The Origins of the General Agreement on Trade and Tariffs

Essay, 2015

6 Pages, Grade: 100/100



For a long period of time people and countries have recognized the importance of international trade and its influence on their welfare. In general terms, as Adam Smith concluded, international trade enables the specialization of nations in the production of goods and services that they can produce more efficiently and at the same time it allows the enjoyment of products that foreign countries have comparative advantages in. However, in specific periods, mainly due to economic ignorance and circumstances of financial uncertainty, countries have tried to protect their economic space by imposing trade restrictions. The consequence of such an action has been the deterioration of the economic environment and the persistence of severe crises. It was exactly the end of the Second World War that directed the economic philosophies of the major players in world trade towards the common idea that trade barriers should be eliminated if countries want to expand their economic potential. As a result, their willingness to create a mutual economic environment that would produce shared financial benefits for all the members led to the creation of the General Agreement on Trade and Tariffs in 1947 in Geneva, Switzerland. The General Agreement on Trade and Tariffs was a contractual framework, a temporary agreement which priority was the reduction of trade barriers between the participating countries. While there are various aspects of the General Agreement on Trade and Tariffs that can be discussed, it is essential to understand the historic circumstances that led to its creation. As such, the General Agreement on Trade and Tariffs was a result of the countries’ will to prevent catastrophic events like a new Great Depression and a new World War.

The Great Depression of the 1930’s was undoubtedly one of the most critical events in the history of the USA. Characterized by high levels of unemployment and low levels of production, the Great Depression still remains in the minds of Americans as one of the most dangerous periods the US has ever gone through, if not the most dangerous one (Davidson et al., 1996). Mainly due to the gold exchange system, the depression spread throughout European countries and affected them to a substantial degree. Actually, according to the economic opinion on the factors that led to the outbreak of the Great Depression, the lack of economic and international trade knowledge contributed considerably to the disaster (Davidson et al., 1996). During the 1930s, when the severe depression threatened the economic reality of most of the world, many forms of trade restrictions like tariffs, quantitative restrictions and exchange controls were introduced by various countries as they were trying to protect their domestic economies (Ayenagbo et al., 2010; Davidson et al., 1996). Basically, they were aiming at diminishing the consequences of their macroeconomic failures by following a mercantilist way of trading: they started exporting more goods and services and limited the inflow of foreign products. In addition to protecting the local economy, the US used trade restrictions as a way of incentivizing the development of the country’s infant industries (Ayenagbo et al., 2010). This tendency culminated in the Smoot-Hawley Act of 1930 which raised US tariff rates by almost 50% between 1929 and 1932 (Ayenagbo et al., 2010). While the economic rationale behind the protective measures was the improvement of the macroeconomic variables like unemployment and production, the result was completely contradictory. Instead of diminishing the burden of the depression, protectionism emphasized the already existing problems and created new ones and a total collapse of international trade ensued. The increase of tariffs by all countries led to a zero sum game that left all of them in their initial position. Concretely, high tariff rates had a twofold effect: they protected the American industries, but at the same time they discouraged foreign trade, making it difficult for Europeans to sell goods and services to the world’s most profitable market. As Europeans were not gaining, they lacked the resources to spend on American products. To conclude, not only did not trade barriers help solve the problems associated with the Great Depression, but they worsened them and created the favorable conditions for a new world war to emerge.

Two other important events that occurred in the first half of the 20th century and affected immensely international trade involved the First and the Second World War. World War destabilized essentially the existing trade relationships as countries charged higher tariffs and introduced import quotas and other controls. The peak of the trade conflict between the Allies and the Central Powers was reached when the Blockade was issued by Britain. The Blockade of 1915 prohibited the export of American goods and services to Germany (Davidson et al., 1996). As there was no authority to regulate the rules of international trade, trade restrictions continued to exist in the period between the two world wars. In addition to the high tariffs that had disrupted trade between countries involved in the First World War, further complications emerged in the international environment as the Peace Treaty of Versailles charged Germany with the payment of $56 billion of war reparations (Davidson et al., 1996). According to historians, the combination of the reparations that were to be paid by Germany and the trade restrictions imposed by various nations created the favorable economic and political climate for the rise of Nazism in Germany and Fascism in Italy and the outbreak of the Second World War (Davidson et al., 1996). Following the logic of World War I, the Second World War was even harsher in terms of the interruption of trade as it involved a larger number of economically important countries.

It was exactly this political and economic environment that dictated the urgent need for the creation of an international organization that would deal with matters of international trade. USA and Britain led the way by first recognizing that if the same mistakes as in the post World War I were to be made, a new Great Depression and a New World War would definitely be the consequences. As a result, the establishment of an international organization regulating trade became one of the three central points in the Bretton Woods Conference held in 1944 (Free trade and preferential tariffs: The evolution of international trade regulation in GATT and UNCTAD, 1968). Alongside with the creation of the International Monetary Fund and the International Bank for Reconstruction and Development which would manage balance of payment problems and finance developmental programs respectively, scholars presented the idea of setting up an organization that would ensure the normal processing of trade relations in the post World War II period. Their initial idea involved the establishment of the International Trade Organization; however, after a series of oppositions by the US Congress, it was negotiated that only a temporary framework for the regulation of trade was formed (Ayenagbo et al., 2010). The Bretton Woods conference determined the initiation of a new era regarding international trade relations which name was General Agreement on Trade and Tariffs. The decisive and central role played by the General Agreement on Tariffs and Trade in shaping postwar trade policy is unquestionable. During the eight rounds of the General Agreement on Trade and Tariffs the average tariff rates on industrial goods have fallen from 40% to nearly 4%. At the same time, membership in GATT has risen so much during the years of its existence that it actually controlled approximately 80% of world trade.

To conclude, the lessons derived from the Great Depression and the World Wars shaped the economic and trade philosophies of the non socialist nations in the second half of the 20th century. It was evident that the establishment of a permanent institution to regulate trade and solve trade disputed was vital for the well functioning of the global economic environment. GATT has been generally successful in accomplishing its objectives. As mentioned before, in addition to controlling 80% of international trade and lowering tariffs considerably, GATT laid the grounds for the formation of World Trade Organization. Furthermore, The GATT has devoted special attention to the problems of developing countries by putting huge efforts with the purpose of facilitating the access of developing countries’ products to developed nations’ markets. Generally speaking, GATT has done quite well in the promotion of economic well being in both developed and developing countries.


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The Origins of the General Agreement on Trade and Tariffs
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