Contributions and Shortcomings of the GATT

Of the seven rounds of trade negotiations sponsored by the GATT on the basis of these principles before the Uruguay Round, the most important were the Kennedy Round, which took place from 1964 to 1967, and the Tokyo Round, which took place from 1973 to 1979. The Kennedy Round resulted in across-the-board tariff reductions of around 50 percent of the level that prevailed at the inception of the round. The Tokyo Round added another 33 percent reduction of tariffs in force in 1973 and started the process of reducing nontariff barriers. As a result of these two and the preceding rounds, international trade witnessed a significant degree of liberalization. Tariffs were reduced from an average of around 40 percent at the time the GATT became operational to less than 10 percent on the eve of the Uruguay Round. The process of liberalization spanned the period from 1948 to 1979, a period of remarkable expansion in the volume of world trade. It is estimated that during the three decades from 1950 to 1980, world exports expanded at an annual rate of about 7 percent, double the rate of growth in world output. There is little doubt that the process of liberalization undertaken under the auspices of the GATT was a major factor in this expansionary period. To be sure, other factors were at work as well—most notably, the unprecedented pace of technological progress in transport and communications, electronics and informatics. But technological progress would not have had the same impact had it not been aided by a reduction in restrictions impeding the international flow of goods and services.

Although the GATT made a major contribution toward the liberalization of world trade, much remained to be done. All rounds of trade negotiations before the Uruguay Round focused on manufactured products. Trade in agricultural products remained to a very large extent beyond the reach of the GATT. From the very beginning of the GATT the major industrial countries—particularly the European countries and the United States—were not interested, for several reasons, in extending the process of liberalization to agricultural products. France, for example, has a long tradition (going back to the Physiocrats in the mid-eighteenth century) that considers agriculture as more than just another form of economic activity. France was not prepared to let the agricultural sector find its own level on the basis of the unfettered operation of market forces. In the United States, the process of liberalizing the agricultural sector was blocked by the fact that, since the Great Depression and the New Deal in the early 1930s, farmers have benefited from a complex system of subsidies, output controls, and parity payments. In all industrial countries the agricultural lobby proved to be a political force to be reckoned with, inhibiting governments and compelling them to keep agriculture beyond the control of the GATT. Thus the process of liberalization, which had a profound impact on trade in industrial products, was conspicuously absent with respect to agricultural products. Agriculture became the target of an extensive arsenal of government intervention in the form of protective tariffs, variable levies, nontariff barriers, quantitative restrictions, domestic support policies, and export subsidies. The distorting effect of such a high level of protectionism was extremely costly—both to consumers in the importing countries and to producers in the exporting countries. Countries with no comparative advantage in a variety of agricultural products became not only self-sufficient but major exporters of these products. In many cases, the world market became the dumping ground for agricultural surpluses that would not have existed but for the artificial stimuli of high protection and domestic support policies.

Agriculture was not the only sector that eluded GATT discipline. International trade in textiles and clothing was another case in point. The textiles and clothing industry is one of the few sectors in which developing countries enjoy a distinct comparative advantage over industrial countries. Moreover, this industry represents the mainstay of modern industrialization in most developing countries. Had international trade in this sector been liberalized to the same degree as other branches of manufactures, it is most probable that producers in the industrial countries would not have been able to withstand competition from developing countries. But the textiles and clothing industry was still economically significant because of the employment it supports in most of the industrial countries. Accordingly, they were not prepared to let the sector languish under the impact of foreign competition. As early as 1962 it was decided to regulate international trade in these products through a strict regime of export and import quotas specified in an international agreement. At the beginning the quantitative regulation of this sector was limited to cotton textiles and clothing. With the rising importance of other natural and synthetic fibres, the scope of the arrangement was broadened to cover all types of textiles and clothing. As of 1974 trade was regulated by the Arrangement Regarding International Trade in Textiles (the Multifibre Arrangement, MFA), which covers the most important industrial country importers and developing country exporters, alloting to each an import or export quota that cannot be exceeded within the lifetime of the agreement. The agreement was renegotiated and renewed once every four or five years.

