The most significant and widespread system of rules for international trade is the General Agreement on Tariffs and Trade system which includes over 200 ancillary treaties and a number of other related arrangements and decisions. Both this system of rules and the organization that enforces and updates these rules are commonly referred to as GATT. GATT came into being in 1948 as part of the efforts to reshape the world economy after the disasters of the Great Depression and World War II. It has sought to liberalize international trade and let market forces function. Over 100 nations agreed to abide by the general principles embodied in the GATT accord, which include (1) recognition of the right to market entry by foreign companies, (2) guarantees that both domestic and foreign companies shall receive the same treatment from government officials, and (3) a commitment to open regulation, decision making, and review.

In September 1986, a new round of negotiations commenced in Punta del Este, Uruguay, with the intent to further reduce barriers to trade in goods, including tariffs and such nontariff barriers as quotas, export subsidies, and anti-import regulations. It was also intended to extend the nearly 40-year-old GATT system to agriculture, financial and other services, and protection of intellectual property, such as patents. Agreements reached by late 1993 met some of these goals. However, some controversial issues were dropped, which threatened to undermine the continuance of the entire system. Although subject to considerable controversy, Congress ratified GATT in the latter part of 1994.

Under the agreements reached in the Uruguay round of negotiations, the United States, Europe, and other major industrial powers agreed to eliminate tariffs completely with respect to certain industries, such as pharmaceuticals, construction equipment, medical equipment, paper, and steel. With respect to several other industries, tariffs will be substantially reduced. The agreements provide for tougher and more expeditious GATT action to resolve disputes over the use of antidumping laws, which have been invoked by both the United States and Europe to impose penalties on foreign producers which sell goods abroad at prices below cost. A system of quotas limiting the imports of textiles and apparel to developed countries will be phased out over a 10-year period along with a significant reduction in textile tariffs. With respect to intellectual property, the pact provides 20-year protection for patents, trademarks, and copyrights, although it permits developing companies at least 10 years to phase in patent protection for pharmaceuticals. Patent protection for biotechnology products is not particularly strong. As for agricultural products, countries exporting farm goods are to reduce the volume of subsidized exports by 21 percent over a 6-year period, bans on rice imports in Japan and South Korea are to be lifted, and quotas for imports of sugar, dairy products, and peanuts to the United States will be phased out and replaced by tariffs. Limitations are imposed on government subsidies for research in such goods as computer chips. A dispute between the United States and the European Community, especially France, over the latter’s limits on foreign audiovisual programming shown on television and the use of movie ticket and video taxes to subsidize the French movie industry, was unable to be resolved. In addition, the negotiations considered trade in services.

The agreement creates a multilateral trading organization, termed the World Trading Organization (WTO), to replace the GATT secretariat. This organization will possess more authority to oversee trade in services and agriculture than that now possessed by GATT. The agreement also eliminates the provision that currently permits any GATT member to block the findings of a panel convened to review charges that one nation’s trade practices violate the agreement. These panels judge whether a nation’s laws or trade actions contravene GATT requirements and can approve trade sanctions against offending nations. In concluding the Uruguay round of the GATT, the trade ministers of approximately 120 nations, including the United States, have opened the door for a worldwide trade accord encompassing more industries in more countries than ever before.

Although trade in services among GATT members exceeds $900 billion annually, it has not been covered under the GATT rules. While the Uruguay round of negotiations achieved some agreement to open markets in the service area, U.S. negotiators were unable to secure guaranteed access to foreign markets that are largely closed to U.S. financial firms, such as banks, securities firms, and insurance companies. Nevertheless, the United States agreed to open its doors to foreign financial firms but asserted the right to limit access after June 30, 1995, to firms from nations failing to reciprocate.

While the recently concluded Uruguay round of negotiations and the resulting pact do not provide specific rules governing trade in financial services, including insurance, the GATT agreement has (1) established a general set of principles governing trade among the signatory countries and (2) called for a
6-month negotiating period between the insurance industries of the individual nations. During this period, proposals were to be considered concerning the opening of markets to free trade in insurance services, including the specific insurance rules to be applied. If access were denied to insurers of one nation, the offended nation could impose similar penalties on the offending nation, according to the broad principles laid down by the WTO. Thus if U.S. insurers are denied access to a particular country’s market, under GATT, the United States has the right to penalize that country by restricting access to the American market.

Thus even though the accord did not provide assurances for the opening of specific insurance markets, it set the stage and bought time for negotiations. For the first time, financial services, including insurance, have been incorporated within the GATT structure. However, for at least two reasons, the task did not promise to be an easy one.

First, numerous countries either prohibit or are very restrictive with respect to access to their insurance markets by foreign insurers. Old ways are difficult to dislodge.

Second, the United States is not invulnerable to criticism. U.S. GATT negotiators are subject to counterarguments. Some foreign insurers contend that state insurance regulation in the United States constitutes a form of protectionism. Many nations demand that their insurers be given the right to do business in the United States under a single U.S. license prior to agreeing to open up their insurance markets to U.S. companies. It is conceivable that a congressionally enacted federal regulatory bill might be necessary to convince certain restricted foreign markets to permit greater access under GATT to U.S. insurers.

Nevertheless, in the absence of GATT, U.S. insurers would possess little leverage to reverse protectionist policies. With GATT they are equipped with the legal framework to negotiate entry into closed markets. Among the U.S. insurance community there is optimism that with the establishment of the WTO, it has an official place at the bargaining table. This is a major step for insurers seeking to expand to do business abroad.

However, the ongoing negotiations conducted under the auspices of the WTO to reach a global pact to liberalize trade in financial services reached a major obstacle. In mid-1995, the United States took the position that it would not grant access to its financial services markets on a "most favored nation" (MFN) basis, under which concessions granted to one nation will automatically be granted to all. The MFN principle is a cornerstone of GATT and its successor, the WTO. Instead, the United States government reserved the right to offer access only to those countries which provide reciprocal treatment for United States financial service entities. The United States position is premised on the inadequacy of financial service market opening promises by several other nations, especially the fast-developing economies in Asia and Latin America. Subsequently more than 90 nations, but not the United States, signed an interim pact, effective through 1997, which guarantees a measure of foreign access to insurance, banking, and securities markets. While not joining in this interim arrangement, the United States has said that foreign companies already operating in the United States may continue to do so, that is, they are "grandfathered." However, new foreign entrants will be treated on a reciprocal, case-by-case basis depending upon how their home countries treat United States companies.

In summary, despite difficulties which still need to be overcome, the Uruguay round of negotiations modifies GATT in a manner to significantly bring down trade barriers, enhance fair trade conditions, and establish a more orderly trade climate for service industries. Although some countries have been criticized for using restrictive means to protect their own national industries despite having subscribed to the GATT principles, in both the short and the long run, GATT promises freer trade around the world in services as well as goods, leading to greater and greater internationalization of financial services in general and insurance in particular.