The General Agreement on Tariffs and Trade set basic rules under which open and nondiscriminatory trade could be conducted between nations following World War II. Meant as a temporary agency that would be replaced by the International Trade Organization then under discussion, GATT became the de facto framework for international trade for almost fifty years when the ITO’s member nations failed to ratify its creation.
On October 30, 1947, representatives of twenty-three countries meeting in Geneva, Switzerland, signed the General Agreement on Tariffs and Trade (GATT) to reduce trade barriers among signatory nations. GATT was an attempt to combat the rise of worldwide protectionism that had preceded World War II. By providing a set of rules for open and nondiscriminatory trade and a mechanism to implement these rules, GATT sought to create an institutional framework within which international trade could be conducted as stably and predictably as possible.
When the Great Depression set in, the U.S. Congress had passed the highly protective Smoot-Hawley Tariff Act in 1930, raising average tariff rates on imports by almost 60 percent. Great Britain had passed the Import Duties Act in 1932, abandoning its traditional free trade policy. Other countries responded with restrictive import policies in self-defense. The result was a downward spiral in international trade, with the volume of trade in manufactured goods declining by 40 percent by the end of 1932.
The U.S. view on international trade began to change after the Democratic victory in the presidential election of 1932. The new secretary of state, Cordell Hull, strongly believed that the United States should take the lead in arresting the worldwide protectionist wave. He was convinced that eliminating trade barriers was the best means of reversing the downward spiral in international trade, which in turn would allow higher standards of living for all countries and promote lasting peace. After several years of his intensive lobbying, the Reciprocal Trade Agreements Act
The United States concluded agreements with twenty-nine countries on the basis of most-favored-nation treatment before the outbreak of World War II. The idea of negotiating reciprocal tariff reductions, embodied in the RTA Act, was the conceptual basis for GATT as well. Soon after the United States entered World War II, the Allied nations, particularly the United States and Great Britain, started discussing postwar trade and monetary issues. The discussion led to the Bretton Woods Conference in July, 1944, at Bretton Woods, New Hampshire. This conference established the charters of the International Monetary Fund and the International Bank for Reconstruction and Development (commonly known as the World Bank) to deal with international monetary issues. It also recognized the need for a comparable institution focusing on trade to complement the monetary institutions.
Negotiations on the form and functions of an International Trade Organization
The United States next expanded those proposals into a draft charter for the ITO in 1946. The charter was amended in successive conferences from 1946 to 1948 in London, New York, Geneva, and Havana. The final version of the ITO charter, known as the Havana Charter
At the same time that the United States published the proposals, it invited several countries to participate in negotiations to reduce tariffs and other trade barriers on the basis of principles laid out in the proposals. The United States proposed to integrate all individual treaties into a multilateral treaty. GATT was thus drawn up as a general framework for rights and obligations regarding tariff reductions for twenty-three participating nations. GATT came into being before the Havana Conference but in accordance with the draft charter for the ITO that was then under discussion. It was originally envisaged as the first of a number of agreements that were to be negotiated under the auspices of the ITO. It was supposed to establish a provisional agency that would pass out of existence once the ITO was established.
The power and the bureaucratic size of the proposed ITO faced strong opposition in the U.S. Congress. Consequently, the Havana Charter was not put before the U.S. Senate for ratification for fear of its defeat. When it was clear that the United States would not ratify the Havana Charter, GATT became by default the underpinning of an international institution, assuming part of the commercial policy role that would have been assigned to the ITO.
Technically speaking, GATT is not an organization of which countries become members but a treaty among contracting parties. As a multilateral agreement, GATT has no binding authority over its signatories. When countries agree to GATT, they are expected to commit to three fundamental principles: nondiscrimination, as embodied in the most-favored-nation clause (all countries should be treated equally); a general prohibition of export subsidies (except for agriculture) and import quotas, from which developing countries are exempted; and a requirement that any new tariff be offset by a reduction in other tariffs.
The General Agreement on Tariffs and Trade was without precedent. Prior to GATT, no agreement had ever been completed that included as many countries, covered as much trade, involved such extensive actions, or represented such a wide consensus on commercial policy. The agreement provided a promising contrast to the record of failures to liberalize trade that had characterized the years between the two world wars.
