General Agreement on Tariffs and Trade (Gatt)

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GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

Prior to World War I (1914–18), world trade flourished and international monetary relations were healthy.

After 1860 a network of bilateral treaties based on most-favored-nation principals (MFN) governed trade

relationships. Nations had flexibility to set and revise tariffs as long as they (tariffs) were consistent with

MFN ideals. (A tariff is a special tax applied to imports to protect a domestic market from a competing

foreign products or sometimes simply to raise revenue for the government.) Tariffs increase the costs of

imports by foreign competitors or by a company domiciled in the U.S. but which exports from another

country, thus making it more difficult for the company to be competitive. Besides tariffs, few other trade

barriers existed during this early period.

World War I severely undermined existing trade networks as countries charged higher tariffs and

introduced import quotas and other controls. These trade barriers persisted after the war, because there

was no central authority to reestablish prior order to world trade. Trade reform was an international focus

until the Great Depression (1929–1939) struck in 1929. The 1930s witnessed greater protectionism

measures, discriminatory trade practices, and other trade actions that impeded international commerce.

As a result, during the 1930s world trade stagnated, not keeping pace with increased economic

production. Another complicating factor was that the Peace Treaty of Versailles that ended the First

World War allowed the Allies (especially France and Great Britain) to receive huge payments of war

reparations from Germany. The final amount of reparations, established in 1921, was $56 billion. These

reparations cut into the financial resources of central Europe. In addition, the erection of protective

tariffs, hobbled Europe's economic recovery, perpetuated poverty, and probably contributed to the rise of

fascist nationalistic movements in Italy and Germany during the 1920s and 1930s.

To insure that the World War I precedent of war reparations and protectionism was not renewed at the

end of World War II (1939–1945), the United States and Great Britain immediately took steps to

arrive at international cooperation among the non-socialist economies of post-war Europe. Rather than

further drain Europe's devastated economies, the United States injected much needed economic

assistance in the form of the Marshall Plan, which was an attempt to help reconstruct Europe in order to

neutralize the considerable political appeal of socialist and communist parties after the war. As part of the

economic program for the Western Allies after World War II, trade barriers were reduced and

discriminatory tariff preferences were eliminated wherever possible.

It was in this political and economic climate that the General Agreement on Tariffs and Trade (GATT)

resulted from a 1947 meeting of 22 nations (representing 80 percent of world trade) in Geneva,

Switzerland. GATT, a specialized agency of the United Nations, comprised a system of international

obligations to limit tariffs on particular items consistent with a set schedule. GATT's primary goal was to

raise living standards and seek full employment by establishing mutually beneficial trade arrangements.

GATT sought to reduce or eliminate tariffs and prohibit other trade controls such as import quotas.

Thus, unlike post–World War I experiences, the world economy following World War II witnessed

expanding international commerce with lowered trade barriers. The extent to which GATT contributed to

the economic success was a subject of debate. Many believed the organization's successes at

periodically reducing trade barriers had greater influence on the post–World War II economic boom than

other institutions including the World Bank and the International Monetary Fund. With the United States

taking the lead, tariffs of industrialized countries fell from approximately 40 percent immediately following

World War II to about five percent in the mid-1990s.

The history of GATT was marked by a series of eight negotiating rounds aimed at steadily reducing trade

barriers. Some rounds took years to reach signed agreement. The first five rounds, occurring in 1947–

1962, expanded membership but they did little to further tariff reduction or eliminate import quotas. Trade

reform and, correspondingly, post-war economic recovery were slow through the 1950s. The sixth round,

known as the Kennedy Round, lasted from 1962–1967, producing the most substantial tariff reductions of

the post-war period. The following Tokyo Round of 1973–1979 added more reductions, and it also

developed a code of conduct and made progress on other barrier restrictions.

The eighth series of negotiations, the Uruguay Round, led to more than 20 separate agreements in

1994. The 124 participating nations made substantial progress in several areas. Notably, the 47-year-old

GATT organization was replaced by the newly created World Trade Organization (WTO). Unlike GATT,

WTO was provided international dispute resolution authority. The participants established more stringent

rules on investment and trade in service industries. (Service includes engineering, tourism, accounting,

and construction industries.)

The WTO recognized intellectual property rights: trademarks received seven years of protection, patents

20 years, and copyrights 50 years. Inclusion of such property rights was a major benefit to U.S. software

industry. It protected books, computer software, film, and pharmaceutical products from piracy. The

agreements further reduced tariffs overall by a third. While industrialized nations agreed to completely

eliminate some tariffs by 2005, developing countries agreed to hold tariff rates to set levels. This reduction

was the largest at that time. Tariffs eliminated by developed countries included a range of products such

as construction, agricultural, medical equipment, steel, alcoholic beverages, paper products, and

pharmaceuticals. Provisions were made to allow nations to withdraw from agreements based on

environmental protection concerns.