With respect to textiles and clothing, developing countries were deprived of the benefits of trade liberalization. Although this industry represented the most conspicuous example, it was not the only case in which the interests of developing countries were virtually ignored. As mentioned earlier, the seven rounds of trade negotiations that preceded the Uruguay Round resulted in reducing tariff levels from an average of about 40 percent to something less than 10 percent. It is important, however, to keep in mind that these are trade-weighted averages. Given that trade among industrial countries accounts for more than 70 percent of total world trade and that the commodity composition of this flow is heavily dominated by manufactured products, the average level of tariffs cited above is not representative of that facing exports from the developing countries. Indeed, the successive rounds of trade negotiations focused on products of interest to the industrial countries, with scant attention paid to developing countries. As a result, the process of liberalization went much farther for products such as motor vehicles, computers, television and radio sets, and telecommunications equipment than for leather goods, glassware, pottery, china, and the like.

This outcome was due to two main reasons. First, these goods were mostly labor-intensive products in which developing countries hold a competitive edge over industrial countries. As was the case with textiles and clothing, industrial countries were not prepared to open up their markets to unrestricted competition in what came to be known as “sensitive” products. Second, and no less important, was the principle of reciprocity, on the basis of which multilateral negotiations in the GATT were conducted. According to this principle, offers of liberalization made by any particular country were contingent on receiving more or less equivalent offers from its trading partners. Since most of the developing countries were not willing to eliminate or reduce their protective tariffs, they were not in a position to engage in the exchange of offers on the basis of reciprocity. It is true that, after the introduction of Part IV in the GATT, developing countries were exempted from the principle of reciprocity. What this exemption meant in practice is that negotiations were to a very large extent carried out among those who were able and ready to exchange concessions. In consequence, products of particular interest to developing countries were left far behind in the liberalization process, and the level of tariffs imposed on these products by the industrial countries was significantly higher than the average for manufactured products as a whole. More important, the incidence of quantitative restrictions and other nontariff barriers was much more evident in these products than in others.

This is not to say that developing countries did not benefit at all from seven rounds of trade negotiations under the GATT. Benefits “trickled down” to developing countries from the general expansion of world trade following the process of liberalization. Moreover, trade concessions made among industrial countries were automatically extended to developing countries pursuant to the MFN clause. Before the Uruguay Round, developing countries were far from being active participants in the GATT negotiations. They were content to sit on the sidelines and invoke the MFN clause once a tariff concession was made by one country in favor of another. This is the problem of “free riders,” who make no concessions of their own but benefit from concessions made by others.

Signs of Strain in the System

The upshot of the preceding analysis is that the process of liberalization under the auspices of the GATT, important and growth-stimulating as it was, failed to produce significant results in at least three areas: agriculture, textiles and clothing, and manufactured products of particular interest to developing countries.

