From GATT to the WTO

1. Bretton Woods Conference

Political Economy of the World during Inter-War Period
Economists hold several reasons for the cause of the great depression. The predominant view
of neo-liberal economists claimed that a totally manageable financial crisis was turned into
the great depression because of the collapse in the world trade, caused by trade wars amongst
the countries. The situation was prompted by the adoption of protectionism by the US
through the 1930 Smoot Hawley Tariffs. The Smoot-Hawley Tariffs Act imposed punitive
protectionist tariffs on foreign goods being imported to the US. The Act was a result of the
lobbying efforts by the U.S. agricultural interest’s groups in order to gain protection against
agricultural imports The Smoot Hawley Act in-turn led to several retaliatory protectionist
policies by the European Market. Illustratively, countries such as Italy and Spain showed
increased protectionism, all of which worsened the prevailing economic situation.
Other economists however hold that it was not protectionism but the downward spiral in
international demand, caused by adherence of the governments to the doctrine of balanced
budget, which aggravated the situation, leading to the great depression.
The great depression created a spiral of unpaid debts, falling tax revenues and discouraged
private funding. The government was the only economic actor left in the economy, which
thereby faced a budget deficit, while it attempted to control the situation of low demand in
the economy. The economic situation was further worsened due to the prevailing Gold
Standard model. Under this model, each national currency was backed by the quantity of gold
held by country’s central bank. Due to this standard, the central banks of the capitalist nation
states could not increase the money supply for fear of compromising the value of their
currencies. Thus, with restricted money supply, credit became scarce and it further reduced
the demand.
Amidst this economic background, two other points are note-worthy. First, a large part of
economics during the high noon of capitalism era was governed by Adam Smith’s laissez
faire theory. According to this theory markets are self-correcting and hence do not require
state intervention. However, in the after-math of great depression and the economic situation
torn by the two world wars, this view started changing. Keynesian economics which
advocated for government regulation became a more predominant view, which was further
endorsed during the Bretton Woods Conference.
The second vital factor noteworthy in the Bretton Woods background was the prevalent
situation of the former USSR countries. Whilst Western Europe and North America were
waging in economic turmoil, Soviet industrialisation under the socialist principles of a
completely planned economy was proving a big success.
Reasons behind the Bretton Woods Conference
The world wars were pyrrhic victories indeed with both sides losing heavily. The lessons
drawn from the inter-war period thus informed the approach of global policy makers towards
reconstruction and development of the post war economy. President Franklin D. Roosevelt of
the US and officials such as Secretary of State Cordell Hull became pioneers for the Bretton
Woods Conference. These officials were adherents of the Wilsonian belief that free trade
promoted not just prosperity, but also peace.
To combat the great depression, several protectionist policies were adopted by the countries.
These policies included:
1. Beggar Thy Neighbour
An international trading policy that utilizes currency devaluations and protective barriers to
alleviate a nation’s economic difficulties at the expense of other countries. While the policy
may help repair an economic hardship in the nation, it will harm the country’s trading
partners, worsening its economic status.
2. Competitive currency devaluations
an abrupt national currency devaluation by one nation is matched by a currency devaluation
of another, especially if they both have managed exchange-rate regimes rather than floating
exchange rates determined by market forces. Competitive devaluation is considered a
“beggar-thy-neighbor” type of economic policy, since it amounts to a nation trying to gain an
economic advantage without consideration for the ill-effects it may have on other countries.
3. High tariffs
Examples of the prevailing high tariffs include the Smoot-Hawley Act of the US and other
retaliatory tariff measures imposed by European countries such as Italy and Spain,
4. Discriminatory trading blocs
The prevailing imperial preferences involved in tariff setting and trade such as the policy of
Britain and France towards their colonies discriminated against preferences allotted to non-
colonies.
Each of these policies further culminated in the destabilisation of international environment
without improving the economic situation. This experience led world leaders to conclude that
economic cooperation was the only way to achieve both peace and prosperity, at home and
abroad. Similarly, in the Brettonwoods discourse, the world was described in terms of free
market of sovereign autonomous states enjoying equal opportunity in an „open international
system.
How did the Bretton Woods operationalize?
The vision of economic cooperation was first articulated in the Atlantic Charter, issued by the
US president Roosevelt and British Prime Minister Winston Churchill at the conclusion of
the August 1941 Atlantic Conference. The Charters fourth point committed the United States
and the United Kingdom “to further the enjoyment by all States, great or small, victor or
vanquished, of access, on equal terms, to the trade and to the raw materials of the world
which are needed for their economic prosperity,” while its fifth point expressed their
commitment to “the fullest collaboration between all nations in the economic field with the
object of securing, for all, improved labour standards, economic advancement and social
security.”
The two countries further elaborated upon these principles in Article VII of their February
1942 agreement on lend-lease aid. In that article, the United Kingdom agreed that in return
for U.S. lend-lease assistance, it would cooperate with the United States in devising measures
to expand “production, employment, and the exchange and consumption of goods,” to
eliminate “all forms of discriminatory treatment in international commerce,” to reduce
barriers to trade, and generally to achieve the goals laid out in the Atlantic Charter.
