The WTO’s difficulties in light of the GATT’s history

Douglas Irwin, Petros C. Mavroidis, 29 July 2008

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The recent meeting of trade officials at the World Trade Organization in Geneva failed to reach preliminary agreements that would have made considerable progress toward concluding the Doha Round of trade negotiations. As a result, the outlook for the Round is grim, at least in terms of the immediate future. Inevitably, the failure of the meeting has raised questions about the future of the WTO as a forum for trade liberalisation. Although important progress has been made on some of the technical aspects of the negotiations, the political will to conclude the round appears to be missing at this stage, as Jeffery Schott noted in his recent Vox column.

It seems that we are a long way from the days when trade negotiations were a major priority.

 

What’s next? Look back to see forward

One way to ponder the future of the WTO is by examining its past. In a recent book (co-authored with Alan Sykes), we take a close look at the origins of the General Agreement on Tariffs and Trade (GATT), the WTO’s predecessor.1

The GATT was created in 1947 for a very specific purpose. That purpose was to reverse the commercial policies of the 1930s that involved greater restrictions on and more discrimination in world trade. These anti-trade policies arose in part because countries sought to insulate themselves from the Great Depression through what became known as “beggar-thy-neighbour” policies. Blocking imports proved to be a futile method of increasing domestic employment due to the economic slump, since one country’s imports were another country’s exports. The combined effect of every country trying to save its own industries and protect its own workers was a collapse in international trade, which merely exacerbated the problems of the world economy and contributed to political frictions between countries.

The GATT grew out of discussions between government officials from the United States and the United Kingdom during World War II. After seeing international trade suffocated under the weight of protectionist policies during the 1930s, officials from both countries had a compelling interest in pursuing policies that would reduce trade barriers and help expand world trade after the war. They sought to foster these conditions by creating a rules-based framework for liberal trade policies that would rein in the use of trade restrictions as well facilitate the process of reducing those barriers.

One of the first individuals to recognise the need for an international agreement was James Meade, then working for the British government and whose later work on trade policy earned him the 1977 Nobel Prize in Economics. In 1942, Meade drafted “A Proposal for an International Commercial Union” that influenced British policymakers and anticipated many features of the GATT.

While the US and UK governments agreed on the most important and basic principles to be included in a trade agreement, they differed on many substantive details that affected the shape of the GATT. The United States adamantly opposed trade discrimination and wanted Britain to dismantle its Imperial preferences, while Britain wanted major reductions in US tariffs, which were much higher than UK tariffs as a result of the Hawley-Smoot tariff of 1930. Britain also convinced the United States to seek a multilateral trade agreement rather than continue its old bilateral approach under the Reciprocal Trade Agreements Act of 1934.

Once these two countries agreed upon a document that could serve as a basis for negotiation, other countries were invited to participate in shaping the provisions of the GATT and the charter of the International Trade Organisation. At a conference in the Palais des Nations in Geneva, representatives of 23 countries met from April to October 1947 and established two key pillars of the post-war world trading system.

  • They created a legal framework for commercial policy by finalising the text of the GATT.
  • The Geneva participants negotiated numerous bilateral agreements to reduce import tariffs, the benefits of which were extended to other GATT parties through the unconditional most-favoured nation (MFN) clause.

As a result, the landmark 1947 meeting produced an enduring framework for post-war commercial relations in which government-imposed trade barriers were contained and then gradually scaled back over time. Under this system of multilateral cooperation, international trade has flourished for over half a century.

History and modern theories

What does the establishment of the GATT say about recent theories of trade agreements? These theories include the idea that the GATT is motivated by:

  • terms of trade externalities across countries,
  • governments seeking external commitments to reduce the power of domestic interest groups, and
  • foreign policy considerations.2

We find some evidence for each of these theories, but the weakest appears to be commitment. Many signatories of the GATT insisted upon a variety of opt-out clauses and exceptions to ensure the flexibility of domestic policy in the face of future economic developments; that is, they did not want to tie their hands too much in an international trade agreement.

There is somewhat more evidence in favour of a terms of trade interpretation. The structure of the bargain suggests that terms-of-trade considerations were implicitly a part of its rationale. The negotiations took place following the principal-supplier rule, and reciprocity was the guiding negotiating principle. A focus on principal suppliers and reciprocal concessions hints that the arrangement was indeed focused on unravelling the damage done to the volume of trade by non-cooperative tariffs, akin to the core problem in the terms-of-trade models.