By the mid-1970s, however, the international trading system was beginning to show signs of strain. The GATT was predicated on the assumption that the major trading powers subscribe to the proposition that their own interests as well as those of the world economy are best served by progressive liberalization of world trade. This assumption was put to severe test under the pressure of the economic disturbances that characterized the world economy in the 1970s and 1980s. The first of these was the collapse of the Bretton Woods foreign exchange regime of fixed parities, which was the basis of the international monetary system. This was followed by two oil shocks, serious external imbalances, and a period of creeping inflation coupled with economic recession. Under these conditions it was difficult to maintain a free and open international trading system. The policies of the major trading powers, in fact, were steadily going in the opposite direction. This was the period that saw the resurgence of protectionism in the industrial countries. A case in point is the sea change in the policies and attitudes of the United States, which for most of the postwar period was the protagonist and the standard-bearer of an open international trading system. To stem the tide of imports from Japan and countries of the Asian rim, the U.S. government resorted to new tools that were questionable under GATT rules and discipline. Instead of outright application of quantitative restrictions, which would have been in violation of its commitments under the GATT, other measures of equal effect were resorted to. Trading partners were “persuaded” to accept voluntary export restraints (VERs), voluntary import expansions (VIEs), and orderly marketing arrangements (OMAs). Under VERs the trading partner would accept to put an agreed limit on the volume or value (or both) of exports to the U.S. market. Under VIEs, the partner would accept to expand its imports of specified products from the United States above what otherwise would have been the case. Under OMAs, the trading partner would regulate its access to the U.S. market in such a way as not to put too much pressure on American producers. These measures were typical of neoprotectionism and came to be known as “gray area” measures in the sense that they were neither clearly inconsistent with GATT rules nor in line with them. To bolster its persuasive power in bilateral negotiations, the U.S. administration was vested with special authority under the Trade and Tariff Act of 1984 and the Omnibus Trade and Competitiveness Act of 1988. Under these laws, domestic producers and other interests could petition the U.S. Trade Representative about “unfair” trading practices of foreign countries. The U.S. Trade Representative has also the power to initiate investigations to determine whether the policies and barriers complained of are unfair in the sense of being “unreasonable,” “unjustifiable,” or “discriminatory” (all these terms are defined in the law). If the determination is affirmative, and if the bilateral consultations do not result in acceptable concessions, the U.S. Trade Representative may apply or threaten retaliation, which is usually done by announcing a large number of import products from the trading partner as the likely targets for tariff or quantitative restrictions. Given the general importance of the U.S. market, the threat of retaliation is usually enough to bring about the desired result.

The United States, however, was not alone in the application of gray measures of protectionism. The European Community (now, the European Union) was not far behind, and Japan was accused of blocking access to its own market through the use of restrictive domestic regulations.

The rise of neoprotectionism in practically all the industrial countries was not the only crack in the GATT edifice. The 1970s and 1980s were decades of incessant trade disputes, not only between the industrial countries and the newly industrialized developing countries, but also among the industrial countries themselves. The history of this period is replete with incidents of trade friction between the United States and the European Community and between both of them and Japan. Not infrequently, the cause of the dispute was the state of the bilateral trade balance. That Japan was able to build up a substantial and persistent trade surplus in its relations with the United States and the European Community goes a long way toward explaining many of the gray area measures. It is not always realized that in a multilateral framework the state of bilateral trade balances is not of great relevance. In the GATT system, it is assumed that a surplus in any bilateral trade relation is to be used to finance a deficit in another. And if all bilateral relations of a country like Japan show surpluses, these are supposed to be offset by an equal deficit in the balance of capital account in the form of an outflow of investment funds. Thus, according to GATT rules, the state of a bilateral trade balance cannot be invoked as an excuse for restricting the flow of trade unless it is the result of predatory conduct, such as dumping, or involves a serious injury to producers in a specific industry, which was not often the case. One can only interpret trade disputes in such cases as evidence of erosion of the multilateralism that is the foundation of the GATT system.

The state of bilateral trade balances was not, of course, the only cause of dispute. In many cases complaints were made because of abusing the safeguard clause, or on account of infringement of patents and other intellectual property rights, or, more generally, whenever there were policies or actions deemed to be inconsistent with obligations under the GATT. If the GATT system were functioning in the way intended by its founders, trade disputes would have been resolved through the dispute settlement mechanism, an integral part of the system. The GATT provisions and procedures provide that when disputes arise, parties concerned first seek consultations under Article XXII and, if they are unable to settle them directly, then refer the matter to the GATT Council. A panel was supposed to be nominated to look into the dispute and make recommendations. If these recommendations were not carried out, the aggrieved party was entitled to retaliate by withdrawing concessions equivalent to the damage endured. Although the system in theory seemed to be adequate, in practice it was far from effective. This was particularly so when the offending party was a major trading partner. In many cases it proved difficult to nominate a panel or to adopt its report. Nor was it practical to expect a small country to retaliate against a big one. In these circumstances, few countries availed themselves of the dispute settlement mechanism.

