Law. International Trade Law The Journey from the GATT to the WTO

Transcription

1 Law International Trade Law The Journey from the GATT to the WTO

2 Role Name Affiliation Principal Investigator Dr. Ranbir Singh Vice Chancellor, National Law University, Delhi Co-P.I Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi Paper Coordinator Dr. Saloni Khanderia-Yadav National Law University, Delhi Content Writer/Author Lakshmi Neelakanthan Lakshmikumaran and Sridharan Attorneys, New Delhi Content Reviewer Prof. Abhijit Das Indian Institute of Foreign Trade, Delhi Language Editor Dr. Saloni Khanderia-Yadav National Law University, Delhi I. Description of Module Items Description of Module Subject Name Law Paper Name International Trade Law Module Name/Title The Journey from the GATT to WTO Module Id 3 Pre-requisites The political economy of the world preceding the two world wars. The meaning of laissez faire economy, planned economy, Keynesian economics & Adam Smith s theory of economics. The power politics amongst the North-South nation states and the circumstances leading to the world wars. Objectives To understand the following:

3 The aims for which the Bretton woods conference was developed; How the conference came into being; Role (Failure) of the conference in addressing the issue of international trade; The nature of the GATT and its provisional application; Success of GATT during the era of its implementation Keywords Bretton Woods, ITO, GATT II. E-text Introduction Bretton Woods can be understood as a system or regime designed to combine binding legal obligations with multilateral decision-making conducted through the newly created international organizations. The system owes its origin to the Bretton Woods Conference which was an effort of the United States (US), the United Kingdom (UK) and other allied nation states in the aftermath of the second world-war. The states engaged in a series of negotiations to establish rules for the post-war international economy. Conducted in July, 1944, the Bretton Woods Conference successfully led to the creation of two financial institutions (Bretton Woods Institutions, popularly known as the BWIs)- International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (more commonly known as the World Bank). Bretton Wood s effort in the creation of a similar institution to regulate international trade, however failed. Yet, a provisional agreement in the form of General Agreement on Tariff and Trade (GATT) evolved which existed during

4 , before being replaced by the modern trade institution- the World Trade Organisation (WTO). This module highlights the background of the Bretton woods conference, its aims and objectives in the aftermath of the second world-war. It also traces the failed attempts towards the creation of International Trade Organisation (ITO). It further highlights the process of formation of the GATT- the predecessor organisation to the WTO. Bretton Woods Conference (1944) Failed attempts to set up ITO (Provisional application of GATT) ( ) Modern Day WTO (1995-till date) Figure 1.1- Depicting the relevance of the Bretton Woods Conference in the modern international trade regime Learning Outcome Understanding the politics and economics behind the Bretton Woods Conference. Evaluating the role of the Bretton Woods Conference in creation of institutions regulating the post-war economy. Understanding the reasons for the failure of ITO (International Trade Organisation) and examining its relevance in the modern trade regime.

5 Topics & Sub-Topics covered 1Bretton Woods Conference 1.1 Political Economy of the World during the Inter-War Period 1.2 Reasons behind the Bretton Woods Conference 1.3 How did the Bretton Woods operationalize? 1.4 Results of the Conference 1.5 Footprints of Bretton Woods in previous regulatory institutions 2. Formation of the GATT 2.1 Evolution 2.2 The proposed ITO charter and reasons for its failure 2.3 GATT s principles &it s provisional application 2.4 Provisional application of GATT 3. Evaluation of Bretton Woods s Efforts: Its contemporary relevance 4. Summary

6 Text 1. Bretton Woods Conference 1.1 Political Economy of the World during Inter-War Period The modern era of free trade global regime traces a complex history. The period between , (usually termed as the golden era of capitalism ) ushered with the Bretton Woods conference, was preceded by severe economic turmoil prevalent between At the time of the economic turmoil, international economy was highly inter-linked and this economic linkage influenced countries political choices in trade and exchange. The economic linkages, especially in Western Europe and North America were the results of extensive trade and commerce activities prevalent at that time, industrial revolution and mass production and exchange (It is apt to note that the era of was the high-noon of Capitalism). 1 The impact of colonisation further led to the liberalisation in the weaker countries and colonies, for example- the Latin American countries. This economic situation was however, rudely shaken by the first world-war, which totally discredited the then popular view that thickening web of commerce would make wars between inter-linked nation states unlikely. 2 In reality, international rivalry amongst the rich capitalist nation states escalated into violent conflicts. Following the first world-war, the great depression of 1929 was yet another traumatic event for the world economy. The depression started in the US (with the infamous 1929 Wall Street Crash)- a country that was hit hardest by the experience. Between 1929 and 1932, the output in the US fell by 30% and unemployment increased 1 Ha Joon Chang, Economics: The User s Guide (Pelican, 2014) 65 (hereinafter Chang) 2 ibid, 73.

