Fixing up the world – GATT and the World Trade Organisation

First published: March 1998

By Alan Freeman

Think of the world economy, and two household words come to mind: the International Monetary Fund and the World Bank, the two supranational bodies created by the Bretton Woods Treaty of 1947 when the allied powers constructed the post-war economic world order. It is less well-known that these two have been joined by another. The World Trade Organisation (WTO), formed in 1994 as a result of the 1986 ‘Uruguay Round’ of negotiations under the General Agreement on Tariffs and Trade (GATT), has emerged as the third pillar of the post-war economic order. Although generally presented as a simple continuation of GATT, it has in fact inaugurated a fundamental change in the organisation of world trade.

The GATT has been transformed from an ineffectual chamber of commerce into a powerful device for restructuring the world market in the commercial and financial interests of the leading powers, the core requirement being to maintain the supremacy of the US economy in the face of the largest trade deficit in world history.

It is supposed to expand world trade, generally perceived as a positive and harmless benefit to all nations. But whatever the free-trade rhetoric, its actual role is to integrate the non-aligned and former Eastern bloc nations into an unrestricted market for the products of a select club of imperialist nations, to suppress national sovereignty in favour of institutional guarantees for the systematic plunder of this market, and to grant this same club immunity from every competitive threat which might result.

The control of trade, alongside better-known devices like financial extortion and debt-slavery, has finally burst from the belly of the world market to claim its place as a primary instrument of advanced-country domination.


The new trade agenda

The WTO enshrines a radical new agenda in world trade. Its cornerstones are:

(a) Liberalising ‘services’ through GATS (General Agreements on Trade and Services) covering one-fifth of all world trade ($1 trillion). This is an institutional change masquerading as trade reform. Since financial services are treated as a ‘commodity’ it encapsulates a legal obligation to free capital movement, overriding the legitimate right to national economic sovereignty. Moreover the definition of exports has been extended in the case of services to include production by foreign-owned subsidiaries in the host country. Trade regulation has thus been extended for the first time to the internal market régimes of member states.

(b) A decisive new trade category of Intellectual Property Rights (IPRs). IPRs have as much to do with trade liberalisation as the free transport of slaves. They outlaw trade in products embodying any technology less than twenty years old – that is, almost everything – except as specified by the current owner of the technology. They are an absolute monopoly by the imperialist countries: 0.16 per cent of world patents are currently owned by third world residents (Mihevic). They make the owner of a technical process a separate legal entity distinct not only from the labourer but also the factory or farm-owner and the original inventor. They transform the ownership and control of technology into a marketable instrument of domination. They set in concrete the principal market mechanism that impoverishes the third world, namely the transfer of technological super-profit through trade.

(c) Large-scale anti-dumping (AD) actions as the preferred protectionist device of the USA, EEC and Australia/New Zealand, a practice baldly described by the World Bank as ‘a packaging of protectionism to make it look like something different’ (Hoekman and Kostecki (1995); from now on this is abbreviated to (HK)). Before 1986, anti-dumping actions were exceptional events. By 1992 they were universal advanced-country practice: 1040 anti-dumping actions were initiated by the industrialised countries between 1985 to 1992, over half directed against either Eastern Europe (132), the third world (137) or the developing Asian countries (297). The non-industrialised countries – three-quarters of the world’s people – initiated a grand total of 91.

(d) The consolidation of a system of trading blocks – ‘Free Trade Areas’ around the dominant capitalist countries: the EC, NAFTA and APEC — with specific exemption from the measures imposed on all other WTO members. Though article XXIV of the GATT proposes stringent conditions that a Free Trade Area must satisfy, these are never applied. As of 1990, only four working parties (of a total of over fifty) could agree that any regional agreement satisfied Article XXIV, three of these before 1957, ‘The GATT’s experience in testing FTAs (free Trade Areas) and customs unions against Article XXIV has not been very encouraging… It is not much of an exaggeration to say that GATT rules [on regional agreements] were largely a dead letter’ [HK 219]. In short, the imperialist countries do what they like.

From consensus to compulsion

This disparate series of changes is being cemented by converting a treaty organisation – the old GATT – into a supranational enforcement organisation that imposes and legislates not just trading relations but the internal property, tax and subsidy regimes of its members.

GATT held protracted ‘rounds’ of multi-party negotiations aimed at the mutual reduction of specific tariffs, subject to consensus. In effect, it was a brokering organisation for extending the bilateral arrangements which the big players would have made in any case to a slightly wider circle of participants: ‘In instances where the choice was between risking serious conflict and attempting to enforce the letter of GATT disciplines – for example on regional integration or subsidies – the contracting parties generally “blinked”. In large part this reflects the nature of the institution, which is basically a club. The club has rules, but its members can decide to waive them, or pretend not to see violations’ (HK:3).

Although historians see the GATT as the principal vehicle of trade liberalisation, this was in large measure because the major powers, under US hegemony, wanted to liberalise their own trade in any case to secure a share of exported US capital during the period when it still enjoyed industrial supremacy. GATT simply invited the others along for the ride.

