The Postwar Trade Regime

Lecture 9 – Tuesday, 11 October 2011J A Morrison 1

James E MeadeCordell Hull

Admin– The Lesson of GATT.org

2

Last time, we discussed the collapse of the global trade

regime during and after WWI.

We also saw the early attempts by the US to rebuild this order in the mid-1930s.

3

Today, we’ll continue that story by tracing the origins of the

General Agreement on Tariffs and Trade (GATT) and its

expansion in the postwar era.

This will set the stage for a discussion on Thursday about the contemporary global trade

regime.4

Lec 9: Postwar Trade Regime

I. From the RTAA to the GATTII. The Genesis of the GATTIII.The Ascendance of the GATTIV.The GATT’s Durability & Legacy

5

Note that the title for Section 2 comes from Irwin, Mavroidis, and Sykes.

(IrMS)

We’ll consider them, though, beyond just Section 2.

6

Lec 9: Postwar Trade Regime

I. From the RTAA to the GATTII. The Genesis of the GATTIII.The Ascendance of the GATTIV.The GATT’s Durability & Legacy

7

I. From the RTAA to the GATT

1. American Shift towards Liberalization

2. Anglo-American Negotiations

IrMS offer their own explanation for the US shift in favor of liberalization in

the mid-1930s.

Let’s compare their analysis to those we have seen. (pp 10-

17)

9

Previous Explanations of US Liberalization in the 1930s

• Bailey, Goldstein, & Weingast (BGW)– See-saw battle between parties on trade

policy– Democrats want to lock in tariff reductions– Institutional changes of RTAA…

• secure liberalization now • Foster exports entrenched advocates

• Michael Hiscox (MH)– Of course democrats liberalized trade– Durability is explained by exogenous

changes in trade interest (caused by war) 10

Do IrMS appreciate the salient institutional features

of the 1934 RTAA?

11

Why, according to IrMS, did the US shift toward trade

liberalization?

(p 13)

12

“When the war came in 1914, I was very soon impressed with two points. . . . I saw that you could not separate the idea of commerce from the idea of

war and peace . . . . [and] that wars were often largely caused by economic rivalry conducted unfairly. . . . But toward 1916 I embraced the

philosophy that I carried throughout my twelve years as Secretary of State . . . . From then on, to

me, unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic

competition, with war...I reasoned that, if we could get a freer flow of trade ‐ freer in the sense of fewer

discriminations and obstructions ‐ so that one country would not be deadly jealous of another and

the living standards of all countries might rise, thereby eliminating the economic dissatisfaction

that breeds war, we might have a reasonable chance for lasting peace.”

-- From Cordell Hull’s Memoirs (IrMS 13) 13

How do we reconcile IrMS’ explanation with those given by BGW and MH?

14

IrMS recognize that explaining the effects of a policy is not the same as explaining why the policy was adopted in the first

place.

15

IrMS on Leadership

• IrMS’ foundational assumption: leadership is key

• How Hull’s leadership set policy (p 14):– Set liberalization as high priority– Ensured robust design

• Hull was a leader (16, 17)

16

(Later, IrMS use leadership in another way: to highlight the US’ leadership. See p 145.)

17

I. From the RTAA to the GATT

1. American Shift towards Liberalization

2. Anglo-American Negotiations

The GATT largely grew out of the negotiations between

Britain and the United States in the 1930s and

1940s.

19

The initial Anglo-American imprint remains immensely

important.

We’ll discuss the efforts at reform—successful and not—later today and Thursday.

But we need to understand the nature of these starting

points. 20

(Brace yourself: some of this will go blow-by-blow.)

21

Hull saw the British imperial preference system as

emblematic of the 1930s beggar-thy-neighbor

strategies.

He was determined to dissolve this economic bloc.

22

Lend-Lease Act

• Passed March 1941• US provides money, munitions, &

supplies to GB and other Allies• The Consideration: GB not obliged to

repay loans, only to return unused portions and offer something of equal value

• US initially tries to trade Lend-Lease Assistance for abolition of Imperial Preference System 23

Naturally, Keynes objected—but on what grounds? (p

19-22)

24

Keynes on “the lunatic proposals of Mr Hull”

• GB lacked authority to oblige commonwealth

• Americans falsely assumed balanced postwar global economy– US: surplus of exports– UK: excessive demand for imports

• Keynes dreaded re-adoption of 19th C strictures (gold standard + free trade) Some controls would be necessary for

monetary policy autonomy 25

The Atlantic Charter

• Meeting between FDR & WSC at Newfoundland, Aug 1941

• Joint Statement of Principles– No territorial aggrandizement– Self-determination– “endeavor, with due respect for their

existing obligations, to further the enjoyment by all States…to…trade and…raw materials”

• Hull was disappointed26

The Mutual Aid Agreement

• Signed 23 Feb 1942• US attempts to trade assistance for

elimination of commercial “discrimination”

• British wonder if US State Dept is the only supporter of free trade

• Unclear language differing interpretations

27

Meade’s (British) Plan

• Proposal for an International Commercial Union (Jul 1942)

• Desired multilateral rather than bilateral agreements

• Exceptions:– Imbalances of payments– “moderate degree of Imperial

Preference”

• International Commerce Commission: Judicial dispute settlement body 28

Washington Seminar, Fall 1943

• Informal Anglo-American discussions• Broad agreement on trade policy:

liberalize!• Different modes of negotiation– US: bilateral negotiations; product-by-

product– GB: multilateral negotiation; across the

board cuts

• New consensus– Negotiations will be multilateral within group– GB gets transition period & exception for

balance of payments problems 29

This brought great hope to the British, but two forces

undermined this consensus…

30

(1) Connections with Money• Persistent disagreement about int’l

monetary system– Exchange rates– Capital controls

• This tainted trade negotiation through the balance of payments connection

--> Each FEP must be considered in the context of the other FEPs!

