In order to arrive at an agreement that all member countries could abide by, the ITO contained a number of exceptions to the general principles.
Because of these compromises, a free-trade principle was often followed by a trade-restriction loophole. Such compromises by the United States and the international prestige of the United States led to general acceptance of the ITO abroad; however, concern for the loopholes raised sufficient apprehensions at home that President Truman decided in 1950 not to seek ratification by the U. S. Congress.
The principles and rules of the GATT are as follows:Most-Favored-Nation TreatmentThe primary objective of the GATT was to create fair and equitable trading relationships among the nations of the world.
Given this objective it is not surprising that the first article was 76 devoted to the principle of non-discrimination. Following historical custom, non-discrimination was defined in terms of "general most-favored-nation treatment".
To belong to GATT, countries must adhere to the most-favored-nation (MFN) clause. This clause requires that if a country, such as the United States, grants a tariff reduction to one country, for example, a cut from 20 percent to 10 percent on wool sweaters from Australia, it must grant the same concession to all other countries.
The MFN clause also applies to quotas and licenses. Although the clause initially was intended to be unconditional, countries have always made exceptions. The most important exceptions are as follows:
* LDC's manufactured products have been given preferential treatment over those from industrial countries.
* Concessions granted to members within a trading alliance, such as the EU or the North
American Free Trade Association (NAFTA), have not been extended to countries outside the alliance.
* Countries that arbitrarily discriminate against products from a given country are not necessarily given MFN treatment by the country whose products are discriminated against.
* No signatory countries are not always treated in the same way as those that grant concessions.
* Countries sometimes stipulate exceptions based on their existing laws at the time of signing a GATT agreement, such as Switzerland's exclusion of agricultural trade.
* Exceptions are made in times of war or international tension.
Quantitative Restrictions Right from the beginning, the United States sought the abolishment of quotas that limit imports to a predetermined quantity.
Quotas are an effective trade-restricting mechanism and are easily understood by all traders. However, it is literally impossible to administer quotas in any manner other than a discriminatory manner. Thus they call for the abolishment of quotas.
In the main, quotas have been phased out, with three major exceptions. First, Article XII is to apply such quotas on a most-favored-nation basis to the maximum extent possible.
The second major exception deals with trade in agricultural products. The developed countries typically have farm-income support programs that operate by maintaining farm prices above world prices.
In order to accomplish this, the domestic market must be separated from world markets. The United States separates these markets by the use of import quotas. The European Community uses a system of variable levies.
A variable levy is simply a tax on imports (like a tariff) that is adjusted daily to assure that import prices (inclusive of the variable levy) are maintained above a minimal target price for local farm products.
The third exception is governed by the GATT Long Term Arrangement Regarding International Trade in Cotton Textiles of 1962. Under this arrangement, countries whose markets for textiles and apparel are disrupted by imports can negotiate "orderly marketing agreements "with selected exporting countries, whereby the exporting country limits its exports to the importing country.