Even if terms-of-trade considerations were not at the forefront of the minds of the GATT founders or consciously articulated, the volume of trade (a notion intimately linked to terms of trade) certainly was. And their actions were consistent with the terms-of-trade view, that a multilateral tariff reduction would internalise an important international externality and be superior to countries setting their trade policies unilaterally.

Although some aspects of the GATT (such as the regulation of subsidies or antidumping) cast doubt on the terms-of-trade theory, the central motivation for the GATT was to unwind the retaliatory trade policies and other protectionist measures that had built up during the 1930s. In other words, the terms of trade perspective is useful in understanding the tariff bargain struck but does not help us understand each and every provision of the GATT.

The foreign policy view

There is considerable evidence from the record of the negotiations in favour of a foreign policy view of the GATT. Cordell Hull, US Secretary of State from 1933 to 1944 and America’s foremost champion of trade liberalisation, supported lower tariffs, non-discrimination, and trade cooperation even more for its political effects in promoting peace than for its beneficial economic effects.

Hull emphatically stated:

“I have never faltered, and I will never falter, in my belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade.”

Regarding post-war trade cooperation, Hull argued that:

“a revival of world trade [is] an essential element in the maintenance of world peace. By this I do not mean, of course, that flourishing international commerce is of itself a guaranty of peaceful international relations. But I do mean that without prosperous trade among nations any foundation for enduring peace becomes precarious and is ultimately destroyed.”

Difficult negotiations are nothing new

In light of the difficulties that recent multilateral trade negotiating rounds have encountered, trade officials, sometimes with nostalgia, reflect back on the easier trade negotiations of the past. Yet what is clearly evident in our book is that, although the 1940s was a golden age of international institution building, the negotiations that led to the GATT were extremely difficult and had many pitfalls, delays, and obstacles. The ambitious plans for an International Trade Organisation were eventually abandoned. In its place remained a smaller and shorter agreement on commercial policy that had many weaknesses, yet the GATT survived as policymakers and export interests increasingly saw the benefits of the accord.

Conclusion

The US and the UK delegates can be credited with creating a document that fostered trade liberalisation for the subsequent 60 years and probably contributed to world peace. This was a time when leadership rose to the challenges that the world was facing. The institution they created helped to solve the specific problem they confronted: the danger that post-war trade policy would remain plagued by the high and discriminatory trade barriers that had stifled and compartmentalised world trade in the 1930s. Given the post-war record of expanding world trade and incomes, they succeeded perhaps beyond their wildest hopes.

The question today is whether the problems currently facing the world trading system are pressing enough to demand that today’s leaders also rise to the occasion and confront the challenges before us.

References

Bagwell, Kyle, and Robert W. Staiger. 2002. The Economics of the World Trading System, Cambridge, MA: MIT Press.
Baldwin, Robert E. 1980. “The Economics of the GATT” in Issues in International Economics, edited by Peter Oppenheimer. Stocksfield, England and Boston: Oriel.
Irwin, Douglas A., Petros C. Mavroidis, and Alan O. Sykes. 2008. The Genesis of the GATT. New York: Cambridge University Press.
Maggi, Giovanni, and Andrés Rodríguez-Clare. 1998. “The Value of Trade Agreements in the Presence of Political Pressures.” Journal of Political Economy, 106: 574-601.


1 The Genesis of the GATT, by Douglas A. Irwin, Petros C. Mavroidis, and Alan O. Sykes, published by Cambridge University Press in June of 2008.
2 Bagwell and Staiger (2002) champion the terms of trade view, Maggi and Rodriguez-Clare (1998) support the commitment theory, and Baldwin (1986) take the foreign policy view. Baldwin (1986, 91) has noted that “economists tend to judge the rules of organizations such as the GATT on the basis of whether they promote economic efficiency, growth, and stability.” Yet, in his view, “maximizing the collective economic welfare of individuals making up either a country or the world is, however, not the main policy objective of the GATT.” Rather, “the broad objective is to help to maintain international political stability by establishing rules of ‘good behaviour’ as well as mechanisms for settling disputes.” Baldwin believes that “the objectives of those establishing the organization were mainly political” and that “even if the above reasoning by trade economists is valid in most cases, it seems to be more the result of a happy coincidence of economic and political objectives rather than of foresight and deliberate choice by the founders of the GATT.”

 

Topics: Economic history, International trade
Tags: GATT, international trade, WTO

Robert E. Maxwell Professor of Arts and Sciences in the Department of Economics at Dartmouth College
Edwin B. Parket Professor of Law at Columbia Law School, New York; Professor of Law at the University of Neuchatel, on leave at the European University Institute. and a CEPR Research Fellow.