Occasionally the hardship of structural relocation of industries in order to arrive at a global division of

labor produced political backlash that impeded the implementation of GATT goals. For instance, the U.S.

textile industry, which had helped to define the regional economies of the Northeast and Southeast and

the West, resisted being phased out to developing nations. The result was the continued protection of

U.S. textiles, with tariffs in place as social factors outweighed economics. However, prior protectionist

agreements, such as the Multi-Fiber Agreement, established that U.S. import quotas would eventually be

phased out. Officials continued to expect that developing countries would eventually take over textile and

apparel production.

GATT/WTO supporters estimated U.S. income would be boosted by $122 billion by 2005 and exports

would double to one trillion dollars by 2010. U.S. manufacturers thought to benefit most from the Uruguay

round were producers of food and chemical products, industrial machinery, computer and

telecommunications equipment, and scientific instruments.

Many U.S. jobs in industries previously protected by tariffs migrated to the cheap labor markets of

developing countries and Eastern Europe. The U.S. workers who used to fill those jobs could only hope

that the promise of new business opportunities and new jobs through expanded international trade would

be fulfilled.

See also: Foreign Investment in the United States, Foreign Investment of U.S.

Companies Abroad, North American Free Trade Agreement

FURTHER READING

Bhagwati, Jagdish, and Mathias Hirsch, eds. The Uruguay Round and Beyond: Essays in Honor of Arthur

Dunkel. Ann Arbor, MI: University of Michigan Press, 1998.

Hoekman, Bernard M., and Michel M. Kostecki. The Political Economy of the World Trading System:

From GATT to WTO. New York: Oxford University Press, 1995.

Jackson, John Howard. The World Trading System: Law and Policy of International Economic Relations,

2nd ed. Cambridge, MA: MIT Press, 1997.

Jackson, John H., and Alan O. Sykes. Implementing the Uruguay Round. New York: Oxford University

Press, 1997.

Martin, Will, and L. Alan Winters, eds. The Uruguay Round and the Developing Countries. New York:

Cambridge University Press, 1996.

Preeg, Ernest H. Traders in a Brave New World: The Uruguay Round and the Future of the International

Trading System. Chicago: University of Chicago Press, 1995.

Cite this article Pick a style below, and copy the text for your bibliography.

. What is the main purpose of the GATS? back to top

The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose results entered into force in January 1995. The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT): creating a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants (principle of non-discrimination); stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.

While services currently account for over 60 percent of global production and employment, they represent no more than 20 per cent of total trade (BOP basis). This — seemingly modest — share should not be underestimated, however. Many services, which have long been considered genuine domestic activities, have increasingly become internationally mobile. This trend is likely to continue, owing to the introduction of new transmission technologies (e.g. electronic banking, tele-health or tele-education services), the opening up in many countries of long-entrenched monopolies (e.g. voice telephony and postal services), and regulatory reforms in hitherto tightly regulated sectors such as transport. Combined with changing consumer preferences, such technical and regulatory innovations have enhanced the “tradability” of services and, thus, created a need for multilateral disciplines.

2. Which countries participate? back to top

All WTO Members, some 140 economies at present, are at the same time Members of the GATS and, to varying degrees, have assumed commitments in individual service sectors.

3. What services are covered? back to top

The GATS applies in principle to all service sectors, with two exceptions.

Article I(3) of the GATS excludes “services supplied in the exercise of governmental authority”. These are services that are supplied neither on a commercial basis nor in competition with other suppliers. Cases in point are social security schemes and any other public service, such as health or education, that is provided at non-market conditions.

Further, the Annex on Air Transport Services exempts from coverage measures affecting air traffic rights and services directly related to the exercise of such rights.

4. Is it true that the GATS not only applies to cross-border flows of services, but additional modes of supply? back to top

The GATS distinguishes between four modes of supplying services: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.

Cross-border supply is defined to cover services flows from the territory of one Member into the territory of another Member (e.g. banking or architectural services transmitted via telecommunications or mail);

Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another Member's territory to obtain a service;

Commercial presence implies that a service supplier of one Member establishes a territorial presence, including through ownership or lease of premises, in another Member's territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and

Presence of natural persons consists of persons of one Member entering the territory of another Member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that Members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis.

