Law International Trade Law

The Journey from the GATT to the WTO

I. Description of Module

Items Description of Module

Subject Name Law

Paper Name International Trade Law

Module Name/Title The Journey from the GATT to WTO

Module Id 3

Pre-requisites The political economy of the world preceding the

two world wars.

The meaning of laissez faire economy, planned

economy, Keynesian economics & Adam Smith‟s

theory of economics.

The power politics amongst the North-South nation

states and the circumstances leading to the world

wars.

Objectives To understand the following:

Role Name Affiliation

Principal Investigator Dr. Ranbir Singh Vice Chancellor, National

Law University, Delhi

Co-P.I Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi

Paper Coordinator Dr. Saloni Khanderia-Yadav National Law University,

Delhi

Content Writer/Author Lakshmi Neelakanthan Lakshmikumaran and

Sridharan Attorneys, New

Delhi

Content Reviewer Prof. Abhijit Das Indian Institute of Foreign

Trade, Delhi

Language Editor Dr. Saloni Khanderia-Yadav National Law University,

Delhi

The aims for which the Bretton woods conference

was developed;

How the conference came into being;

Role (Failure) of the conference in addressing the

issue of international trade;

The nature of the GATT and its provisional

application;

Success of GATT during the era of its

implementation

Keywords Bretton Woods, ITO, GATT

II. E-text

Introduction

Bretton Woods can be understood as a system or regime designed to combine binding

legal obligations with multilateral decision-making conducted through the newly

created international organizations. The system owes its origin to the Bretton Woods

Conference which was an effort of the United States (US), the United Kingdom (UK)

and other allied nation states in the aftermath of the second world-war. The states

engaged in a series of negotiations to establish rules for the post-war international

economy. Conducted in July, 1944, the Bretton Woods Conference successfully led to

the creation of two financial institutions (Bretton Woods Institutions, popularly

known as the BWIs)- International Monetary Fund (IMF) and the International Bank

for Reconstruction and Development (more commonly known as the World Bank).

Bretton Wood‟s effort in the creation of a similar institution to regulate international

trade, however failed. Yet, a provisional agreement in the form of General Agreement

on Tariff and Trade (GATT) evolved which existed during 1947-1994

, before being replaced by the modern trade institution- the World Trade Organisation

(WTO).

This module highlights the background of the Bretton woods conference, its aims and

objectives in the aftermath of the second world-war. It also traces the failed attempts

towards the creation of International Trade Organisation (ITO). It further highlights

the process of formation of the GATT- the predecessor organisation to the WTO.

Figure 1.1- Depicting the relevance of the Bretton Woods Conference in the

modern international trade regime

Learning Outcome

Understanding the politics and economics behind the Bretton Woods Conference.

Evaluating the role of the Bretton Woods Conference in creation of institutions

regulating the post-war economy.

Understanding the reasons for the failure of ITO (International Trade Organisation)

and examining its relevance in the modern trade regime.

Bretton Woods Conference (1944)

Failed attempts to set up ITO

(Provisional application of GATT)

(1947-1994)

Modern Day WTO

(1995-till date)

Topics & Sub-Topics covered

1Bretton Woods Conference

1.1 Political Economy of the World during the Inter-War Period

1.2 Reasons behind the Bretton Woods Conference

1.3 How did the Bretton Woods operationalize?

1.4 Results of the Conference

1.5 Footprints of Bretton Woods in previous regulatory institutions

2. Formation of the GATT

2.1 Evolution

2.2 The proposed ITO charter and reasons for its failure

2.3 GATT‟s principles &it‟s provisional application

2.4 Provisional application of GATT

3. Evaluation of Bretton Woods’s Efforts: Its contemporary relevance

4. Summary

Text

1. Bretton Woods Conference

1.1 Political Economy of the World during Inter-War Period

The modern era of free trade global regime traces a complex history. The period

between 1945-73, (usually termed as the „golden era of capitalism‟) ushered with the

Bretton Woods conference, was preceded by severe economic turmoil prevalent

between 1914-1945. At the time of the economic turmoil, international economy was

highly inter-linked and this economic linkage influenced countries‟ political choices

in trade and exchange.

