FAQ: How have the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade, impacted trade?

Talking Points:

The General Agreement on Tariffs and Trade (GATT), established in 1947 in Geneva, Switzerland, was responsible for governing approximately 90 percent of world trade. It sought to liberalize trade and thereby improve the world trading system through a code of rules and a forum at which negotiations and other trade discussions took place. Importantly, it played a major role in the settlement of trade disagreements among member countries. The founders of GATT believed that increased international trade would promote an economic interdependence between countries, making wars between trading partners unthinkable.

GATT was responsible for reducing the international tariff average from 40 percent in 1947 to 5 percent in 1990. These reductions permitted international trade to expand tremendously, national incomes to increase substantially, and international competition to flourish, resulting in higher quality, lower priced goods. The organization was very successful at reducing international trade barriers. However, many analysts argued that it was not very successful at remedying less apparent forms of protection, such as non-tariff barriers. New protectionist tools, such as abusive uses of dumping legislation, labor and other issues, were recognized as the new non-tariff barriers. It was widely held that GATT would not be able to contain this.

In the early 1990s, GATT’s inability to eliminate non-tariff barriers put the organization in jeopardy. Its incapacity to successfully remedy the U.S.-European Community disagreement over agricultural subsidies created doubt as to the organization’s ability to meet future challenges. Furthermore, the decreasing level of world confidence in GATT contributed to the speed at which countries formed trading blocs. Since the successful conclusion of the GATT Uruguay Round Agreements, the degree of confidence in its successor organization, the World Trade organization(WTO), has risen significantly.

Established on January 1, 1995, the WTO deals with agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property and much more. By June 2005, the number of WTO members had reached 148 (in 1948 the GATT had 23 contracting parties). The WTO is a democratic organization whose agreements are adopted by consensus. Consequently, each country decides according to its legislative process whether or not it will be bound by WTO agreements.

FAQ: How did the Multifiber Arrangement emerge and what is its impact on textile and apparel?

Talking Points:

During the 1960s and 1970s, worldwide growth in the number of textile and apparel producers led to production overcapacity. As a result, the global supply of textiles and apparel exceeded the growth in demand. Competition intensified. As producers in developed countries attempted to protect their markets from imports originating in low-wage countries, bilateral trade policies emerged under an international framework.

The Arrangement Regarding International Trade in Textiles, more commonly known as the Multifiber Arrangement (MFA), was finalized at the end of 1973 and enacted in January 1974. Approximately 50 countries signed the original agreement, which was established and managed under the auspices of the General Agreement on Tariffs and Trade, the predecessor to the WTO. The MFA was considered general and became an umbrella arrangement under which bilateral agreements could be conducted, typically involving the implementation of import quotas. These agreements and quotas were necessary because importing countries, primarily developed countries, believed specific textile and apparel products imported from developing countries were disrupting their markets. As part of the new arrangement, provisions were included that monitored the implementation of the MFA, defined strict rules for determining market disruption, and permitted quotas to grow by 6 percent annually.

The original MFA was renegotiated in 1977 (MFA II, 1977-81). Although the United States was the leader in pursuing the original multilateral agreement, the European Community took the lead this time and pressed for an increasingly restrictive MFA. The 6-percent annual growth rate for quotas permitted in the first MFA was of particular concern to European Community (EC) representatives. Manufacturers argued that it was unfair for imports to increase by 6 percent a year when their own share of the domestic market was increasing at rates as slow as 1 percent. As a result, industry leaders sought to have the import growth rate tied to the domestic rate. Under the new Multifiber Arrangement, a less severe clause was added that allowed the EC to reduce certain quota growth rates below 6 percent.

The 1981 negotiations for renewal of the MFA (MFA III, 1981-86) were particularly difficult. From the perspective of both the EC and U.S. textile and apparel industries, MFA II—despite its increasingly restrictive features—was not effective in slowing the tide of imports. Developing countries became increasingly organized in pressing for their interests, however, and in the end they succeeded in implementing a less-restrictive “anti-surge” provision, which provided for special restraints in the event of “sharp and substantial increases” in imports of the most sensitive products. MFA III also tightened the definition of market disruption by requiring proof of a decline in the growth rate of per capita consumption.

U.S. officials went into the 1986 MFA renewal negotiations under heavy pressure from the domestic textile industry to provide increased protection from low-wage imports. During this period, EC industries were affected less by imports, enjoying a relatively healthy economic period. The EC, however, joined the United States and Canada in presenting a joint statement for the 1986 renewal (MFA IV, 1986-91). Although exporting countries were even more organized than in the past, their diverse composition continued to prevent full unity. In addition, they still lacked the bargaining power sufficient to counter the strength of the developed countries. Because quotas were based on past performance, smaller suppliers, usually from the least developed countries, had little opportunity to obtain substantial quota increases. In an effort to improve the exporting nations’ bargaining position, the International Textiles and Clothing Bureau (ITCB) was established to represent their interests more effectively.

Throughout the GATT negotiations, textile and apparel trade provoked one controversy after another. By December 1988, ministers from 19 developing countries asserted their unwillingness to continue in the broader talks unless problems related to the Multifiber Arrangement were addressed. They requested a clear timetable for phaseout of the MFA. Representatives from developed countries found it hard to agree to the demands. As the GATT talks dragged on, various countries offered proposals for bringing textile trade back under mainstream GATT regulations. In 1990, U.S. officials offered a plan that provided quota allocations for each country which would be eliminated gradually, and an overall global quota, but the U.S. proposal encountered strong opposition from exporting nations. U.S. retailers and importers also believed the plan would be detrimental to their interests.

After GATT talks resumed in Brussels in December 1990, the new Agreements on Textiles and Clothing, which became known as the Brussels Draft, called for textile products to be integrated into GATT, eliminating quota restrictions in three stages. A year later, however, textile negotiations reached an impasse over certain issues related to phasing out the MFA. In December 1993, the Uruguay Round talks resumed, and after seven years of bitter deliberation, a GATT accord was finalized. The MFA was officially replaced by the Uruguay Round’s final Agreements on Textiles and Clothing, which was enacted on January 1, 1995 as part of the WTO, the successor to GATT. Despite heavy developed country opposition to a 10-year phaseout of quotas, the agreement provided for the elimination of quotas on textiles and apparel over the decade ending January 1, 2005. After this date, only tariffs should remain.

As a result of the abolished quotas, prices are anticipated to fall and major Western buyers are expected to narrow their sources to large vertically integrated Asian suppliers. China, in particular, is expected to gain an increasingly large share of textile and clothing production.

As stated earlier, the WTO estimates that the U.S. quota on Chinese imports of apparel had the equivalent effect of a 34 percent tax on Chinese imports. By eliminating this tax, absent offsetting trade barriers or currency changes, China’s share of U.S. imports is projected to rise from 16 percent to 50 percent; its share of the U.S. apparel market is estimated to rise from 5.4 percent to 22.5 percent. Much of this will be at the expense of past suppliers, including Bangladesh and the Philippines.

This section appeared in Part III: Frequently Asked Questions and Talking Points of the book Grasping Globalization: Its Impact and Your Corporate Response, 2005.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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