5. Why was it necessary to introduce, apart from the traditional concept of cross-border trade, three additional modes of supply? back to top

The supply of many services is possible only through the simultaneous physical presence of both producer and consumer. There are thus many instances in which, in order to be commercially meaningful, trade commitments must extend to cross-border movements of the consumer, the establishment of a commercial presence within a market, or the temporary movement of the service provider himself.

6. Does the GATS affect a Member's ability to pursue national policy objectives and priorities? back to top

The GATS expressly recognizes the right of Members to regulate the supply of services in pursuit of their own policy objectives, and does not seek to influence these objectives. Rather, the Agreement establishes a framework of rules to ensure that services regulations are administered in a reasonable, objective and impartial manner and do not constitute unnecessary barriers to trade.

7. What are the basic obligations under the GATS? back to top

Obligations contained in the GATS may be categorized into two broad groups: General obligations, which apply directly and automatically to all Members and services sectors, as well as commitments concerning market access and national treatment in specifically designated sectors. Such commitments are laid down in individual country schedules whose scope may vary widely between Members. The relevant terms and concepts are similar, but not necessarily identical to those used in the GATT; for example, national treatment is a general obligation in goods trade and not negotiable as under the GATS.

(a) General obligations

MFN Treatment: Under Article II of the GATS, Members are held to extend immediately and unconditionally to services or services suppliers of all other Members “treatment no less favourable than that accorded to like services and services suppliers of any other country”.

This amounts to a prohibition, in principle, of preferential arrangements among groups of Members in individual sectors or of reciprocity provisions which confine access benefits to trading partners granting similar treatment.

Derogations are possible in the form of so-called Article II-Exemptions. Members were allowed to seek such exemptions before the Agreement entered into force. New exemptions can only be granted to new Members at the time of accession or, in the case of current Members, by way of a waiver under Article IX:3 of the WTO Agreement. All exemptions are subject to review; they should in principle not last longer than 10 years. Further, the GATS allows groups of Members to enter into economic integration agreements or to mutually recognize regulatory standards, certificates and the like if certain conditions are met.

Transparency: GATS Members are required, inter alia, to publish all measures of general application and establish national enquiry points mandated to respond to other Member's information requests.

Other generally applicable obligations include the establishment of administrative review and appeals procedures and disciplines on the operation of monopolies and exclusive suppliers.

(b) Specific Commitments

Market Access: Market access is a negotiated commitment in specified sectors. It may be made subject to various types of limitations that are enumerated in Article XVI(2). For example, limitations may be imposed on the number of services suppliers, service operations or employees in the sector; the value of transactions; the legal form of the service supplier; or the participation of foreign capital.

National Treatment: A commitment to national treatment implies that the Member concerned does not operate discriminatory measures benefiting domestic services or service suppliers. The key requirement is not to modify, in law or in fact, the conditions of competition in favour of the Member's own service industry. Again, the extension of national treatment in any particular sector may be made subject to conditions and qualifications.

Members are free to tailor the sector coverage and substantive content of such commitments as they see fit. The commitments thus tend to reflect national policy objectives and constraints, overall and in individual sectors. While some Members have scheduled less than a handful of services, others have assumed market access and national treatment disciplines in over 120 out of a total of 160-odd services.

The existence of specific commitments triggers further obligations concerning, inter alia, the notification of new measures that have a significant impact on trade and the avoidance of restrictions on international payments and transfers.

8. What information is contained in services “schedules”? back to top

Each WTO Member is required to have a Schedule of Specific Commitments which identifies the services for which the Member guarantees market access and national treatment and any limitations that may be attached. The Schedule may also be used to assume additional commitments regarding, for example, the implementation of specified standards or

regulatory principles. Commitments are undertaken with respect to each of the four different modes of service supply.

Most schedules consist of both sectoral and horizontal sections. The “Horizontal Section” contains entries that apply across all sectors subsequently listed in the schedule. Horizontal limitations often refer to a particular mode of supply, notably commercial presence and the presence of natural persons. The “Sector-Specific Sections” contain entries that apply only to the particular service.

All schedules are available on the WTO website.

9. When did Members' specific commitments enter into force? back to top

The majority of current commitments entered into force on 1 January 1995, i.e. the date of entry into force of the WTO. New commitments have since been scheduled by participants in extended negotiations (see below) and by new Members that have joined the WTO.

10. Can commitments be introduced or improved outside the context of multilateral negotiations? back to top

Yes, any Member is free to expand or upgrade its existing commitments at any time.

11. Can specific commitments be withdrawn or modified? back to top

Pursuant to Article XXI, specific commitments may be modified subject to certain procedures. Countries which may be affected by such modifications can request the modifying Member to negotiate compensatory adjustments; these are to be granted on an MFN basis.