The economic linkages, especially in Western Europe and North America were the

results of extensive trade and commerce activities prevalent at that time, industrial

revolution and mass production and exchange (It is apt to note that the era of 1870-

1913 was the „high-noon‟ of Capitalism).1 The impact of colonisation further led to

the liberalisation in the weaker countries and colonies, for example- the Latin

American countries.

This economic situation was however, rudely shaken by the first world-war, which

totally discredited the then popular view that thickening web of commerce would

make wars between inter-linked nation states unlikely.2In reality, international rivalry

amongst the rich capitalist nation states escalated into violent conflicts.

Following the first world-war, the great depression of 1929 was yet another traumatic

event for the world economy. The depression started in the US (with the infamous

1929 Wall Street Crash)- a country that was hit hardest by the experience. Between

1929 and 1932, the output in the US fell by 30% and unemployment increased

1Ha Joon Chang, Economics: The User’s Guide (Pelican, 2014) 65 (hereinafter Chang)

2ibid, 73.

eightfold from 3% to 24%. Germany and France also suffered badly, with their

outputs falling by 16 and 15% respectively. 3

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 interests 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.4

Even if the cause of the great depression remains debatable, its impact has been

unanimously agreed. 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

3ibid, 75-76.

4ibid, 76.

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.5

The turmoil of the 1914-45 periods reached its peak with the outbreak of the second

world war. The loss and destruction caused by the second world-war resulted in the

first reversal in the acceleration in economic growth since the early nineteenth century.

To illustrate, per capita income growth rate of the world fell from 1.31 per cent during

1870-1913 to 0.88 per cent during 1913-50.6

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 (laissez-faire capitalism; See Glossary).

However, in the after-math of great depression and the economic situation torn by the

two world wars, this view started changing. Keynesian economics (See Glossary)

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 Wood‟s 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. Illustratively,

Soviet‟s success can be measured in its ability to repel the Nazi advance the Eastern

front during the second world war.7 Similarly, in Soviet countries, income per capita

was estimated to have grown by 5% between 1928-1938, in contrast to 1-2% at which

the rest of the world grew.

With this economic and political background, in mind, let us understand the nature,

aims and role of the Bretton Woods Conference.

5ibid, 77.

6A. Madisson, The World Economy: Historical Statistics(OECD, 2003) 383.

7Chang, 75.

1.2 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.

In-order to combat the great depression, several protectionist policies were adopted by

the countries. These policies included:

1.2.1 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.8

1.2.2 Competitive currency devaluations- Competitive devaluation refers to a scenario

in which 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.9

1.2.3 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, as discussed above.

1.2.4 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.

8Investopedia, http://www.investopedia.com/terms/b/beggarthyneighbor.aspaccessed 12 July 2014.

9Investopedia, http://www.investopedia.com/terms/c/competitive-devaluation.aspaccessed 12 July 1214.

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.10

Similarly, in theBrettonwoods discourse,

the world was described in terms of free market of sovereign autonomous states

enjoying equal opportunity in an „open international system‟.11

1.3 How did the Bretton Woods operationalize?

The cooperation efforts began with the strengthening of alliance between the US and

the UK. 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 Charter‟s

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 labor standards, economic advancement and social security.”12

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

10 US Department of State, Milestones: 1937–1945, Bretton Woods-GATT, 1941–

1947https://history.state.gov/milestones/1937-1945/bretton-woods accessed 12 July 2014 (hereinafter

US Dept. of State, Bretton Woods-GATT)

11 Richard Peet, Unholy Trinity: The IMF, WB and WTO (Macmillian, 2003) 37 (hereinafter Peet).

12

ibid, 34.

international commerce,” to reduce barriers to trade, and generally to achieve the

goals laid out in the Atlantic Charter.13

By early 1942, U.S. and British officials began preparing proposals that would foster

economic stability and prosperity in the postwar 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 plans. 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.14

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. As a result, from 1942 until 1944, bilateral and

multilateral meetings of allied financial experts were held in order to settle upon a

common approach. 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.15

1.4 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.