The Uruguay Round: Rationale and Results

It is not an exaggeration to say that, by the beginning of the 1980s, the prospects for the international trading system were dim indeed. The failure of the GATT to address some important trade issues, to uphold commitment to multilateralism, to arrest the drift toward bilateral deals and regional arrangements, to put an end to protectionist trends, and to give substance to its dispute settlement mechanism—all of these shortcomings called into question the credibility of the system that was put in place as one of the pillars, along with the Bretton Woods institutions, of the world economy in the postwar period. The problem was compounded by a feeling that the GATT system failed to evolve in line with far-reaching changes in international trade. When the GATT was established, it was right to consider liberalization of world trade in goods as the primary task. The flow of trade was impeded by a variety of restrictions inherited from the Great Depression. The elimination of tariff and nontariff barriers, and the articulation of rules of conduct in international trade, appeared to be worthy goals to pursue. But after seven rounds of trade negotiations, some of the major trading powers seemed to have lost interest in the process. It was felt that, given political reality, the scope for further liberalization was becoming increasingly limited. In their view an eighth round of trade negotiations could be justified only if its scope were broadened to encompass some of the issues of increasing importance in world trade. The first of these is liberalization of international trade in services. It was argued that services are becoming a major source of income and employment for a large number of industrial as well as developing countries—in the domestic economy as well as in international trade. The rising importance of services was a direct result of higher levels of income together with great technological advances. When the GATT was established, international trade in services was negligible. The past two decades or so have witnessed spectacular growth in cross-border activities in tourism, banking, insurance, air and sea transport, contracting, consulting, and scores of other service sectors. By the beginning of the 1980s it was estimated that international trade in services accounted for as much as 20 percent of total world trade. It was also estimated that the potential for further expansion was enormous. But widespread restrictions applied by practically all countries in most sectors stood in the way of such expansion. The prevailing view in the industrial countries was that the situation in this area was not unlike that which had existed in the trade of goods on the eve of the birth of the GATT, and that the benefits that could be reaped from liberalization were just as great. According to this view, it was intolerable that the GATT should be oblivious to such a far-reaching change in the world economy.

Another new issue was related to international protection of intellectual property rights, which came to be known as trade-related intellectual property rights (TRIPs). In view of the rising importance in international trade of patented goods and trademarks, the major technology-producing countries felt a need to promote effective and adequate protection of intellectual property rights, to ensure that measures and procedures to enforce those rights are in place, and to develop a multilateral framework of principles, values, and disciplines dealing with international trade in counterfeit goods.

A third new issue concerned so-called trade-related investment measures (TRIMs). The basic objective in this case was to extend GATT rules and disciplines to certain provisions that were deemed to be trade distorting in the investment laws of some capital-importing countries.

In all these areas the focus of liberalization was not the elimination or reduction of border-type measures such as tariffs, since there were virtually no measures of this kind impeding international flows in services, patents, trade secrets, or investment funds. The target in all these cases was primarily provisions in domestic laws considered to be protectionist, restrictive, or discriminatory. For this reason, developing countries were strongly opposed to the extension of GATT discipline to these areas—an extension that was regarded by them as interference in domestic affairs, not to mention the fact that the GATT, by statute, was expressly limited to international trade in goods.

In light of the above considerations, the GATT system that had served the world well for over three decades was regarded by many observers at the beginning of the 1980s as moribund, in disarray, irrelevant, and suffering serious and continuing erosion. Notwithstanding the failings of the system—real or perceived—it was recognized by all concerned that to allow it to go completely under would carry great dangers and risks. Recurrent trade frictions among the major trading countries and between them and developing countries could, in the absence of any recognized rules of conduct, deteriorate into virtual trade wars with ominous implications for the world economy. Possible recourse to beggar-my-neighbor policies, as happened in the Great Depression, would inflict grievous damage on all trading countries. These were the fears that generated the impetus to launch a new round of multilateral trade negotiations.

The Uruguay Round was to be the most comprehensive round ever undertaken within the framework of the GATT. Its objectives were spelled out in the Punta del Este Ministerial Declaration as follows:

• to bring about further liberalization and expansion of world trade to the benefit of all countries, especially developing country Contracting Parties, including the improvement of access to markets by the reduction and elimination of tariffs, quantitative restrictions, and other nontariff measures and obstacles;

• to strengthen the role of the GATT, improve the multilateral trading system based on the principles and rules of the GATT, and bring about a wider coverage of world trade under agreed, effective, and enforceable multilateral discipline;

• to increase the responsiveness of the GATT to the evolving international economic environment through facilitating necessary structural adjustments, enhancing the relationship of the GATT with the relevant international organizations, and taking account of changes in trade patterns and prospects; and

• to foster concurrent cooperative action at the national and international levels to strengthen the interrelationship between trade policies and other economic policies affecting growth and development.