12. Are there any specific exemptions in the GATS to cater for important national policy interests? back to top

The GATS permits Members in specified circumstances to introduce or maintain measures in contravention of their obligations under the Agreement, including the MFN requirement or specific commitments. The relevant Article provides cover, inter alia, for measures necessary to:

protect public morals or maintain public order;

protect human, animal or plant life or health; or

secure compliance with laws or regulations not inconsistent with the -Agreement including, among others, measures necessary to prevent deceptive or fraudulent practices.

Moreover, the Annex on Financial Services entitles Members, regardless of other provisions of the GATS, to take measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.

Finally, in the event of serious balance-of-payments difficulties Members are allowed to temporarily restrict trade, on a non-discriminatory basis, despite the existence of specific commitments.

13. Are there special provisions for developing countries? back to top

Developing country interests have inspired both the general structure of the Agreement as well as individual Articles. In particular, the objective of facilitating the increasing participation of developing countries in services trade has been enshrined in the Preamble to the Agreement and underlies the provisions of Article IV. This Article requires Members, inter alia, to negotiate specific commitments relating to the strengthening of developing countries' domestic services capacity; the improvement of developing countries' access to distribution channels and information networks; and the liberalization of market access in areas of export interest to these countries.

While the notion of progressive liberalization is one of the basic tenets of the GATS, Article XIX provides that liberalization takes place with due respect for national policy objectives and Members' development levels, both overall and in individual sectors. Developing countries are thus given flexibility for opening fewer sectors, liberalizing fewer types of transactions, and progressively extending market access in line with their development situation. Other provisions ensure that developing countries have more flexibility in pursuing economic integration policies, maintaining restrictions on balance of payments grounds, and determining access to and use of their telecommunications transport networks and services. In addition, developing countries are entitled to receive technical assistance from the WTO Secretariat.

14. What is the so-called “built-in agenda” of the GATS? back to top

The GATS, including its Annexes and Related Instruments, sets out a work programme which is normally referred to as the “built-in” agenda. The programme reflects both the fact that not all services-related negotiations could be concluded within the time frame of the Uruguay Round, and that Members have already committed themselves, in Article XIX, to successive rounds aimed at achieving a progressively higher level of liberalization (see below). In addition, various GATS Articles provide for issue-specific negotiations intended to define rules and disciplines for domestic regulation (Article VI), emergency safeguards (Article X), government procurement (Article XIII), and subsidies (Article XV). These negotiations are currently under way.

At the sectoral level, negotiations on basic telecommunications were successfully concluded in February 1997 and negotiations in the area of financial services in mid-December 1997. In these negotiations, Members achieved significantly improved commitments with a broader level of participation.

15. Are the results of the extended sectoral negotiations in telecommunications and financial services legally different from other sector-specific commitments? back to top

No. The results of sectoral negotiations are new specific commitments and/or MFN exemptions related to the sector concerned. Thus, they are neither legally independent from other sector-specific commitments nor constitute agreements different from the GATS. The new commitments and MFN exemptions have been incorporated into the existing Schedules and Exemption Lists by way of separate Protocols to the GATS.

16. Why was a new services round necessary? back to top

In services, the Uruguay Round was only a first step in a longer-term process of multilateral rule-making and trade liberalization. Observers tend to agree that, while the negotiations succeeded in setting up the principle structure of the Agreement, the liberalizing effects have been relatively modest. Barring exceptions in financial and telecommunication services, most schedules have remained confined to confirming status quo market conditions in a relatively limited number of sectors. This may be explained in part by the novelty of the Agreement and the perceived need of Members to gather experience before considering wider and deeper commitments. Moreover, many administrations needed time to develop the necessary regulation — including quality standards, licensing and qualification requirements — that ensures that external liberalization is compatible with, and conducive to, core policy objectives (quality, equity, etc.) in socially or infrastructurally important services.

More than ten years have passed since the Agreement's inception, and the economic importance of services — in terms of production, income, employment and trade — has continued to rise. There thus appears ample scope for new and/or improved commitments in new negotiations.

17. What has been achieved to date in the new services round? back to top

Under Article XIX, Members are (self-)committed to launch successive rounds of services negotiations with a view to achieving a progressively higher level of liberalization. The first such round was to begin no later than five years from the date of entry into force of the Agreement and, accordingly, started in January 2000. The initial focus was mainly on the built-in agenda with a view to creating a sound basis for the negotiations of new specific commitments. During a stock-taking session in March 2001, Members agreed on the Negotiating Guidelines and Procedures for the new round (document S/L/93) and discussed a first series of sector proposals which had been submitted by individual countries; the Guidelines and all proposals are available on the WTO Web Site.

