A viewer asked this question on 8/22/2000:
Hi, I'm from the Philippines, I just want to know how the GATT works and who benefits from it?
JesseGordon gave this response on 8/22/2000:
I'll start off with some basics; "GATT" is the old name and "WTO" is the new name.
* The World Trade Organization (WTO) is an international organization intended to reduce trade barriers, formed in 1995.
* The General Agreement on Trade and Tariffs (GATT) is the international treaty which preceded the WTO's formation; it began in 1947.
* The 'Uruguay Round' was the most recently completed round of GATT negotiations, completed in 1994.
* Negotiations to start a new 'Round' took place in Seattle in Dec. 1999, but were disrupted by riots.
* WTO members (which includes the US and most industrialized countries) grant each other 'MFN' or Most Favored Nation status, which means minimal import tariffs.
Basically , the WTO "works" by requiring signatory countries to lower their import tariffs, import quotas, export subsidies, and other domestic laws that hinder free trade. One country can "sue" another if they think the other country is imposing trade barriers.
That's the practical means by which it works. The theoretical basis is that free trade is inherently beneficial. That's the basis of the entire capitalist system, so you pretty much have to accept that, or be against free trade, GATT, and the WTO.
The inherent benefit comes about because, say, it's relatively cheaper to produce RAM chips in the Philippines than in the US, and it's relatively cheaper to produce finished computers in the US than it is in the Philippines. Let's say the costs were:
* $500 to produce chips in the Philippines;
* $1000 to produce chips in the US;
* $500 to finish a computer in the US;
* $1000 to finish a computer in the Philippines.
If you did it all in the Philippines, it would cost $1500 to make a computer (assuming those were the only two steps). If you did it all in the US, it would still cost $1500. But if you produced the chips in the Philippines and the finished computer in the US, it would cost only $1000. You have to add something for the extra shipping, say $100, but it would still cost only $1100 for the "free trade" production in two countries. The "benefit" is because consumers in both countries can then buy a computer for $1100 instead of $1500.
Sources and links: http://www.issues2000.org/Background_Free_Trade_&_Immigratio n.htm
A viewer asked this follow-up question on 8/23/2000:
EARLY THIS YEAR, THERE WAS A MASS IMPORTATION OF CHICKEN IN THE PHILIPPINES THROUGH THE GATT THAT WAS DISTRIBUTED AROUND THE COUNTRY, MOST OF IT WAS NOT IN GOOD CONDITION AND OF COURSE WAS OF CHEAPER PRIZE THAN THE LOCALLY PRODUCED CHICKEN. WHTA DO YOU THINK IS THE DEGREE OF DAMAGE IT CAUSES TO OUR LOCAL PRODUCERS? WHATS THE EFFECT ON IT TO THE LOCAL INDUSTRY?WHO BENEFITED FROM IT?
JesseGordon gave this response on 8/23/2000:
1) GATT itself didn't actually import any chickens -- GATT provided the framework under which the Philippine government changed the import laws to allow private companies to import chickens with no import fees. So GATT is two steps removed from the actual chickens. They're not the beneficiaries.
2) The Philippine government is also not a beneficiary, except to the extent that Filipinos get to buy cheaper chickens and export their own goods more readily abroad. In fact, in the short term, the Philippine government loses out because they no longer receive import fees on chickens. That's why GATT was hard to get countries to sign on to -- because governments had to look at the longer term.
3) I'm afraid you're not going to like this part, but Filipino consumers ARE the beneficiary. Getting cheaper chickens is an economic benefit, even if they're of lower quality. Having a range of options -- low-quality chickens for cheap, high-quality local chickens for more money -- is the sort of benefit that GATT is intended to produce. It has done so in your example.
4) Of course the importing company is also a beneficiary, because they got to sell more chickens, and in general get to expand their market so they can produce more chickens in the future.
5) The local chicken company is obviously the loser. That's what always happens when competition increases -- the local chicken company would be much better off if they had a monopoly, but consumers would be worse off.
6) However, free-trade theory would say that the local chicken company should do okay in the long run as long as they have a competitive product. They should switch their focus from "we sell chickens" to "we sell higher-quality chickens than our competitor." In other words, the effect on the local industry is to spur competitiveness and require that they differentiate their product from the importers.
7) If they can't do that (i.e., if the extra quality of their chickens is not worth the extra cost) then they'll go out of business. But the consumer would benefit from that too, since the net effect would be cheaper chickens; and some other company (perhaps an importer also, but perhaps domestic) would produce high-quality chickens to fulfill that part of the market. That's supposed to happen in free-trade also -- the "marginal producers" fail, and consumers benefit anyway.
Return to index