GATT and the Global Order in the Postwar Era

Published by EH.Net (February 2023).

Francine McKenzie. GATT and the Global Order in the Postwar Era. Cambridge: Cambridge University Press 2020. xiii + 323 pp. $41.99 (hardback), ISBN 978-1108494892.

Reviewed for EH.Net by James Foreman-Peck, Emeritus Professor of Economics, Cardiff University.

Both an organization and a set of rules, the General Agreement on Tariffs and Trade (GATT) originated in the proposed post-1945 International Trade Organization (ITO) intended to prevent or soothe conflicts caused by trade. This was to be achieved by rule-based non-discriminatory all-inclusive trade regulations. But the ITO was never established at the end of the Second World War, so the GATT, initially a temporary expedient, became permanent in an underfunded existence. Eric Wyndham White, who ran the GATT until 1968 ‘ably assisted by the US’, was a liberal internationalist, seeing the secretariat as an honest internationalist broker. He used the threat of resignation frequently to encourage reaching agreements. He avoided admitting GATT subordination to GATT members by showing ‘flexibility’. Free trade internationalism was more common among the wealthier nations reacting against the 1930s, whereas poorer countries concerned with development were more likely to emphasis its disadvantages. However, as one negotiator remarked, ‘no country fully favours GATT objectives’, and it was only in the interest of a common Cold War front that tensions between Britain and the US over Empire preference were stifled.

International historian Francine McKenzie has consulted numerous primary sources around the world, as well as secondary sources, to write an account of this important trade policy institution. Organized around four broad themes – the Cold War, regionalism, development, and agriculture – the study shows and analyses what negotiators and policy makers thought, behind the often bland or triumphant compromise public statements.

The Cold War challenged GATT’s claims of inclusivity and universality. In fact, helped by the US, GATT became a pillar and instrument of the ‘free world’, even though the GATT secretariat encouraged communist countries to join GATT, with inevitable economic and political difficulties. The US treated GATT as a policy instrument, with the exclusion of Hungary two years after the 1956 revolution and of China after the Tiananmen Square massacre of 1989. None of the changes brought about by the reduction in tariffs sought by GATT in a market economy were automatic under central planning. They could be implemented only upon the explicit instructions of the central planners. Moreover, the decisions leading to these changes need not be disclosed. There was no mechanism under central planning that a market-based trade partner could rely on to ensure the required reallocation of resources following the abolition of a trade barrier (Matejka 1990).

Neoclassical economics indicates that unilateral reduction of national trade barriers is most welfare enhancing, but this is not how tariffs were reduced after 1945. Rather, the GATT adopted a bilateral approach to multilateral tariff bargaining. Reciprocal request-offer negotiations were made voluntarily between pairs of countries about specific products. The most-favored nation (MFN) principle (Article I of GATT) then required the results of these bilateral negotiations be extended to the entire GATT membership. When deciding the concessions that they were prepared to offer, member governments could consider the indirect benefits they might have expected from the simultaneous negotiations between other countries. Preferential or regional agreements, inherently discriminatory, on theoretical grounds posed a threat to the efficiency of this multilateral system (Bagwell and Staiger 1999). Trade creation might outweigh trade diversion in aggregate but the individual country losers from the diversion were not necessarily compensated by the creation. Customs Unions and free trade agreements were nevertheless permitted by article XXIV of the GATT.

Even so the European Coal and Steel Community (1951) contravened the GATT. The European Economic Community (EEC) was granted a waiver because the US wanted a strong Cold War partner in Europe. There was no GATT discussion prior to the EEC’s discriminatory and restrictive Treaty of Rome (1957). Again, the US in effect favoured the EEC over GATT. The EEC’s Common Agricultural Policy (CAP) threatened to take agricultural protectionism to new heights, but the EEC refused to allow GATT to scrutinise it. The US had itself already been granted a waiver of the prohibition of agricultural import quotas in 1955 and was not well placed to object. The EEC prioritised regional interests unapologetically and conspicuously, refusing to give compensation for Common External Tariff in the Dillon Round (1959-62). In the Kennedy Round that opened in 1964 despite very significant liberalization elsewhere, little was achieved with agriculture. Once more the US saw the Round as fortifying the western alliance and GATT was obliged to show ‘flexibility’ again. Significantly, the EEC did not leave GATT because departure would signal rejection of cooperation, international rules, and interdependence. Mackenzie observes that prioritising rights over obligations of GATT membership was not restricted to EEC but the bloc’s size made it matter more.