31

(2) Domestic Politics• US State Dept liked free trade, but

Congress was another matter• Congress questions abandoning

RTAA– RTAA had a proven track record– Bilateral negotiations would maximize

benefits of US power

32

After the war ended, the US ended Lend-Lease, forcing

GB to request further loans.

Relations worsened when the US returned to its old

mantra: we’ll give you financial assistance if you

eliminate Imperial Preference. 33

Lec 9: Postwar Trade Regime

I. From the RTAA to the GATTII. The Genesis of the GATT• The Ascendance of the GATT• The GATT’s Durability & Legacy

34

II. The Genesis of the GATT

1. The GATT and the ITO2. The Structure of the GATT

In the summer of 1945, Canada responded to the US’s return to bilateralism

with an innovative suggestion…

36

Canada’s Plan

• Selective Nuclear Multilateral-Bilateral Approach

1. Small “nucleus” of countries negotiate bilaterally

2. Agreements then generalized for larger group of countries

US adopted this two-step plan in early 1946.

37

US’ Two-Step Strategy

• US extends invitations to select countries to meet in March 1946

• Feb 1946: UN Econ & Soc Committee recommends drafting charter for ITO

But the former was delayed and the latter fizzled entirely. Why?

38

Domestic politics.

(pp 112-113)

39

The ITO never materialized because it failed to secure Congressional approval.

40

So, then how did the GATT get through?

41

The GATT also did not receive Congressional

approval.

But it was snuck through under the auspices of the

RTAA.

42

II. The Genesis of the GATT

1. The GATT and the ITO2. The Structure of the GATT

Here are some of the essential features of the

original GATT (“GATT 1947”).

44

GATT 1947

• 23 countries (“contracting parties”) signed 30 October 1947 in Geneva

• Agreement– “Protocol of Provisional Application”,

done in conjunction with expected ITO–Multilateral, MFN status– Very loose dispute settlement

mechanism– Consensus Decision-making

45

Results of GATT 1947

• Immediate Results– 45,000 individual reductions– Affects $10 billion of trade (20% of

global total)

• Long-term Results– Established regime for future trade

negotiations

46

Lec 9: Postwar Trade Regime

I. From the RTAA to the GATTII. The Genesis of the GATTIII.The Ascendance of the GATT• The GATT’s Durability & Legacy

47

Despite its explicitly “provisional” status in 1947,

the GATT emerged as the cornerstone of the postwar

global trade regime.

48

After the War, successive “rounds” were convened in which “contracting parties”

met to negotiate trade liberalization.

Each “round” was modeled on GATT 1947.

49

GATT RoundsRound Name

Place Year(s) Subjects Countries Significance

GATT 1947 Geneva 1947 Tariffs 23 Established Framework

Annecy Annecy 1949 Tariffs 13

Torquay Torquay 1951 Tariffs 38

Dillon Geneva 1960-1961 Tariffs 26

Kennedy Geneva 1964-1967 Tariffs & Anti-dumping

62 Rule Change: Inclusion Exclusion

Tokyo Geneva 1973-1979 Tariffs, NTBs, “framework” agreements

102

Uruguay Geneva 1986-1994 Tariffs, NTBs, Intellectual Prop, DSU

123 Led to WTO

50

Significant Trends

• Increase in Length of Rounds• Broadening Scope• Increase in Size

The GATT grows over time!

51

Lec 9: Postwar Trade Regime

I. From the RTAA to the GATTII. The Genesis of the GATTIII.The Ascendance of the GATTIV.The GATT’s Durability & Legacy

52

IV. GATT’s Durability & Legacy

1. Explaining the GATT’s Durability2. Assessing the GATT’s Legacy

Why did the GATT prove so durable?

54

Obviously, the US’ newfound commitment to

free trade was crucial.

But this was a prerequisite—necessary but not

sufficient.

55

Why did the US continue to use the GATT framework

rather than returning to the RTAA or developing some

new protocol for liberalization?

And why did the rest of the world go along?

56

It met the needs of both developed and developing

countries…

57

(1) Loose, “Provisional” Structure

• Ambiguity & Flexibility Lowered bar of participation

• Ease of Exit Enhanced advantages of powerful states

58

(2) Two-Step Process

• Allowed powerful states to set agenda

• But still created value for all members– Bad deal is better than no deal at all

59

Here’s the takeaway:

GATT was premised upon consolidating advantages of

the powerful while still ensuring weak states were

better off with it than without it.

60

IV. GATT’s Durability & Legacy

1. Explaining the GATT’s Durability2. Assessing the GATT’s Legacy

De jure, decision-making in the GATT was premised on

consensus (unanimity).

But de facto the powerful countries set the agenda.

62

This has led to what IPE scholars call democratic gap: the practical lack of

democratic rule in international regimes.

63

And there is a deeper irony here: the countries that

dominate these international regimes are

predominantly democracies!

64

This is what I call democratic irony:

democracy, which is highly correlated with international power,

ironically leads democratic states to develop incredibly undemocratic international

regimes. 65

Next Time: The Trade Regime Today

• From the GATT to the WTO• Does the WTO matter?• Doha: The Colonies Strike Back• Regionalism & Multilateralism• The Normative Questions– Principle: Is trade liberalization good?– Execution: What’s with the double

standard for developing & developed countries?

66