By early 1942, U.S. and British officials began preparing proposals that would foster
economic stability and prosperity in the post-war world. Harry Dexter White, Special
Assistant to the U.S. Secretary of the Treasury, and John Maynard Keynes, an advisor to the
British Treasury, each drafted plan. The plans aimed at creating organizations that would
provide financial assistance to countries experiencing short-term balance of payments
deficits. Financial assistance would safeguard countries and thereby prevent them from
protectionist or predatory economic policies adopted to improve their balance of payments
position.
While both plans envisioned a world of fixed exchange rates, and believed to be more
conducive to the expansion of international trade than floating exchange rates, they differed
in several significant respects. An Agreement was finally reached at the July 1944 United
Nations Monetary and Financial Conference. This gathering hosted delegates from 44 nations
that met in Bretton Woods, New Hampshire, famously known as the Bretton Woods
Conference.
Results of the Conference
The conference resulted in the formation of a monetary regime joining an unchanged gold
exchange standard (prevalent in the preceding era), supplemented by a centralized pool of
gold and national currencies, with an entirely new exchange rate system of adjustable pegs.
The IMF was charged with the following functions:
 Regulatory- administering the rules governing currency values and convertibility and
overseeing a system of fixed exchange rates centred on the U.S. dollar and gold.
 Financial- Supplying supplementary liquidity by providing short-term financial
assistance to countries experiencing temporary deficits in their balance of payments;
 Consultative- serving as a forum for consultation and cooperation among
governments;
The IBRD was responsible for providing financial assistance for the reconstruction of war-
ravaged nations and the economic development of less developed countries.
In July 1945, the US Congress passed the Bretton Woods Agreements Act, which authorised
the US to officially join IMF and the World Bank. The two organizations officially came into
existence five months later.
The fixed exchange rate system established at the Bretton Woods prevailed only for three
decades. Post the exchange crises of August 1971, the US President Richard M. Nixon
suspended the dollars convertibility into gold. Further, during February/March 1973 floating
exchange rates become the norm for the major industrialized democracies, which continues to
persist till date.
Footprints of Bretton Woods in previous regulatory institutions
It must be noted that the era of global regulation through institutions began as early as early
1920s. Political organisations such as the League of Nations maintained regulatory
institutions, for example- the Economic and Financial Organisation. Similarly, an
international bank to aid post war reconstruction was first discussed in Brussels in 1920.
Another proposal to restore the gold standard, stabilised via central bank cooperation and
managed by an international convention was discussed in Genoa in 1922. League of Nations
also helped organise loans for the countries in the 1927 period. Similarly, world leaders
including members of the League, the US and Soviet members met in Geneva and Hague
subsequently to discuss issues of balancing budget, removing control on movement of goods
and services etc. Thus, the success of the Bretton Woods can be seen as cumulation of
previously initiated efforts of nation states during the inter-war period.
2. Formation of the General Agreement on Tariffs and Trade (GATT)
Evolution
One of the most contentious issues was the system of discriminatory preferential tariffs. Such
tariffs were established and continued among the members of the British Commonwealth in
1932, whereby trade within the Commonwealth was subject to lower tariffs than trade
between the Commonwealth nations and the rest of the world.
The U.S. officials such as Cordell Hull opposed such imperial preferences on both
ideological and practical grounds. Similarly, countries such as Canada that were members of
the preferential system were also the United States largest trading partners and hence called
for its abolition. However, many Commonwealth officials favored keeping the preferences.
They similarly asserted that imperial preferences would continue until at-least the US agreed
to reduce the high Smoot-Hawley tariffs, it set in 1930. Thus, an evident dead-lock continued
on these issues.
Post Bretton Woods, 15 countries re-began talks in December 1945 to reduce and bind
customs tariffs. With the second-world war only recently ended, they wanted to give an early
boost to trade liberalization. Thus, they began to correct the legacy of protectionist measures
which remained in place from the early 1930s.
This first round of negotiations resulted in a package of trade rules and 45,000 tariff
concessions affecting $10 billion of trade, which was about one fifth of the then worlds total.
It further led to the elimination of several imperial preferences. The group had expanded to
23 by the time the deal was signed on 30 October 1947. The tariff concessions came into
effect by 30 June 1948 through a “Protocol of Provisional Application”. This signified the
birth of the General Agreement on Tariffs and Trade, with 23 founding members (officially
known as the “contracting parties” to the GATT).
It is vital to note that the 23 were also part of the larger group negotiating a separate Charter
for creating International Trade Organisation- a formal regulatory institution for international
trade. One of the provisions of the GATT said that they should accept some of the trade rules
of the ITO draft. This, the members believed, should be done swiftly and “provisionally” in
order to protect the value of the tariff concessions they had negotiated during GATT
formation. They spelt out how they envisaged the relationship between GATT and the ITO
Charter. GATT was designed not only to implement the agreed tariff cuts but to also serve as
an interim codification of the rules governing commercial relations among its signatories
until the ITO was created. It must be noted that members also allowed for the possibility that
the ITO might not be created.