7 eightfold from 3% to 24%. Germany and France also suffered badly, with their outputs falling by 16 and 15% respectively. 3 Economists hold several reasons for the cause of the great depression. The predominant view of neo-liberal economists claimed that a totally manageable financial crisis was turned into the great depression because of the collapse in the world trade, caused by trade wars amongst the countries. The situation was prompted by the adoption of protectionism by the US through the 1930 Smoot- Hawley Tariffs. The Smoot-Hawley Tariffs Act imposed punitive protectionist tariffs on foreign goods being imported to the US. The Act was a result of the lobbying efforts by the U.S. agricultural interests groups in order to gain protection against agricultural imports The Smoot Hawley Act in-turn led to several retaliatory protectionist policies by the European Market. Illustratively, countries such as Italy and Spain showed increased protectionism, all of which worsened the prevailing economic situation. Other economists however hold that it was not protectionism but the downward spiral in international demand, caused by adherence of the governments to the doctrine of balanced budget, which aggravated the situation, leading to the great depression. 4 Even if the cause of the great depression remains debatable, its impact has been unanimously agreed. The great depression created a spiral of unpaid debts, falling tax revenues and discouraged private funding. The government was the only economic actor left in the economy, which thereby faced a budget deficit, while it attempted to control the situation of low demand in the economy. The economic situation was further worsened due to the prevailing Gold Standard model. Under this model, each national currency was backed by the quantity of gold held by country s central bank. Due to this standard, the central banks of the capitalist nation states could not increase 3 ibid, ibid, 76.

8 the money supply for fear of compromising the value of their currencies. Thus, with restricted money supply, credit became scarce and it further reduced the demand. 5 The turmoil of the periods reached its peak with the outbreak of the second world war. The loss and destruction caused by the second world-war resulted in the first reversal in the acceleration in economic growth since the early nineteenth century. To illustrate, per capita income growth rate of the world fell from 1.31 per cent during to 0.88 per cent during Amidst this economic background, two other points are note-worthy. First, a large part of economics during the high noon of capitalism era was governed by Adam Smith s laissez faire theory. According to this theory markets are self-correcting and hence do not require state intervention (laissez-faire capitalism; See Glossary). However, in the after-math of great depression and the economic situation torn by the two world wars, this view started changing. Keynesian economics (See Glossary) which advocated for government regulation became a more predominant view, which was further endorsed during the Bretton Woods Conference. The second vital factor noteworthy in the Bretton Wood s background was the prevalent situation of the former USSR countries. Whilst Western Europe and North America were waging in economic turmoil, Soviet industrialisation under the socialist principles of a completely planned economy was proving a big success. Illustratively, Soviet s success can be measured in its ability to repel the Nazi advance the Eastern front during the second world war. 7 Similarly, in Soviet countries, income per capita was estimated to have grown by 5% between , in contrast to 1-2% at which the rest of the world grew. With this economic and political background, in mind, let us understand the nature, aims and role of the Bretton Woods Conference. 5 ibid, A. Madisson, The World Economy: Historical Statistics(OECD, 2003) Chang, 75.