The WTO marked two decisive changes. Firstly it moved from ‘result-orientation’ to ‘rule-orientation’; trade was now governed by laws and formulas instead of targeted commodities. This extends to legal trade regulations which the WTO obliges member governments to write into their own laws. Most significantly, these rules are now policed: ‘Formerly the GATT was not an international organisation (i.e. a legal entity in its own right) but an inter-governmental treaty. As a result, instead of ‘member states’ GATT had ‘contracting parties’… The WTO is an international organisation that administers multilateral agreements pertaining to trade in goods (GATT), trade in services (GATS), and trade-related aspects of intellectual property rights’ (HK:23).

If a member country breaches a WTO regulation, an enforcement process is triggered and consensus is required not to implement sanctions but to prevent them. If a third world country seeks exemption to protect its industries or agricultural producers from competition from the technologically more advanced Northern countries, it faces co-ordinated, punitive trade sanctions from all WTO members.

The reconstruction of the world market

What makes such threats effective is a systematic expansion of GATT and the WTO which has culminated in the re-establishment of a global world market previously sundered in two by the outcome of the Russian Revolution, two World Wars and the Chinese Revolution.

GATT was a minority club with a mere 23 signatories. The balance of forces was so weak that it proved impossible to establish the international trade organisation (ITO), called for in the Bretton Woods agreements. In the 1949 ‘Annecy’ round of negotiations a mere 11 countries took part. China withdrew in 1950 and the US, which had followed a fiercely protectionist stance between the wars, abandoned the attempt to secure congressional ratification of the ITO. Though the initial 1947 agreement secured a 21 per cent reduction in US tariffs, the next three rounds secured only a further 8.4 per cent reduction.

The term ‘free trade’ has never appeared on GATT’s formal agenda. The GATT-1947 preamble calls for ‘raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, developing the full use of the resources of the world and expanding the production and exchange of goods’. The principal mechanism was to reduce tariffs and eliminate discriminatory treatment.

No planned economy took part until 1967 when Poland joined, and the third world countries succeeded in neutralising or blocking the application of the GATT trade agreements to themselves through the non-aligned movement and the 1964 establishment of UNCTAD – the United Nations Conference on Trade and Development – which was formed to press for trade measures to benefit developing countries. The ‘Kennedy Round’ of 1963 involved 74 countries and spun out for four years. The practice of picking and choosing was so widespread it was nicknamed ‘GATT à la carte’. The ‘Tokyo round’ of 1973 involved 99 countries but lasted six years and was obliged to legalise preferential tariff and non-tariff treatment in favour of developing countries.

Thus though the developing countries were drawn into GATT’s orbit, access to a separate economic system in the USSR and Warsaw Pact countries offered them an important degree of autonomy. Though governed (and impoverished) by the world market they could veto many imperialist proposals, imposing selective controls on trade to protect domestic producers, and limiting the drain of capital brought on by unequal exchange, because they could always resort to (or threaten) trade with the Soviet or Chinese blocs instead. The ‘third world’ – a term coined by Mao Tse-Tung – took part in trade negotiations, but acted collectively to veto or water down measures that damaged domestic producers, offsetting, though not overcoming, the impact of the world market on domestic accumulation.

By the end of the Uruguay round, which began in 1986 and ended a gruelling eight years later, the scene had changed utterly. There were now 128 member countries including most former Eastern European countries. The former USSR no longer presented an effective alternative outlet or supplier. Aggressive ‘threat-based’ US policies, the debt crisis and the draconian intervention of the IMF with its structural adjustment, export-oriented programmes, produced the ‘neo-classical counter-revolution’ (Todaro 1994:85). Keynesians were replaced on the leading world financial institutions, and wave after wave of neo-liberal advisors and political regimes came to the fore in development economics and in the third world countries themselves. (Cheryl Payer presents strong evidence of a systematic World Bank campaign to discredit development economics and promote the new generation of pro-liberal economists such as Bhagwati.) Resistance gave way to capitulation; the new order had arrived.

Divergence, big time

The most fundamental point to grasp is that free trade produces inequality. The neo-classical doctrine of ‘convergence’ , for which the nearest adequate term is ‘cretinous’, is contrary to all known facts. Characterising 120 years of the world market as ‘Divergence, big time’, senior World Bank economist Lance Pritchett (1997:12) goes on to examine its more recent phase: ‘From 1980–1994, growth per capita GDP averaged 1.5 per cent in the advanced countries and 0.34 percent in the less developed countries. There has been no acceleration of growth in most poor countries, either absolutely or relatively, and there is no obvious reversal in divergence… taken together, these findings imply that almost nothing that is true about the growth rates of advanced countries is true of the developing countries, either individually or on average’ (Pritchett 1997:14).

It is convenient to discover the errors of World Bank policies with the WTO around to enforce them by threats and blackmail; it no longer matters whether the hapless victims believe them or not. Like 19th century missionaries, the economists have done their job; now the armies take over.