13

ibid, 34.

14

US Dept. of State, Bretton Woods-GATT.

15

ibid.

Further, the two major accomplishments of the Bretton Woods conference were the

creation of the International Monetary Fund (IMF) and the International Bank for

Reconstruction and Development (IBRD), commonly known as the World Bank.

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 centered 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.

IMF and IBRD continue to function as pivotal organisations in regulating world trade

and finance. today. However, 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 dollar‟s 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.

It can be said that structurally, the Bretton Woods combined a respect for the

traditional principle of national sovereignty, especially of the United States with a

new commitment to collective responsibility for management of monetary relations,

expressed both in mutually agreed rules and in the powers of the IMF.16

1.5 Footprints of Bretton Woods in previous regulatory institutions

Bretton Wood‟s contribution in the formation of modern global regulatory institutions

was tremendous. However, 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.17

2. Formation of the General Agreement on Tariffs and Trade (GATT)

2.1 Evolution

While the Bretton Woods was successful in creation of two pivotal financial

institutions to regulate trade and finance, a similar agreement on international trade

proved more difficult to achieve. One of the most contentious issues was the system

of discriminatory preferential tariffs. Such tariffswere 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.

16B. Cohen, Bretton Woods System,

http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html(prepared forRoutledge Encyclopedia of

International Political Economy) Accessed on July 12, 2014.

17

See generally, Peet.

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.

Similarly, the nation-states could not agree on a proposed structure to create an

organisation that would oversee international trade, just as the IMF and IBRD were

formulated.

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 world‟s 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 separateCharter

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.18

In retrospect, this evaluation of the members was correct, as the

ITO never came into existence. The reasons for the same shall be explored below.

2.2 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.19

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.20

Subsequently, on December 6, 1950, President

Truman announced that he would no longer seek Congressional approval of the ITO

Charter.21

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.22

After its ratification, eight rounds of trade negotiations were

conducted under the aegis of GATT which resulted in significant tariff reductions among its

members. The GATT was superseded by the World Trade Organization in 1995, the first

formal trade regulatory institution, after the failure of ITO.23

The GATT principles and

18The GATT years from Havana to Marrakesh, WTO website

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm accessed on July 12, 2014.

19ibid.

20

Jones &Kenen, Handbook of International Economics (1stedn.)376.

21

P. van den Bossche, The Law and Policy of the World Trade Organization (2nd

edn. CUP, 2008) 80 22

ibid, 81.

23Wikipedia, http://en.wikipedia.org/wiki/International_Trade_Organizationaccessed on 12 July 2014.

agreements were thereafter adopted by the WTO, which was charged with administering and

extending them

2.3 GATT’s principles & it’s provisional application

For almost half a century, the GATT‟s basic legal principles remained much as they were in

1948. There were additions in the form of a section on development added in the 1960s and a

few „plurilateral‟ agreements (i.e. with voluntary membership) in the 1970s. GATT‟s efforts

to reduce tariffs further continued. Much of this was achieved through a series of multilateral

negotiations known as “trade rounds” which were held under GATT‟s auspices.

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 Wood‟s contemporary significance

remains monumental. The efforts that went into the creation of institutions and

agreements such as the IBRD, IMF and the GATT reflected the true political

economy of that era, vital for understanding the functioning of the modern regimes.

Similarly, Bretton Wood‟s conclusion does not go without its critique. At the time of

its conclusion, Bretton Wood‟s core foundational principle was that mutual

dependence, reciprocity and relative equality in economic and political-military

capacity amongst nation-states would prevent further wars.24

However, in reality one

24

Peet, 33.

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 Wood‟s 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 emphaises the role of regulation in economic liberalisation, a

debate which has resurfaced in the light of the on-going global economic crisis.