9 1.2 Reasons behind the Bretton Woods Conference The world wars were pyrrhic victories indeed with both sides losing heavily. The lessons drawn from the inter-war period thus informed the approach of global policy makers towards reconstruction and development of the post war economy. President Franklin D. Roosevelt of the US and officials such as Secretary of State Cordell Hull became pioneers for the Bretton Woods Conference. These officials were adherents of the Wilsonian belief that free trade promoted not just prosperity, but also peace. In-order to combat the great depression, several protectionist policies were adopted by the countries. These policies included: Beggar Thy Neighbour- An international trading policy that utilizes currency devaluations and protective barriers to alleviate a nation's economic difficulties at the expense of other countries. While the policy may help repair an economic hardship in the nation, it will harm the country's trading partners, worsening its economic status Competitive currency devaluations- Competitive devaluation refers to a scenario in which an abrupt national currency devaluation by one nation is matched by a currency devaluation of another, especially if they both have managed exchange-rate regimes rather than floating exchange rates determined by market forces. Competitive devaluation is considered a beggar-thy-neighbor type of economic policy, since it amounts to a nation trying to gain an economic advantage without consideration for the ill-effects it may have on other countries High tariffs- Examples of the prevailing high tariffs include the Smoot-Hawley Act of the US and other retaliatory tariff measures imposed by European countries such as Italy and Spain, as discussed above Discriminatory trading blocs- The prevailing imperial preferences involved in tariff setting and trade such as the policy of Britain and France towards their colonies discriminated against preferences allotted to non-colonies. 8 Investopedia, 12 July Investopedia, 12 July 1214.

10 Each of these policies further culminated in the destabilisation of international environment without improving the economic situation. This experience led world leaders to conclude that economic cooperation was the only way to achieve both peace and prosperity, at home and abroad. 10 Similarly, in thebrettonwoods discourse, the world was described in terms of free market of sovereign autonomous states enjoying equal opportunity in an open international system How did the Bretton Woods operationalize? The cooperation efforts began with the strengthening of alliance between the US and the UK. The vision of economic cooperation was first articulated in the Atlantic Charter, issued by the US president Roosevelt and British Prime Minister Winston Churchill at the conclusion of the August 1941 Atlantic Conference. The Charter s fourth point committed the United States and the United Kingdom to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity, while its fifth point expressed their commitment to the fullest collaboration between all nations in the economic field with the object of securing, for all, improved labor standards, economic advancement and social security. 12 The two countries further elaborated upon these principles in Article VII of their February 1942 agreement on lend-lease aid. In that article, the United Kingdom agreed that in return for U.S. lend-lease assistance, it would cooperate with the United States in devising measures to expand production, employment, and the exchange and consumption of goods, to eliminate all forms of discriminatory treatment in 10 US Department of State, Milestones: , Bretton Woods-GATT, https://history.state.gov/milestones/ /bretton-woods accessed 12 July 2014 (hereinafter US Dept. of State, Bretton Woods-GATT) 11 Richard Peet, Unholy Trinity: The IMF, WB and WTO (Macmillian, 2003) 37 (hereinafter Peet). 12 ibid, 34.

11 international commerce, to reduce barriers to trade, and generally to achieve the goals laid out in the Atlantic Charter. 13 By early 1942, U.S. and British officials began preparing proposals that would foster economic stability and prosperity in the postwar world. Harry Dexter White, Special Assistant to the U.S. Secretary of the Treasury, and John Maynard Keynes, an advisor to the British Treasury, each drafted plans. The plans aimed at creating organizations that would provide financial assistance to countries experiencing short-term balance of payments deficits.financial assistance would safeguard countries and thereby prevent them from protectionist or predatory economic policies adopted to improve their balance of payments position. 14 While both plans envisioned a world of fixed exchange rates, and believed to be more conducive to the expansion of international trade than floating exchange rates, they differed in several significant respects. As a result, from 1942 until 1944, bilateral and multilateral meetings of allied financial experts were held in order to settle upon a common approach. An Agreement was finally reached at the July 1944 United Nations Monetary and Financial Conference. This gathering hosted delegates from 44 nations that met in Bretton Woods, New Hampshire, famously known as the Bretton Woods Conference Results of the Conference The conference resulted in the formation of a monetary regime joining an unchanged gold exchange standard (prevalent in the preceding era), supplemented by a centralized pool of gold and national currencies, with an entirely new exchange rate system of adjustable pegs. 13 ibid, US Dept. of State, Bretton Woods-GATT. 15 ibid.