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Set of multilateral trade agreements aimed at the abolition of quotas and the reduction of tariff duties among the signing nations. Originally signed by 23 countries at Geneva in 1947, GATT became the most effective instrument in the massive expansion of world trade in the later 20th century. By 1995, when

GATT was replaced by the World Trade Organization (WTO), 125 nations had signed its agreements, which governed 90% of world trade. GATT's most important principle was trade without discrimination, in which member nations opened their markets equally to one another. Once a country and its largest trading partners agreed to reduce a tariff, that tariff cut was automatically extended to all GATT members. GATT also established uniform customs regulations and sought to eliminate import quotas. It sponsored many treaties that reduced tariffs, the last of which, signed in Uruguay in 1994, established the WTO.

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General Agreement on Tariffs and Trade(GATT), former specialized agency of the United Nations. It was established in 1948 as an interim measure pending the creation of the International Trade Organization. However, plans for the latter were abandoned and GATT continued to exist until the end of 1995. Members of GATT were pledged to work together to reduce tariffs and other barriers to international trade and to eliminate discriminatory treatment in international commerce. The most important service of GATT was to negotiate multilateral extensions of tariff reductions through the

application of the most-favored-nation clause most-favored-nation clause (MFN), provision in

a commercial treaty binding the signatories to extend trading benefits equal to those accorded any third

state.

..... Click the link for more information. . GATT also provided for regular meetings to consider other

problems of international trade. An important GATT principle was that protection of domestic industries was to be done strictly through tariffs and not measures such as import quotas. The only exceptions

permitted to GATT rules were those dealing with balance of payments balance of

payments,balance between all payments out of a country within a given period and all payments into

the country, an outgrowth of the mercantilist theory of balance of trade.

..... Click the link for more information. difficulties, and these exceptions are carefully supervised.

GATT provided the framework for most important international tariff negotiations from 1947 until 1994. The eighth, or Uruguay round, of GATT negotiations, which began in 1986 with 15 negotiating groups, was long stalemated by the issue of agricultural subsidies maintained by the European Community. The agreement that resulted (1994) from the Uruguay round led to the creation (1995) of the more powerful

World Trade Organization World Trade Organization(WTO), international organization

established in 1995 as a result of the final round of the General Agreement on Tariffs and Trade (GATT)

negotiations, called the Uruguay Round.

..... Click the link for more information. (WTO) as a replacement for GATT. However, the GATT

framework remained in place for a 12-month transition period. The Columbia Electronic Encyclopedia® Copyright © 2007, Columbia University Press. Licensed from Columbia University Press. All rights reserved. www.cc.columbia.edu/cu/cup/

General Agreement on Tariffs and Trade (GATT)

Set of multilateral trade agreements aimed at the abolition of quotasand the reduction of tariffduties among the signing nations. Originally signed by 23 countries at Geneva in 1947, GATT became the most effective instrument in the massive expansion of world trade in the later 20th century. By 1995, when GATT was replaced by the World Trade Organization(WTO), 125 nations had signed its agreements, which governed 90% of world trade. GATT's most important principle was trade without discrimination, in which member nations opened their markets equally to one another. Once a country and its largest trading partners agreed to reduce a tariff, that tariff cut was automatically extended to all GATT members. GATT also established uniform customs regulations and sought to eliminate import quotas. It sponsored many treaties that reduced tariffs, the last of which, signed in Uruguay in 1994, established the WTO.

For more information on General Agreement on Tariffs and Trade (GATT), visit Britannica.com. Britannica Concise Encyclopedia. Copyright © 1994-2008 Encyclopædia Britannica, Inc.

Warning! The following article is from The Great Soviet Encyclopedia (1979). It might be outdated or ideologically biased.

General Agreement on Tariffs and Trade

a multilateral intergovernmental agreement on the system of trade and trade policy, signed in Geneva in October 1947 by 23 countries. By early 1971 more than 90 countries, including the socialist states of Cuba, Poland, Czechoslovakia, and Yugoslavia, were party to GATT under various conditions. The GATT secretariat is located in Geneva.

