The GATT’s open and liberal multilateral trading system is built on four basic and simple rules.
1. The first rule, while recognising that it is important for member countries to follow open and liberal trade policies, permits them to protect domestic production from foreign competition, provided that such protection is extended only through tariffs and is kept at low levels.
To this end, it prohibits countries from using quotas, except in specified cases. The rule against the use of quotas has been strengthened in the Uruguay Round.
2. The second rule provides for the reduction and elimination of tariffs and other barriers to trade through multilateral negotiations. The tariffs thereby reduced are listed on a tariff-line basis in each country’s schedule of concessions.
The rates given in these schedules are known as bound (fixed) rates. Member countries are under an obligation not to increase tariffs above the bound rates.
3. The third rule requires countries to conduct their trade without discriminating against countries from which goods are imported or to which goods are exported.
This rule is laid down in the Most Favoured Nation (MFN) principle. An important exception to this rule is permitted in the case of Regional Preferential Arrangements. (The EU uses this exception for maintaining the Lome Convention, the Maghreb and the Mashraq Agreements).
4. The fourth rule is known as the national treatment rule. It requires countries not to impose on an imported product, after it has entered then- domestic markets on paying customs duties at the bo’rder, and internal taxes such as sales, or value added tax rates higher than those levied on a similar domestic product.
In short, GATT works on the basis of non-discrimination and reciprocity. The first implies that if one trade partner is granted favourable import terms, this should automatically apply to other GATT members, even though exceptions are possible.
The reciprocity means that when one country lowers import duties, it can demand a reciprocal lowering. In all, there have been seven negotiating rounds since GATT was established.
The success of GATT is illustrated by the increase in the number of member countries ($110) and the considerable reductions in trade tariffs, which have been achieved.
They have been reduced from an average of 40% to 5%. It has to be observed that pressure from the International Monetary Fund (IMF) has bought about tariff reduction in many countries.
During the Uruguay Round, the new agreement related mainly to the following topics:
i. Valuation of goods for customs purposes
ii. Pre-shipment inspection of goods
iii. Mandatory and voluntary product standards and sanitary and phytosanitary regulations
iv. Import licensing procedures
v. Rules applicable to exports
vi. Subsidies on industrial exports
vii. Dumping practices
viii. Trade-related Investment Measures (TRIMs)
ix. Opening of markets for agricultural goods.