12 Further, the two major accomplishments of the Bretton Woods conference were the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank. The IMF was charged with the following functions: Regulatory- administering the rules governing currency values and convertibility and overseeing a system of fixed exchange rates centered on the U.S. dollar and gold. Financial- Supplying supplementary liquidity by providing short-term financial assistance to countries experiencing temporary deficits in their balance of payments; Consultative- serving as a forum for consultation and cooperation among governments; The IBRD was responsible for providing financial assistance for the reconstruction of war-ravaged nations and the economic development of less developed countries. In July 1945, the US Congress passed the Bretton Woods Agreements Act, which authorised the US to officially join IMF and the World Bank. The two organizations officially came into existence five months later. IMF and IBRD continue to function as pivotal organisations in regulating world trade and finance. today. However, the fixed exchange rate system established at the Bretton Woods prevailed only for three decades. Post the exchange crises of August 1971, the US President Richard M. Nixon suspended the dollar s convertibility into gold. Further, during February/March 1973 floating exchange rates become the norm for the major industrialized democracies, which continues to persist till date. It can be said that structurally, the Bretton Woods combined a respect for the traditional principle of national sovereignty, especially of the United States with a

13 new commitment to collective responsibility for management of monetary relations, expressed both in mutually agreed rules and in the powers of the IMF Footprints of Bretton Woods in previous regulatory institutions Bretton Wood s contribution in the formation of modern global regulatory institutions was tremendous. However, it must be noted that the era of global regulation through institutions began as early as early 1920s. Political organisations such as the League of Nations maintained regulatory institutions, for example- the Economic and Financial Organisation. Similarly, an international bank to aid post war reconstruction was first discussed in Brussels in Another proposal to restore the gold standard, stabilised via central bank cooperation and managed by an international convention was discussed in Genoa in League of Nations also helped organise loans for the countries in the 1927 period. Similarly world leaders including members of the League, the US and Soviet members met in Geneva and Hague subsequently to discuss issues of balancing budget, removing control on movement of goods and services etc. Thus the success of the Bretton Woods can be seen as cumulation of previously initiated efforts of nation states during the inter war period Formation of the General Agreement on Tariffs and Trade (GATT) 2.1 Evolution While the Bretton Woods was successful in creation of two pivotal financial institutions to regulate trade and finance, a similar agreement on international trade proved more difficult to achieve. One of the most contentious issues was the system of discriminatory preferential tariffs. Such tariffswere established and continued among the members of the British Commonwealth in 1932, whereby trade within the Commonwealth was subject to lower tariffs than trade between the Commonwealth nations and the rest of the world. 16 B. Cohen, Bretton Woods System, forroutledge Encyclopedia of International Political Economy) Accessed on July 12, See generally, Peet.

14 The U.S. officials such as Cordell Hull opposed such imperial preferences on both ideological and practical grounds. Similarly, countries such as Canada that were members of the preferential system were also the United States largest trading partners and hence called for its abolition. However, many Commonwealth officials favored keeping the preferences. They similarly asserted that imperial preferences would continue until at-least the US agreed to reduce the high Smoot-Hawley tariffs, it set in Thus, an evident dead-lock continued on these issues. Similarly, the nation-states could not agree on a proposed structure to create an organisation that would oversee international trade, just as the IMF and IBRD were formulated. Post Bretton Woods, 15 countries re-began talks in December 1945 to reduce and bind customs tariffs. With the second-world war only recently ended, they wanted to give an early boost to trade liberalization.thus they began to correct the legacy of protectionist measures which remained in place from the early 1930s. This first round of negotiations resulted in a package of trade rules and 45,000 tariff concessions affecting $10 billion of trade, which was about one fifth of the then world s total. It further led to the elimination of several imperial preferences. The group had expanded to 23 by the time the deal was signed on 30 October The tariff concessions came into effect by 30 June 1948 through a Protocol of Provisional Application. This signified the birth of the General Agreement on Tariffs and Trade, with 23 founding members (officially known as the contracting parties to the GATT). It is vital to note that the 23 were also part of the larger group negotiating a separatecharter for creating International Trade Organisation- a formal regulatory institution for international trade. One of the provisions of the GATT said that they should accept some of the trade rules of the ITO draft. This, the members believed, should be done swiftly and provisionally in order to protect the value of the tariff concessions they had negotiated during GATT formation. They spelt out how they envisaged the relationship between GATT and the ITO Charter. GATT was designed not only to implement the agreed tariff cuts but to also serve as an interim codification of the rules governing commercial relations among its signatories until the ITO was created. It must be noted that members also allowed for the possibility that the