Among the twenty-three participating countries, 123 bilateral negotiations occurred. The United States was a party to 22 of them, and the remaining 101 took place among the other members of the group. The signatory nations accounted for more than three-fourths of world trade, and negotiations covered two-thirds of trade among GATT’s member nations. Tariffs were reduced on about fifty thousand items, accounting for about half of world trade. Average tariff rates were cut by about one-third in the United States. By 1950, average tariffs on dutiable imports into the United States had fallen to about 25 percent of Smoot-Hawley levels.
GATT is a remarkable success story of an international organization. Over the years, it has provided the framework for an open trade system and a set of rules for nondiscrimination and settlement of international trade disputes. Although GATT was very successful in reducing barriers to trade, however, its policies of mutual and reciprocal tariff reduction were criticized by developing countries as harmful to their development, owing to the unfavorable terms of trade their largely agricultural and commodity-based trade faced in relation to the much higher-priced manufactured goods exported by developed countries. This and other motives propelled them to establish the U.N. Conference on Trade and Development (UNCTAD), which served as a forum for developing-country grievances and a platform from which to seek reform of the international economic order.
Despite these successes, the credibility of GATT was undermined by the difficulty of reducing nontariff barriers and exemption of several important sectors from application of GATT principles. In 1995, GATT was replaced by the World Trade Organization (WTO), which was tailored to be better suited to the post-Cold War international economy and to respond more effectively to the concerns of developing as well as developed nations.
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Bhagwati, Jagdish. The World Trading System at Risk. Princeton, N.J.: Princeton University Press, 1991. The author is an ardent supporter of GATT. This book contains a collection of his lectures, which make a case for the continuation of GATT-sponsored multilateral trade talks. -
Gardner, Richard N. Sterling-Dollar Diplomacy: The Origins and the Prospects of Our International Economic Order. New expanded ed. New York: McGraw-Hill, 1969. Provides complete details of the preparatory work of ITO-GATT. -
Hughes, Jonathan R. T. American Economic History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Detailed account of colonial and U.S. economic history from 1607 through the mid-1990’s. -
Jackson, John H. Restructuring the GATT System. New York: Council on Foreign Relations Press, 1990. Explores issues relating to future restructuring of GATT. Chapter 1 provides a brief but succinct history of GATT. -
_______. The World Trading System: Law and Policy of International Economic Relations. Cambridge, Mass.: MIT Press, 1989. An introductory text on trade law and policy within the background of international law, national law, and related disciplines, including economics and political science. -
Kock, Karin. International Trade Policy and the GATT, 1947-1967. Stockholm, Sweden: Almqvist & Wiksell, 1969. A study of the interplay of foreign trade policies of GATT members and their cooperation in GATT. -
Lanjouw, Jean O., and Iain Cockburn. Do Patents Matter? Empirical Evidence After GATT. Cambridge, Mass.: National Bureau of Economic Research, 2000. Pamphlet that puts forth a detailed study of the effects of the GATT upon international intellectual property law and patents. Bibliographic references. -
Mavroidis, Peter C. The General Agreement on Tariffs and Trade: A Commentary. New York: Oxford University Press, 2005. Evaluation of GATT’s functions, legacy, and role in relation to the World Trade Organization. Bibliographic references and index. -
Tussie, Diana. The Less Developed Countries and the World Trading System: A Challenge to the GATT. New York: St. Martin’s Press, 1987. Studies GATT from the point of view of less developed countries, with particular focus on how they have been treated by the developed countries in GATT negotiations. -
Wilcox, Clair. A Charter for World Trade. New York: Macmillan, 1949. An excellent book on the history, provisions, and significance of the Havana Charter. The author represented the United States as chairman of its delegation at the conference in London and vice chairman of its delegations at Geneva and Havana.
Bretton Woods Agreement Encourages Free Trade
Benelux Customs Union Enters into Force
Marshall Plan Provides Aid to Europe
European Coal and Steel Community Is Established
European Common Market Is Established
European Free Trade Association Is Established
European Economic Community Adopts the Common Agricultural Policy
Association of Southeast Asian Nations Is Formed
Johnson Restricts Direct Foreign Investment
Birth of the European Monetary Union Project