The Final Act that emerged after seven years of negotiations fully reflects these highly ambitious objectives. Compared with earlier rounds, the Uruguay Round was unique. In the first place it succeeded in covering international trade in agricultural products and in textiles and clothing—two areas that had proved most intractable in all previous rounds. It also extended GATT rules and disciplines to services, TRIPs, and TRIMs, which by statute had fallen outside its jurisdiction. Consequently, the World Trade Organization (WTO), which was established by the Uruguay Round as a successor to the GATT, will have a far more extensive mandate than its predecessor. The Uruguay Round was also the first round in which developing countries were active participants. They realized that they could do better by participating than by remaining outside, and they were not reluctant to make concessions because they were already engaged in extensive trade liberalization in the context of economic reform programs. At the same time, industrial countries indicated, both in the Punta del Este Declaration and throughout the negotiations, that they recognized the special needs and circumstances of developing countries and were willing to take them into account. This was evident from accepting to bring to an end the special regime governing trade in textiles and clothing, so that this important sector for developing countries would be fully integrated in the GATT system. Moreover, in all cases where a liberalization commitment was instituted, the implementation period was significantly longer, and the depth of tariff cuts was much lighter for developing countries than for developed countries. As regards the least developed countries, they were virtually exonerated of all obligations imposed on other member countries.

The Seminar: Coverage and Issues for Analysis

In recognition of the importance of the Uruguay Round for the Arab countries, the Arab Fund for Economic and Social Development and the Arab Monetary Fund organized this seminar in cooperation with the IMF and the World Bank. The remainder of this volume presents the six papers that were presented to, and discussed by, the seminar. Chapter 2, by Jesus Seade, sums up the results of the Uruguay Round. Chapter 3, by Paul Chabrier, Mohamed El-Erian, and Rakia Moalla-Fetini, and Chapter 4, by Jamal Zarrouk, provide a general analysis of the implications of the Uruguay Round for the Arab countries. These are followed by three sectoral papers: Chapter 5 on agriculture by Ian Goldin and Mylène Kherallah; Chapter 6 on textiles and clothing by Naheed Kirmani, Rupa Chanda, and Clinton Shiells; and Chapter 7 on services by Bernard Hoekman and Carlos Primo Braga. The choice of these sectors was a function of their relative importance in the foreign trade of most Arab countries. Oil, the premier export article for so many countries in the region, is conspicuous by its absence. As explained by Jesus Seade in Chapter 2:

The overall change in the tariff treatment of crude and refined products once the Uruguay Round results are implemented is difficult to ascertain by virtue of the high proportion of countries maintaining specific as opposed to ad valorem duties on the products concerned. After the results are implemented, crude petroleum will continue to be characterized by a low level of bindings in major markets …, although the tariff treatment is generally low or duty-free. For refined products, the level of bindings is substantially higher than for crude petroleum, but average tariffs (where available) are also generally higher. The post-Uruguay Round situation of crude and refined petroleum—in comparison with that of other products—is mainly a reflection of the virtual absence of the major exporter interests from GATT tariff negotiating rounds [emphasis added].

The papers at hand provide a detailed account of the impact the Uruguay Round will have on the Arab countries. Given the limitations of space in an introductory chapter, it is not possible to summarize the conclusions reached by the authors. But all studies point to the great opportunities that will be opened up in the export markets as a result of eliminating and reducing barriers to trade in goods and services. It was made clear that taking advantage of such opportunities presupposes the attainment of a certain level of competitiveness. At the same time, all member countries of the WTO have undertaken specific commitments that will expose their home industries to a higher degree of competition. To maximize the benefits and minimize the risks, it is incumbent upon the Arab countries to carry out comprehensive stabilization and structural adjustment programs.