Regionalism proliferated partly because achieving agreement was easier than with the larger GATT membership. In 1971 the GATT council agenda listed nine regional trade agreements covering almost 30 countries. Some, like ASEAN in 1977 were well received by GATT as genuinely liberalising and others, like the Canada-US agreement of 1989, ever, explicitly attempted to conform to GATT rules. Arthur Dunkel (Director-General 1980-93) claimed to see no intrinsic conflict between regionalism and globalism, but the regional agreements threatened GATT authority; by 1994 of 50 GATT working parties established to consider regional agreements, probably diplomatically only six reached any conclusion.

Though the original ITO had placed considerable emphasis on development, the GATT was persistently criticised by developing countries, who comprised the majority of GATT members. Especially when steered by Raul Prebisch at the United Nations Conference on Trade and Development (UNCTAD), they maintained that liberal policies were not applicable to them. Led by Brazil, one of GATT’s responses in 1964 was the International Trade Centre, to provide support for developing countries exporters. But GATT’s dithering then allowed the OECD and UNCTAD time to devise a generalised system of preferences (GSP) that, contrary to the MFN, provided for preferential tariff reductions for developing countries exports in rich country markets. In 1971 GATT members unanimously voted to adopt the GSP. However, more pertinent for dynamic developing economies were agreements such as the Multi Fibre Arrangement (MFA) from 1974 to 1994, imposing quotas on the exports of textiles and garments that developing countries could sell to developed countries.

Agriculture was another sector that faced a host of barriers for developing country exports. GATT rules did not exempt agriculture, but there was strong resistance to liberalisation from large GATT members especially the EEC, the US, and Japan. This challenged GATT’s credibility as a universally relevant organisation because there were so many agricultural exporting countries in GATT; liberalisation of agricultural trade greatly lagged manufacturing. in 1986 Australia was prominent in establishing the Cairns group pressing for ‘fair trade’ in agricultural products and in explaining how Australian farmers were being squeezed by the EEC policy. At the Uruguay Round (1986-1994) the US insisted on liberalizing agricultural trade, while the EEC led by France and Ireland maintained that the CAP was non-negotiable. Yet by the mid-1980s the CAP guarantees of high prices had led to huge food stockpiles; subsidies and other agricultural support took two thirds of the EC budget. Rice production was a nation-wide activity in Japan, so Japan lobbied (unsuccessfully) for a food security clause permitting the exclusion of rice imports. Director-General Dunkel’s widely criticised compromise proposal blended European and US positions: a 20% reduction in scope and volume of existing subsidies and no more export subsidies, dropping prices subsidies in favour of income support and converting non-tariff barriers to tariffs (NTB). Farmers round the world protested and in 1990 25,000 farmers gathered in Brussels, objecting to proposed reduction in subsidies. At least 40,000 farmers attempted to march on the Strasbourg parliament in 1992. 5000 protested in Tokyo and 20,000 in South Korea. The French government and farmers objected violently but were not supported by the rest of EEC. A US concession for French films and more gradual phasing the subsidy reductions permitted agreement, though the President of South Korea resigned over allowing rice imports. NTBs converted to tariff showed how high barriers to food imports had risen; among others the EEC tariffs were 235% on butter and on white sugar, 207%.

Membership of GATT grew throughout the institution’s lifetime, so in that respect the institution can be judged a success. Ceding some sovereignty by following international rules was perceived to have compensating advantages. The successor organisation from 1995, the World Trade Organization, continued GATT’s pursuit of trade liberalisation. Perhaps GATT worked best for the more advanced countries and liberalizers, judging by trade expansion (Subramanian and Wei 2007). McKenzie’s conclusion that GATT, a ‘do gooding’ organization, was never good enough at doing good, simply reflects that GATT’s mediation of divergent national interests necessarily required compromises for all parties.

References

Bagwell, Kyle, and Robert W. Staiger. ‘An Economic Theory of GATT’. American Economic Review 89(1): 215-248 (1999).

Matejka, Harriet. ‘Central Planning, Trade Policy Instruments, and How Centrally Planned Economies Fit into the GATT Framework’. Soviet and Eastern European Foreign Trade 26(1): 36-65 (1990).

Subramanian, Arvind, and Shang-Jin Wei. ‘The WTO Promotes Trade, Strongly but Unevenly’. Journal of International Economics 72(1): 151-175 (2007).

James Foreman-Peck is Emeritus Professor of Economics at Cardiff University. His publications include A History of the World Economy; International Economic Relations since 1850 (Pearson, 1994) and ‘Trade Wars and the Slump’ (European Review of Economic History, 2007).

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