COMMENTARY


GATT Turns 60

By DOUGLAS A. IRWIN
April 9, 2007; Page A13

Sixty years ago this week (April 10, 1947) at the Palais des Nations in Geneva, Switzerland, representatives from 23 nations opened a conference that attracted little attention at the time, but had far-reaching consequences for the world economy. The conferees met to negotiate tariff reductions and finalize the text of a General Agreement on Tariffs and Trade (GATT). They sought to create an open world trading system, one in which trade would flow relatively freely between countries with the understanding that new trade barriers would not be erected to impede this flow. In the 60 years since then, world trade and prosperity have flourished to a degree well beyond the hopes of the founders of the GATT, a result that can be attributed in part to their sage actions half a century ago.

The origins of the GATT can be found in the economic disaster of the interwar period. After World War I, the United States turned its back on the League of Nations and international economic cooperation. World leaders failed to put the world trade and payments system, which had been severely disrupted by the war, on a functional basis after the war.

[GATT]

On top of this came the Great Depression, and with it a dramatic contraction of world trade. The U.S. imposed the protectionist Smoot-Hawley tariff in 1930. Two years later, Britain abandoned its traditional free trade policy by imposing a General Tariff and signing the Ottawa agreements with its former colonies, creating a preferential trading bloc that discriminated against nonmembers. Germany strong-armed countries in southeastern Europe into special bilateral trading arrangements with the Reich. Japan created the Greater East Asian Co-Prosperity Sphere to siphon off Asian trade for its own benefit. Although the world economy recovered slowly from the depression, the spread of high tariffs, import quotas, discriminatory practices and foreign exchange restrictions meant that world trade remained stagnant and compartmentalized throughout the 1930s.

The tragic economic and political consequences of that "low dishonest decade" spurred some officials to think about a new economic framework. Marked by the bitter experience after World War I, Cordell Hull -- FDR's Secretary of State -- came to believe that "unhampered trade dovetail[s] with peace; high tariffs, trade barriers and unfair economic competition, with war." As he declared, "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." Due to Hull's guidance and persistence, Congress enacted the Reciprocal Trade Agreements Act of 1934, which gave the executive branch the authority to undertake bilateral negotiations to reduce tariffs. Although the trade agreements negotiated during the 1930s had a limited effect, it marked a significant departure from the old non-negotiable high tariffs enacted by Congress, and set the stage for a new era in U.S. trade policy.

World War II provided the opportunity for Anglo-American cooperation on postwar commercial policy. While the Americans envisioned expanding the bilateral approach it had taken in the 1930s, the British advocated a much more ambitious multilateral approach. In 1942, James Meade, then a U.K. civil servant and later a professor and Nobel laureate in economics, drafted a plan for an International Commercial Union, the trade counterpart to John Maynard Keynes's proposal for an International Clearing Union for postwar finance. After the War Cabinet endorsed Meade's plan, British and American officials began informal discussions about the shape of the postwar trading system.

These informal meetings eventually led to the 1947 GATT conference in Geneva. The U.S. and Britain, along with other countries, exchanged tariff reductions and finalized the provisions of the GATT. Although the Anglo-American delegates agreed on the overriding objective of freeing trade, the negotiations were difficult and required many compromises.

The U.S. insisted that the most-favored nation (MFN) clause -- ensuring nondiscrimination in trade -- be the Article I cornerstone of the GATT because it wanted to prevent the spread of Imperial preferences that discriminated against its exports. Fearful of its postwar financial situation, Britain demanded large American tariff cuts in exchange for a reduction in preferences and wanted the freedom to impose quantitative restrictions on imports in case of balance of payments difficulties, something that became Article XII of the GATT.

Initially, the tariff reductions negotiated in Geneva had a limited impact on international trade because wartime exchange controls and quantitative restrictions remained in place. However, as these controls were phased out during the 1950s, the lower tariffs allowed world trade to grow rapidly. The expansion of world trade promoted the rapid economic recovery of Europe and Japan. In turn, the spread of economic growth allowed democracy to become firmly established in a way that had failed dismally during the interwar period.

By the 1960s, the flourishing world economy gave the GATT participants the confidence to build on this early success and reduce tariffs and non-tariff barriers even more. Thus followed the Kennedy Round in the 1960s, the Tokyo Round in the 1970s, and the Uruguay Round in the late 1980s and early 1990s, each of which chipped away at the protectionist walls blocking world trade. In 1995, the World Trade Organization (WTO) was established in recognition of the fact that world trade rules had been extended to services, intellectual property and other new areas of trade.

Over its 60-year history, the GATT has had many shortcomings. Agricultural trade has largely eluded liberalization. The current spread of preferential trade arrangements, in the form of bilateral and regional so-called free trade agreements, have reintroduced discriminatory trade practices in a way that weakens the multilateral system built on the MFN clause.

The GATT has also gone through many difficult phases. The world economy went through a particularly dangerous period in the late 1970s and early 1980s, when sluggish growth and painful structural adjustments led many countries to ignore the GATT rules altogether. Trade barriers in the form of voluntary export restraints and orderly marketing arrangements proliferated, restricting trade in sectors such as automobiles, steel and textiles. In this environment, the prospect for new trade negotiations seemed so dismal that some suggested "the GATT is dead."

Despite these shortcomings and difficulties, the GATT framework has survived as a durable code of conduct for commercial policy and dispute resolution. Tariffs have been ratcheted down, the penchant for voluntary trade restrictions has been put to rest, and potential trade wars have been peacefully defused. The relevance of the GATT is reflected in the WTO's ever-growing membership, now up to 150 countries.

The prosperity of the world economy over the past half century owes a great deal to the growth of world trade which, in turn, is partly the result of farsighted officials who created the GATT. They established a set of procedures giving stability to the trade-policy environment and thereby facilitating the rapid growth of world trade. With the long run in view, the original GATT conferees helped put the world economy on a sound foundation and thereby improved the livelihood of hundreds of millions of people around the world.

The task for statesmen today is to look beyond short-term political considerations, arising from the complaints of special interests that fear market competition and the parsing of subsidies, and bring the ongoing Doha Round to a successful conclusion. If immediate steps cannot be taken to liberalize trade, then the phasing in of reforms and the phasing out of subsidies over many years is perfectly consistent with the long-term objectives of the GATT. We should remind ourselves how much poorer the world would be today without the politically courageous decisions made by visionary diplomats meeting in Geneva 60 years ago this month.

Even as the World Bank and International Monetary Fund struggle to rethink their role in the modern world economy, the role of the GATT and WTO is secure. The postwar expansion of world trade fostered by the GATT has made a lasting contribution to world prosperity and, as Cordell Hull suggested, to world peace as well.

Mr. Irwin, an economics professor at Dartmouth, is author of "Free Trade under Fire" (Princeton, 2005).