GATT includes an agreement on principles of trade policy that the participating countries must observe in foreign trade and an agreed-upon list of mutual concessions. On the basis of this list the contracting parties sign bilateral treaties within the framework of GATT. The aim of the agreement was the renunciation by the contracting parties of quantitative restrictions on import as a means of foreign trade policy. However, the principles of the trade policy laid down in GATT were used by the imperialist countries to a large extent in their own interest. The socialist countries using the GATT mechanism are trying to improve their trade and political positions with respect to the capitalist countries that are party to the agreement. During its existence GATT has lowered customs tariffs in trade between its members. At the same time the agreement has not provided the proclaimed aim of liberalization of foreign trade, in view of contradictions between the major capitalist countries, contradictions that have become especially acute with the setting up of exclusive integrated economic blocs such as the European Economic Community and the European Free Trade Association. Moreover, while advancing demands for trade liberalization, GATT does not make the necessary distinctions between the developed capitalist countries and the developing countries. In demanding from the latter a renunciation of quantitative restrictions on the import of industrial goods, GATT in effect hinders the development of a domestic industry in these countries. At the same time the retention of the restrictions on the imports of agricultural goods and raw materials allowed by GATT slows down the growth of export of the developing countries and adversely affects their economic position.

In 1965 a special committee was set up within the GATT secretariat. Formally this committee was to deal with the problems of the developing countries, but in effect its establishment by the Western powers was intended to reduce the importance of the UN Conference on Trade and Development, which was set up in 1964. Beginning in 1964 the negotiations on mutual tariff concessions, the so-called Kennedy round, were conducted within the framework of GATT. In view of contradictions between the contracting parties these negotiations lasted until 1967. They ended with a series of mutual trade concessions, but the main demands of the developing countries, such as elimination of barriers to export other than tariffs, remained unfulfilled.

Absolute advantage. An advantage that a country has in producing certain goods or servicesrelative to all or many other countries due to specific factors of production at its

disposal- such as rich farmland and a favorable climate for agricultural production or a highly educated labor force for high-tech manufacturing. A country's absolute advantage

means that it can produce certain goods or services at a lower cost than would be possible for other countries. Thus it is clearly beneficial for this country to specialize in producing and

exporting these goods and services. But even countries that do not have any absolute advantages can benefit from international trade; see comparative advantage.

Glossary

Absolute advantage. An advantage that a country has in producing certain goods or servicesrelative to all or many other countries due to specific factors of production at its disposal- such as rich farmland and a favorable climate for agricultural production or a highly educated labor force for high-tech manufacturing. A country's absolute advantage means that it can produce certain goods or services at a lower cost than would be possible for other countries. Thus it is clearly beneficial for this country to specialize in producing and exporting these goods and services. But even countries that do not have any absolute advantages can benefit from international trade; see comparative advantage.

Access to safe water.The percentage of the population with reasonable means of getting safe water- either treated surface water or clean untreated water from springs, wells, or protected boreholes.

Accumulation of capital. Using investment to build capital assets.

Adult illiteracy.The percentage of the population 15 and older who cannot, with understanding, read and write a simple statement about their everyday life.

Age dependency ratio.The ratio of the nonworking population- people under 15 or over 65-to the working population- people 15-64. In 1996 the average ratio for low-income countrieswas 0.7, for middle-income countries 0.6, and for high-income countries 0.5.

Agriculture.The sector of an economy that includes crop production, animal husbandry, hunting, fishing, and forestry.

Birth rate.The number of live births in a year expressed as a percentage of the population or per 1,000 people.

Capital (capital assets).A stock of wealth used to produce goods and services. Modern economists divide capital into physical capital (also called produced assets), natural capital, and human capital.

Carbon dioxide emissions per capita.The amount of carbon dioxide a country releases into the atmosphere during a certain period- usually one year- divided by the total population of that country. Large amounts of carbon dioxide are released when people burn fossil fuelsand biomass- fuelwood, charcoal, dung- to produce energy.

Chlorofluorocarbons (CFCs).Cheap synthetic gases that serve as coolants in refrigerators and air conditioners and as propellants in aerosol spray cans. Although originally considered harmless, CFCs are now known to accumulate in the earth's atmosphere, where they destroy the protective ozonelayer and trap the sun's heat- contributing to the greenhouse effect (see greenhouse gases). The use of CFCs is now controlled by the Montreal Protocol, an agreement signed by many countries.

Comparative advantage.The concept, formulated by British economist David Ricardo, according to which economic agents- people, firms, countries- are most efficient when they do the things that they are best at doing. Comparative advantage is particularly important in global markets, where countries benefit most by producing and exporting goods and services that they can produce more efficiently (at a lower cost, by using less physical, human, and natural capital) than other goods and services. In particular, Ricardo showed that a country can benefit from international trade even if it has higher costs of production for all traded goods and services relative to the countries it trades with- that is, even if it has no absolute advantageswhatsoever. This can be done by correctly choosing the country's international specialization in accordance with its comparative advantages. In this case, by using export earnings to import other goods and service at prices that are lower than the costs of their domestic production, the country will maximize the overall volume of national production and consumption.

