 1960s. And the impetus of trade liberalization helped ensure that trade development always out-paced production growth during the GATT era. The rush of new members during the Uruguay Round confirmed that the multilateral trading system was recognized as an anchor for growth and an instrument of economic and trade development.
The limited success of the Tokyo Round, outside the tariff reduction results, was an indication of tough times to come. GATT’s achievement in reducing tariffs to such a low level, in conjunction with a series of economic downturns in the 1970s and early 1980s, drove governments to formulate other forms of protection for sectors facing increased overseas competition. High unemployment rates drove governments in Europe and America to look for mutual market-sharing pacts with competitors and to initiate a subsidies race to retain their grip on agricultural trade. These modifications weakened the credibility and value of GATT.
By the 1980s a number of problems had surfaced with the GATT. First, the conflict resolution mechanism of GATT was not functioning as effectively as had been anticipated. Countries with longstanding disputes were unable to reach any resolutions on several issues, ranging from government subsidies for exports to regulations regarding foreign direct investment. Secondly, several commodities, most notably, agricultural products and textiles, were extensively exempt from GATT disciplines. Thirdly, it was generally believed that some forms of administered trade protection including voluntary export restraints, antidumping duties, and countervailing duties were limiting trade and distorting trade patterns in several important sectors. Fourthly, trade in services was expanding quickly and GATT had no regulations regarding trade in services. Fifthly, countries that produced intellectual property, such as computer programs, movies and patented pharmaceuticals, were becoming increasingly aggravated by the lack of intellectual property protection in several developing nations. Finally, the regulations as regards trade-related investment measures, such as domestic purchase requisites for factories built from foreign direct investment were ardently disputed.
To deal with these problems, a new round of trade negotiations, the Uruguay Round, was initiated in 1986. The objectives of the Uruguay Round were much more ambitious than in previous rounds. It sought to introduce key reforms into the functioning of the global trading system. The GATT treaty of 1994, negotiated during the Uruguay Round, established the WTO, the global institution to govern trade that was initially envisioned 5 decades earlier by the attendees of the Bretton Woods Conference. The new GATT treaty provided for a completely new and diverse dispute resolution mechanism to purge the gridlock of the old system. Additionally, the Uruguay Round expanded GATT’s influence to new areas—agreements concerning trade in agriculture, textiles, services, and intellectual property were key achievements. Finally, new sets of regulations regarding administered security came into effect with the creation of the WTO in 1995