Technological change under capitalist conditions gives advanced industrial producers, selling into the same market as a backward producer, an excess or ‘super-profit’. Given a free market in goods and capital, this profit accumulates in the advanced nations, particularly if the state acts as guarantor of the capital transfer. This provides further funds to increase their technological lead, further increasing the gap. There is no end to this process under capitalism. The process of accumulation and technical change literally sucks the lifeblood from the poor nations.

This is the context for TRIPS (intellectual property rights) enforcement. This world market in knowledge is a major and profoundly anti-democratic new stage of capitalist development. The transformation of knowledge into property necessarily implies secrecy; communication itself violates property rights. The WTO is transforming what was previously a universal resource of the human race – its collectively, historically and freely-developed knowledge of itself and nature – into a private and marketable force of production.

As well as laying the foundation of hi-tech, software and genetic engineering fortunes the new category is transforming the whole nature of agriculture. Small agricultural producers the world over are now being forced, in effect, to abandon natural production from their own seed and pay premium prices for genetically engineered seeds. The consequence is no less than an end to the self-sufficiency of world agricultural production.

The WTO as institutional policeman

The second consequence is that the re-consolidation of a universal world market is, simply, the surest guarantee of the descent into starvation and poverty of the mass of the world’s peoples. The only escape for any nation except the small club of leaders is to except itself, in one way or another, from the general functioning of the market. This is why the old GATT could not be an enforcement agency and why the new WTO has to be an enforcement agency.

The WTO is now the third arm of the IMF and the World Bank, which work in consort to impose a complete institutional policy framework on the world. The banks impose open markets and free trade as a condition of credit and debt relief. But free trade is defined to mean an institutional regime which overrides the economic sovereignty of all but the largest players. This includes not just full capitalist property rights and the free movement of capital but extends to taxes, subsidies or any measure that can be construed as ‘unfair competition’ – that is, any element of state provision.

The original GATT agenda sought to avert a repeat of the interwar breakup into hostile trading blocks, and prioritised ‘non-discrimination’ and ‘reciprocity’. Non-discrimination states that members must make the same trade concessions to all others as to their ‘most-favoured nations’ (MFNs). Reciprocity states that there should be, in some (usually poorly-defined) sense, an equality of loss, which implies an exchange of reductions in barriers. These principles could apply in a small club where they extended essentially bilateral agreements to a wider circle. But in any wider reduction, the losses and gains for all partners cannot possibly be the same; there are losers and winners. This is why GATT functioned as it did, as a negotiating forum whose decisions were quite easy to avoid or bypass.

With enforcement and ‘rule-based’ tariff reductions it becomes impossible to ensure that all parties benefit. Therefore, everyone seeks exceptions to the rules. The industrial powers have established two systematic procedures for imposing their exceptions. This is the recourse to anti-dumping legislation, coupled with the GATT provision that exempts ‘trading blocs’ from most GATT regulations. The third world and transition countries have in contrast lost almost all exceptions to which they could previously resort. Moreover, the application of reciprocity is by nature asymmetrical between large and ‘small’ nations where ‘small’, it should be remembered, has to be translated into the language of money – in which India is one-fifth the size of the USA. As HK (163) note: ‘fundamentally, it is a fact of life that small economies (i.e. most developing countries) have little to bring to the negotiating table.’

This is the background to two further principles which have risen to prominence with the WTO: ‘fair competition’ and ‘market access’. Under fair competition any non-market production – or indeed, any element of subsidy – of any good for export is immediately in violation of WTO principles.

But the market access rule involves the most far-reaching consequences of institutional enforcement because of the role played by services, which characterise the new stage of capital exports. Fifty per cent of the global stock of foreign direct investment is now in services.

Most service activities can only be provided locally, so to reach foreign markets a service provider must locate in the host country. On US insistence, the WTO now provides that services provided by a foreign-owned subsidiary constitute exports and must be able to compete on a ‘level playing field’ with domestic producers. If generalised, this principle would mean, for example, that a US health company in the UK could initiate a GATT action against the UK for unfair competition by the NHS.

This position is not yet settled. The G-10 group of larger developing countries opposed it vigorously, supported by UNCTAD which proposed to define trade in services as occurring only when the majority of value added is produced by non-residents; a labour-, in fact human-based, criterion. It embodies the simple principle that a nation’s residents should determine what happens in their own economy. The US proposal, a property-based principle, asserts that the economic right of the owner overrules the political rights of the people.

In 1990 Martin Khor Kok Peng (p37) accurately predicted that: ‘the [Uruguay] round is an attempt by transnational companies to establish sets of international laws that would grant them unprecedented unfettered freedoms and rights to operate at will and without fear of new competitors almost anywhere in the world’.


Chossudovsky, M (1997) The Globalization of Poverty, Impacts of IMF and World Bank Reforms. Penang: Third World Network, and London: Zed Books.

Hoekman, B and Michel Kostecki (1995) The Political Economy of the World Trading System: from GATT to WTO. Oxford: OUP.

Mihevic (1995) The Market Tells them So. London: Zed.

Pritchett, Lance (1997) ‘Divergence, Big Time’, Journal of Economic Perspectives Summer 1997, pp3–17).

Todaro, M.P. (1994) Economic Development. New York: London.