Countries with transition economies (transition countries, transition economies).Countries moving from centrally planned to market-oriented economies. These countries- which include China, Mongolia, Vietnam, former republics of the Soviet Union, and the countries of Central and Eastern Europe- contain about one-third of the world's population.

Death rate.The number of deaths in a year expressed as a percentage of the population or per 1,000 people.

Demilitarization.Orientation of a country's economy away from military production. The opposite of militarization.

Demography.The scientific study of human populations, including their size, composition, distribution, density, and growth as well as the causes and socioeconomic consequences of changes in these factors.

Developed countries (industrial countries, industrially advanced countries). High-income countries, in which most people have a high standard of living. Sometimes also defined as countries with a large stock of physical capital, in which most people undertake highly specialized activities. According to the World Bankclassification, these include all high-income economies except Hong Kong (China), Israel, Kuwait, Singapore, and

the United Arab Emirates. Depending on who defines them, developed countries may also include middle-income countries with transition economies, because these countries are highly industrialized. Developed countries contain about 15 percent of the world's population. They are also sometimes referred to as "the North."

Developing countries. According to the World Bankclassification, countries with low or middle levels of GNP per capita as well as five high-income developing economies-Hong Kong (China), Israel, Kuwait, Singapore, and the United Arab Emirates. These five economies are classified as developing despite their high per capita income because of their economic structure or the official opinion of their governments. Several countries with transition economiesare sometimes grouped with developing countries based on their low or middle levels of per capita income, and sometimes with developed countriesbased on their high industrialization. More than 80 percent of the world's population lives in the more than 100 developing countries.

Economic development.Qualitative change and restructuring in a country's economy in connection with technological and social progress. The main indicator of economic development is increasing GNP per capita(or GDP per capita), reflecting an increase in the economic productivity and average material wellbeing of a country's population. Economic development is closely linked with economic growth.

Economic growth.Quantitative change or expansion in a country's economy. Economic growth is conventionally measured as the percentage increase in gross domestic product (GDP) or gross national product (GNP)during one year. Economic growth comes in two forms: an economy can either grow "extensively" by using more resources (such as physical, human, or natural capital) or "intensively" by using the same amount of resources more efficiently (productively). When economic growth is achieved by using more labor, it does not result in per capita income growth (see Chapter 4). But when economic growth is achieved through more productive use of all resources, including labor, it results in higher per capita income and improvement in people's average standard of living. Intensive economic growth requires economic development.

Energy use per capita.The amount of energy a country consumes in a certain period- usually one year- divided by the population of that country. This includes fossil fuelsburned by machines (such as cars), as well as electricity generated from nuclear power, geothermal power, hydropower, and fossil fuels. No matter what its source, energy use per capita is measured in equivalent amounts of oil. Though substantial in some developing countries, energy from biomass- fuelwood, charcoal, dung- not considered in this statistic because reliable data are not available.

European Union (EU).A regional international organization with most developed countriesof Europe among its members. In 1995 it succeeded the European Economic Community (EEC), established in 1957 to promote economic integration among its member countries.

Externalities.Effects of a person's or firm's activities on others which are not compensated. Externalities can either hurt or benefit others- they can be negative or positive. One negative externality arises when a company pollutes the local environment to produce its goods and does not compensate the negatively affected local residents. Positive externalities can be produced through primary education- which benefits not only primary

students but also society at large. Governments can reduce negative externalities by regulating and taxing goods with negative externalities. Governments can increase positive externalities by subsidizing goods with positive externalities or by directly providing those goods.

Fertility rate. See total fertility rate.

Foreign direct investment. Foreign investmentthat establishes a lasting interest in or effective management control over an enterprise. Foreign direct investment can include buying shares of an enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates. International Monetary Fund (IMF)guidelines consider an investment to be a foreign direct investment if it accounts for at least 10 percent of the foreign firm's voting stock of shares. However, many countries set a higher threshold because 10 percent is often not enough to establish effective management control of a company or demonstrate an investor's lasting interest.

Foreign investment. Investment in an enterprise that operates outside the investor's country. See also foreign direct investmentand portfolio investment.

Fossil fuels.Coal, natural gas, and petroleum products (such as oil) formed from the decayed bodies of animals and plants that died millions of years ago. A nonrenewable source of energy.

GDP. See gross domestic product.

