GATT principles and their role in international trade

GATT's Principles

The GATT has been replaced by the WTO. The WTO has five principles. They are trade without discrimination, freer trade through negotiation, predictability through binding and through transparency, promoting fair competition, and encouraging development and economic reform (WTO, no date). These principles govern the procedures that are developed. The organization engages in multilateral negotiations to reduce barriers to trade and to find ways to reshape the global economy to a freer economic system. There are mechanisms for dispute resolution that help to enforce the terms negotiated at the different multilateral trade agreements.

The first principle, trade without discrimination, has two similar dimensions of most favored nation wherein others are treated equally among each other and national treatment in which foreigners are treated equally to locals. These components apply primarily to goods -- foreign goods would be treated equally to local goods after they enter the local market, for example. In economic terms, this means the removal of trade barriers such that goods are free to move about the world. Nations can therefore take advantage of comparative and competitive advantage, conditions that may not apply when goods are subject to external controls such as trade barriers. Ghosh et al. (2003) found that most favored nation treatment does offer some benefits to emerging nations, particular with respect to bargaining power.

The second principle establishes that nations should set their own trade agreements through negotiation -- freer trade should not be imposed upon a nation. The concept of negotiation to free trade does have its drawbacks in terms of international economics in that the disparity of bargaining power between nations, even in a multilateral setting, means that deals negotiated do not necessarily reflect free and equitable trade between nations. While inequality of bargaining power is not reflected in WTO dispute resolutions, it has been found to exist in the content of the law itself (Moon, 2006).

The third principle will result in smoother transactions. The reduction of risk in transactions is directly associated with transparency and lower information costs. By reducing transaction risk, it stands that transactions will increase as will innovation. Thus, international trade is encouraged by the third principle. The fourth principle of promoting fair competition seeks to increase trade by opening markets. The WTO cites the agreement on government procurement, for example, as a means to open competition by removing protections and boundaries. This principle has substantial overlap with other principles.

The fifth principle will encourage international trade. Economic reform means installing market-oriented systems where there were previously none. Developing economies will not only occur through increasing trade but will serve to increase trade as countries develop more comparative and competitive advantages in more sectors.

The WTO's principles seek to promote freer trade through the removal of trade barriers. Trade barriers increase transaction costs, which distort markets. These market distortions have the effect of reducing trade. The benefits of trade have been known since Ricardo, so the WTO is operating on the assumption that increasing trade will stimulate global economic growth. In general, these principles guide global trade in the right direction of stimulating trade, creating economic opportunities where none previously existed and providing opportunities for nations that in an environment where nations engage in active protectionism would not have those opportunities.