In assessing the impact of the Uruguay Round on the Arab countries, it is important to keep in mind the following points.

• The results of the Uruguay Round cover a vast number of issues spelled out in 28 internationally binding agreements in addition to numerous ministerial decisions and declarations. Concessions made by one party are supposed to have been balanced by equivalent concessions on the part of others. It would be a mistake to pass judgment on the impact of the round on the basis of what happened or is likely to happen with a single issue or a limited number of issues. Since what is lost on one side may be more than offset by what is gained on another, a proper assessment of the results should take into account the whole package of commitments and concessions.

• The process of liberalization in the Uruguay Round entails reduction of tariff and nontariff barriers by certain percentages over a certain period of time. Tariffs on agricultural products, for instance, are to be cut by 24 percent over ten years in the case of developing countries. The commitments undertaken in this example are in the majority of cases less onerous than those undertaken within the framework of IMF- or World Bank-supported adjustment programs, in which the time frame is much shorter and the depth of cuts significantly deeper.

• The elimination of subsidies to agricultural exports in industrial countries is likely to impose a burden on food-importing developing countries as a result of rising food prices. Such a negative effect was recognized in the Final Act, which provides for compensation to the affected countries through food aid and “soft” loans from the Bretton Woods institutions. As one of the major food importers, Egypt is likely to qualify for compensation on this account. Although the negative impact cannot be dismissed, its magnitude should not be exaggerated. It should be remembered that export subsidies will not be totally eliminated. They will only be reduced, by 36 percent over a six-year period (that is, an average reduction of 6 percent a year). Moreover, the negative impact may be important in the short run, but in the long run all importing countries will benefit from the relocation of production in favor of the most efficient producers. Finally, the loss realized on the import side should be set against the benefits that are likely to accrue to the food-importing countries from improvement in conditions of access for their exports.

• Developing country beneficiaries of the Generalized System of Preferences (GSP) are likely to lose as a result of erosion in their preferential margins. This is true of some Arab countries—such as Morocco, Tunisia, Algeria, Lebanon, and Egypt—that enjoy preferential treatment in the European market. Here again the magnitude of loss should be kept in proper perspective. Preferential treatment under GSP is not a contractual relationship, but an arrangement that can be modified or withdrawn unilaterally by the preference-granting country. It is selectively applied, both with respect to product and country coverage; even when it is applied, the system can be phased out once a country reaches a certain level of competitiveness. In any case, the size of benefits accruing to the preference-receiving countries has been steadily on the decline since introduction of the GSP in the early 1970s. This is partly due to the decline in the MFN tariff rates, which has the effect of shrinking the preferential margins, and partly because in many products tariffs are not the only impediment to trade but are coupled with quantitative restrictions and nontariff barriers, which are not covered by the GSP.

• Once a country becomes a member of the WTO, it is entitled to all rights, and is of course subject to all obligations, under the Final Act of the Uruguay Round as well as under the original GATT of 1947 and all subsequent agreements entered into by the Contracting Parties. At present there are eight Arab countries that are members of the WTO: Bahrain, Egypt, Kuwait, Mauritania, Morocco, Qatar, Tunisia, and the United Arab Emirates. It goes without saying that countries that are not members have no claims and are bound by no obligations. This situation entails a great deal of risk to the countries concerned. Obviously, they are not entitled to MFN treatment, which means they can be discriminated against without recourse. To be sure, member countries may voluntarily extend such a treatment to a nonmember, and they often do. But this is a unilateral favor that could be withdrawn at the pleasure of the granting country. Much more important, a nonmember country cannot take part in trade negotiations. Consequently, its export interests are left unattended to. As mentioned before, trade restrictions on crude oil and petroleum products are cases in point. The situation might have been materially different had the oil exporting countries been members of the GATT and taken an active interest in successive rounds of trade negotiations. Fortunately, a number of Arab countries that had stayed outside the GATT are taking steps to become members of the WTO. On the basis of cost-benefit calculations, this is a move in the right direction.