GATT

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.

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.