Evolving paradigms

In the Planning Series of articles, we had looked at how India’s trade policy evolved through the five-year plans, how the direction and pattern of trade changed and how the balance of payments performed. In this series of articles, we will look at the evolution of the world trade order, the pre-General Agreement on Trade and Tariffs (GATT) years, the formation of GATT, the coming of the WTO, and the role of India in this process. In this series, which we call the ‘International Trade Series’, we will look at each round of trade talks and what was achieved in each of these rounds.

The pre-GATT years

In the 15th -17th century, international trade was very different from what we have today in terms of tariffs and a multilateral institutional framework. That period was the age of exploration of new lands and new trade routes. Most of the explorers were Spanish and Portuguese, which were the dominant colonial powers of the day. We all have heard of the famous explorers like Christopher Columbus, Vasco da Gama and Magellan, who led voyages across the world with the aim of trading with old partners and finding new trade routes. The 17th-18th centuries comprised the period of a competition for colonies and trade between France, England and the Dutch. The foundations of the joint stock company were also laid in the Netherlands during this period, as has been described in The Ascent of Money by Niall Ferguson. This was also the period when trading companies such as the British East India and Dutch East India were established. Mercantilism was the dominant economic doctrine wherein countries maximised their exports and restricted imports, and fought wars to establish new colonies. These colonies were the source of raw materials and a destination of finished products.

In the 19th century, the colonies had stabilised and no major wars were fought over colonies except the Opium wars, which were fought to facilitate British opium trade in China and gain access to the Chinese market. Most other wars in the 19th century were among European powers to establish their supremacy (Crimean war fought between the UK, France, and the Ottomans against Russia; Franco-Prussian War fought between France and Prussia, leading to a unified Germany; Napoleanic wars fought between Napoleon and various European powers). By the mid-19th century, there was a loose network of bilateral trade ties, and everyone agreed to follow the Most Favored Nation (MFN) clause, meaning that no country would be discriminated against in the application of tariffs. Among the major trading countries, there were low tariffs and no quantitative restrictions. Douglas Irwin, in his article ‘The GATT in Historical Perspective’, published in American Economic Review in January 1995, stated that export volume grew faster than output between 1870-1913. The 19th century was also the period of the industrial revolution, which would not have succeeded without increasing trade. The industrial revolution was a period of rapid technological advancements, development of transport infrastructure and advocacy of free trade.

The early 20th century saw the development of tension among European powers, leading to the first World War, with hostilities breaking out in 1914. This led to a rise in trade restrictions such as tariffs, quotas and embargoes. Shipping lanes became unsafe and there were new trade partnerships. With the Treaty of Versailles, there were crippling reparations imposed on Germany and economic nationalism and self-reliance became the dominant thoughts. Colonies, such as India, had no option but to participate in the war efforts and contribute resources and troops.

The League of Nations was founded at the end of the war in 1920, and was the first intergovernmental body established to maintain world peace. The League of Nations convened the first World Economic Conference in 1927, whose objective was to dismantle war time trade controls and promote free and fair trade. A trade agreement was signed by the 29 countries who participated, but it could not be implemented. Soon thereafter, most of the participating countries were faced with high levels of unemployment and recession. The Great Depression hit the world in 1929, and ideas like economic liberalism and free trade were tossed out of the window. Policies such as the Smoot-Hawley Tariff Act were adopted in the 1930s. The Smoot-Hawley Tariff Act raised average US tariffs by 20 per cent, which led to retaliatory measures by European countries. Trade between the US and Europe collapsed and worsened the Great Depression. This continued to be the case till after the second World War.

In the early 1940s, the US and UK began discussing the post-war reconstruction of Europe and setting up of an international multilateral framework. The result was the Bretton Woods conference in 1944, which created the World Bank and IMF. The GATT was created a few years later because the initial negotiations were to create the International Trade Organisation (ITO) whose role was to bring about trade reforms. However, the ITO was never created, and the GATT came into existence in 1947.

The GATT years

While the role of the IMF and the World Bank was to bring about monetary stability and full employment, GATT had a supporting role to dismantle trade barriers and stop discriminatory trade. Twenty-three countries, led by the US, the UK, Canada and France, signed off in Geneva to create the GATT in 1947. Among the less developed countries, India, Brazil and China were important signatories. The simple aim of GATT, as stated in its preamble, was to contribute to rising standards of living and full employment by “entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce”.

The GATT years continued from the Geneva round of 1947, followed by negotiating rounds in Annecy (1949), Torquay (1951), Geneva (1956), Dillon Round (in Geneva in 1960-61), Kennedy Round (in Geneva in 1964-67), Tokyo Round (in Geneva in 1973-79) and the Uruguay Round (1986-94). We will look at each of these rounds in more detail in the articles that follow.

Arguably, the bedrocks of the GATT text were: Most Favoured Nation (MFN) status, National Treatment, and progressive trade liberalisation. The MFN status means that a country cannot discriminate between two trading partners. In other words, if it offers a tariff concession to country X, it has to form the same level of concession to country Y. National Treatment means that a country has to treat imported goods and services on the same footing as the domestically produced goods and services. An important achievement of the GATT rounds was that the tariff concessions were locked in and could not be reversed. The negotiations in the GATT years were clearly a success, since there was no raising of tariffs or reversing the tariff-cuts. This was reflected in the rising trade volumes all through the 1960s and 1970s. A significant downside of the GATT years was that large areas of trade were off the table: the important ones being agriculture trade and trade in textiles and apparels.

The creation of the WTO

At the end of the Uruguay Round, it was felt that the structure of the world economy had changed substantially, with services becoming a large part of GDP across the world and services trade rising over the years. Moreover, intellectual property was becoming an increasing part of a product’s value and consequently of trade (mainly in pharma and Information Technology products). These issues needed to be included in the remit of the multilateral trading framework. The GATT was discontinued and morphed into the World Trade Organisation on January 1, 1995. However, the GATT text continues to be a guiding document even now. Another important feature of the WTO was the Dispute Settlement Mechanism, which was intended to be a forum to resolve trade disputes among members. The WTO’s first Ministerial Conference was held in Singapore in December, 1996. The main round of trade negotiations under WTO has been the Doha Round, launched in 2001. The successive negotiations have been held in Ministerial Conferences, which are supposed to be held every two years. In this series, we will look at the progress made through these conferences.

Conclusion

The world has come a long way from the mercantilist times of 15th-16th century to the current rules-based world trade system under the WTO. In this series, we will look at how the institutional structure governing world trade has evolved in each GATT round and the subsequent meetings under the WTO.

The writer is Additional Chief Secretary, Department of Mass Education Extension and Library Services and Department of Cooperation, Government of West Bengal.