Spread Knowledge

MGT520 - International Business - Lecture Handout 29

User Rating:  / 0


The General Agreement on Tariffs and Trade (GATT) is a multilateral treaty designed to minimize trade barriers. GATT went into effect in 1948. It provided a forum for trade ministers to discuss policies and problems of common concern. GATT’s mission was adopted by the World Trade Organization (WTO), which replaced GATT in 1995.

The Role of the General Agreement on Tariffs and Trade:

  • The goal of GATT was to promote a free and competitive trading environment that benefits efficient producers. To that end, GATT sponsored international negotiations, called “rounds,” to reduce trade barriers (both tariff and nontariff). GATT successfully oversaw a reduction of tariffs from an average of over 40% in 1948 to approximately 3% today, and promoted a dramatic increase in world trade.
  • To ensure that international trade is conducted on a nondiscriminatory basis, GATT follows the most favored nation (MFN) principle which requires one nation to treat a second nation no worse than it treats any third nation. Any preferential treatment that is extended to one country must be extended to all countries. Thus, the principle implies multilateral rather than bilateral trade negotiations.

Most Nations are Favored:

Though not required to do so, WTO member countries often grant MFN status to countries not belonging to the WTO. In the United States only, a few countries (such as Afghanistan, Cuba, Laos, North Korea, Libya, and Vietnam) are excluded. The Clinton administration changed the term "Most Favored Nation" (MFN) to "Normal Trade Relations" (NTR).

  • There are two exceptions to the MFN clause. First, in an effort to assist poorer nations with economic development, GATT permits nations to lower tariffs to developing countries without lowering them for more developed countries. For example, the United States follows the Generalized System of Preferences (GSP) code to offer developing nations reduced tariffs. Second, regional agreements promoting economic integration such as the EU or NAFTA are exempt from the MFN clause.
  • Nations following GATT principles are still able to protect domestic industries by finding loopholes in the treaty. For example, countries may adopt quotas and other no tariff barriers yet still comply with the GATT.
  • The final meeting of GATT took place in Uruguay. The round was ratified in 1994, and took effect in 1995. As in previous rounds, negotiations focused on reducing tariff barriers. Negotiations also took place to reduce no tariff barriers to trade. Other key areas that were considered include: agricultural policy, trade in services, intellectual property rights, and the creation of the World Trade Organization.

Related Content: MGT520 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of International Business