The proposed ITO charter and reasons for its failure
Less than a month after GATT was signed, the Havana conference discussing the ITO began
on 21 November 1947. The Charter provided for the establishment of the ITO, and set out the
basic rules for international trade and other international economic matters. It was proposed
that ITO would be accorded the status of a specialised UN agency. According to the WTO
website, the draft ITO Charter was ambitious. It extended beyond world trade disciplines, to
include rules on employment, commodity agreements, restrictive business practices,
international investment, and services.
After four months of negotiations, the representatives of 53 countries signed the finished
charter in March 1948. Thus, the ITO Charter was finally agreed in Havana in March 1948.
However, ratification in some national legislatures proved impossible. The most serious
opposition was in the US Congress, even though the US government had been one of the
driving forces. An argument of the US against the new organization was that it would be
involved into internal economic issues. Subsequently, on December 6, 1950, President
Truman announced that he would no longer seek Congressional approval of the ITO Charter.
Without the support of the US, the ITO could never come into existence.
Upon ITO’s failure, the GATT gradually became the focus for international governmental
cooperation on trade matters. The GATT was superseded by the World Trade Organization in
1995, the first formal trade regulatory institution, after the failure of ITO. The GATT
principles and agreements were thereafter adopted by the WTO, which was charged with
administering and extending them.
GATT’s principles & it’s provisional application
GATT was provisional with a limited field of action, but its success over 47 years in
promoting and securing the liberalization of much of world trade remains incontestable.
Continual reductions in tariffs alone helped spur very high rates of world trade growth during
the 1950s and 1960s, around 8% a year on average. The momentum of trade liberalization
further helped ensure that trade growth consistently out-paced production growth throughout
the GATT era, a measure of countries‟ increasing ability to trade with each other and to reap
the benefits of trade. The rush of new members during the Uruguay Round demonstrated that
the multilateral trading system was recognized as an anchor for development and an
instrument of economic and trade reform.
3. Evaluation of Bretton Woods’s Efforts: Its contemporary relevance
Despite dating back to six decades, Bretton Woods contemporary significance remains
monumental. Similarly, Bretton Woods conclusion does not go without its critique. At the
time of its conclusion, Bretton Woods core foundational principle was that mutual
dependence, reciprocity and relative equality in economic and political-military capacity
amongst nation-states would prevent further wars. However, in reality one must note that
Bretton Woods was conceived in an era of extreme inequality amongst nation states and lack
of dependence (as East was separating from the West). The prevailing situation at the time of
the Bretton Woods Conference can serve as a useful comparative exercise with the modern
trade rounds such as the Doha rounds of trade negotiation.
Further, Bretton woods was characterised by several economic theories. On one hand there
were aggressive capitalist forces that wanted to expand globally beyond the domestic
boundaries of the western world. On the other hand, the Kenyesian influence became more
prominent, as the Bretton Woods leaders emphasised on regulation alongside market control.
Similar debates are being raised even today, in the after-math of the economic crisis of 2008,
where world leaders are brainstorming for solutions to combat world recession.
Furthermore, the modern-day relationship between the WTO and BWIs such as the World
Bank and IMF remain highly complex. In order to understand the nature of trade and finance
regulation, Bretton Woods and its debates remain highly useful.
4. Summary
Beginning with the early inter-war period, nation states had shown desire to regulate their
international trade and finance through institutional efforts. The period between 1914-45
which witnessed severe economic turmoil, further promoted their efforts to cooperate in
regulation of trade and finance, in-order to further prevent wars. The inter-war period was
characterised by several discriminatory policies adopted by the states, for example- beggar
thy neighbour, imperial preferences in regulating tariffs, imposing high tariffs and indulging
in competitive devaluation. These practices along with the prevailing macro-economic
conditions characterised by the great depression (1929) and the destruction caused by the two
world wars, finally led members of the US, UK and allied powers to convene the Bretton
Woods conference. The conference (1944) successfully created two institutions for financial
regulation and economic development- IMF and IBRD. However, a similar organisation to
regulate trade- ITO could not be finalised. The reasons for the failure of ITO‟s birth were its
ambitious charter, which member states especially the US found too intrusive to domestic
regulation. Instead GATT which was initiated by 23 member states in 1947 continued to gain
strength in the period that followed. Despite its provisional application, it created an initial
trade package deal, tariff concession and subsequent trade liberalisation, before being finally
succeeded by the modern institution of the WTO. Though historical, Bretton Woods and its
efforts hold contemporary relevance. It provides an insight into the political economy of the
inter-war period. It further emphasises the role of regulation in economic liberalisation, a
debate which has resurfaced in the light of the on-going global economic crisis.