General Agreement on Tariffs and Trade (GATT).From 1947 until 1995, an international organization with a mandate to reduce protectionand promote free trade among nations. Many barriers to trade- import tariffs, import quotas, and others- were reduced during its eight rounds of international negotiations. Issues discussed during the last round of GATT negotiations, in Uruguay (1986-94), included reducing government restrictions on foreign investment and on trade in services such as banking, insurance, transport, tourism, and telecommunications. In 1995 GATT was succeeded by the World Trade Organization (WTO).

GNP. See gross national product.

GNP per capita. A country's gross national product (GNP)divided by its population. Shows the income each person would have if GNP were divided equally. Also called income per capita. GNP per capita is a useful measure of economic productivity, but by itself it does not measure people's well-being or a country's success in development. It does not show how equally or unequally a country's income is distributed among its citizens. It does not reflect damage made by production processes to natural resources and the environment. It does not take into account any unpaid work done within households or communities or production taking place in the gray (shadow) economy. It attributes value to anything being produced whether it harms or contributes to general welfare (for example, medicines and chemical weapons). And it ignores the value of such elements of people's well-being as leisure or freedom.

Gray economy (shadow economy).Consists of business activities that are not accounted for by official statistics. It includes illegal activities (or the socalled black market) and activities that are in themselves legal but go unreported or under-reported for purposes of tax evasion.

Greenhouse gases.Gases that trap the sun's heat within the earth's atmosphere, creating a greenhouse effect that may dangerously raise temperatures around the globe. Greenhouse gases include ozone, methane, water vapor, nitrousoxide, carbon dioxide, and chlorofluorocarbons (CFCs).

Gross domestic investment rate.All the outlays made to replace and increase a country's physical capital, plus changes in inventories of goods, expressed as a percentage of GDP. Gross domestic investment, along with foreign direct investment, is critical for economic growthand economic development.

Gross domestic product (GDP).The value of all final goods and servicesproduced in a country in one year (see also gross national product). GDP can be measured by adding up all of an economy's incomes- wages, interest, profits, and rents- or expenditures- consumption, investment, government purchases, and net exports (exports minus imports). Both results should be the same because one person's expenditure is always another person's income, so the sum of all incomes must equal the sum of all expenditures.

Gross domestic saving rate. Gross domestic product(GDP) minus consumption by government and the private sector, expressed as a percentage of GDP. A high gross domestic saving rate usually indicates a country's high potential to invest. See also savings.

Gross enrollment ratio.The number of students enrolled at a certain level of education as a percentage of the population of the age group that officially corresponds to that level. Can be above 100 percent if some enrolled students are older or younger than the age group that officially corresponds to that level of education.

Gross national product (GNP).The value of all final goods and servicesproduced in a country in one year (gross domestic product) plus income that residents have received from abroad, minus income claimed by nonresidents. GNP may be much less than GDP if much of the income from a country's production flows to foreign persons or firms. But if the people or firms of a country hold large amounts of the stocks and bonds of firms or governments of other countries, and receive income from them, GNP may be greater than GDP. For most countries, however, these statistical indicators differ insignificantly (see Chapter 2). "Gross" indicates that the value lost through the "wear and tear" of capital used in production is not deducted from the value of total output. If it were deducted, we would have a measure called net domestic product (NDP), also known as national income. The words "product" and "income" are often used interchangeably, so GNP per capita is also called

income per capita.

Definition of 'Tariff'

A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. They are one of several tools available to shape trade policy.

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Investopedia explains 'Tariff'

Governments may impose tariffs to raise revenue or to protect domestic industries from foreign competition, since consumers will generally purchase cheaper foreign produced goods. Tariffs can lead to less efficient domestic industries, and can lead to trade wars as exporting countries reciprocate with their own tariffs on imported goods. Organizations such as the WTO exist to combat the use of egregious tariffs

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Definition of 'Trade'

A basic economic concept that involves multiple parties participating in the voluntary negotiation and then the exchange of one's goods and services for desired goods and services that someone else possesses. The advent of money as a medium of exchange has allowed trade to be conducted in a manner that is much simpler and effective compared to earlier forms of trade, such as bartering.

In financial markets, trading also can mean performing a transaction that involves the selling and purchasing of a security.

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Investopedia explains 'Trade'

Trading is not a new phenomenon - we've been doing it for centuries! The trade that occurred among the most primitive humans has evolved considerably over time, and the word "trade" has come to include the complex trading that occurs on the floor of the New York Stock Exchange (NYSE).

However, the basic elements of buying and selling in some form of a market haven't changed a bit, because ultimately, trade still involves giving one thing in exchange for another.

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