15 ITO might not be created. 18 In retrospect, this evaluation of the members was correct, as the ITO never came into existence. The reasons for the same shall be explored below. 2.2 The proposed ITO charter and reasons for its failure Less than a month after GATT was signed, the Havana conference discussing the ITO began on 21 November The Charter provided for the establishment of the ITO, and set out the basic rules for international trade and other international economic matters. It was proposed that ITO would be accorded the status of a specialised UN agency. According to the WTO website, the draft ITO Charter was ambitious. It extended beyond world trade disciplines, to include rules on employment, commodity agreements, restrictive business practices, international investment, and services. 19 After four months of negotiations, the representatives of 53 countries signed the finished charter in March Thus, the ITO Charter was finally agreed in Havana in March However, ratification in some national legislatures proved impossible. The most serious opposition was in the US Congress, even though the US government had been one of the driving forces. An argument of the US against the new organization was that it would be involved into internal economic issues. 20 Subsequently, on December 6, 1950, President Truman announced that he would no longer seek Congressional approval of the ITO Charter. 21 Without the support of the US, the ITO could never come into existence. Upon ITO s failure, the GATT gradually became the focus for international governmental cooperation on trade matters. 22 After its ratification, eight rounds of trade negotiations were conducted under the aegis of GATT which resulted in significant tariff reductions among its members. The GATT was superseded by the World Trade Organization in 1995, the first formal trade regulatory institution, after the failure of ITO. 23 The GATT principles and 18 The GATT years from Havana to Marrakesh, WTO website accessed on July 12, ibid. 20 Jones &Kenen, Handbook of International Economics (1 st edn.) P. van den Bossche, The Law and Policy of the World Trade Organization (2 nd edn. CUP, 2008) ibid, Wikipedia, on 12 July 2014.

16 agreements were thereafter adopted by the WTO, which was charged with administering and extending them 2.3 GATT s principles & it s provisional application For almost half a century, the GATT s basic legal principles remained much as they were in There were additions in the form of a section on development added in the 1960s and a few plurilateral agreements (i.e. with voluntary membership) in the 1970s. GATT s efforts to reduce tariffs further continued. Much of this was achieved through a series of multilateral negotiations known as trade rounds which were held under GATT s auspices. GATT was provisional with a limited field of action, but its success over 47 years in promoting and securing the liberalization of much of world trade remains incontestable. Continual reductions in tariffs alone helped spur very high rates of world trade growth during the 1950s and 1960s, around 8% a year on average. The momentum of trade liberalization further helped ensure that trade growth consistently out-paced production growth throughout the GATT era, a measure of countries increasing ability to trade with each other and to reap the benefits of trade. The rush of new members during the Uruguay Round demonstrated that the multilateral trading system was recognized as an anchor for development and an instrument of economic and trade reform. 3. Evaluation of Bretton Woods s Efforts: Its contemporary relevance Despite dating back to six decades, Bretton Wood s contemporary significance remains monumental. The efforts that went into the creation of institutions and agreements such as the IBRD, IMF and the GATT reflected the true political economy of that era, vital for understanding the functioning of the modern regimes. Similarly, Bretton Wood s conclusion does not go without its critique. At the time of its conclusion, Bretton Wood s core foundational principle was that mutual dependence, reciprocity and relative equality in economic and political-military capacity amongst nation-states would prevent further wars. 24 However, in reality one 24 Peet, 33.

17 must note that Bretton Woods was conceived in an era of extreme inequality amongst nation states and lack of dependence (as East was separating from the West). The prevailing situation at the time of the Bretton Woods Conference can serve as a useful comparative exercise with the modern trade rounds such as the Doha rounds of trade negotiation. Further, Bretton woods was characterised by several economic theories. On one hand there were aggressive capitalist forces that wanted to expand globally beyond the domestic boundaries of the western world. On the other hand, the Kenyesian influence became more prominent, as the Bretton Wood s leaders emphasised on regulation alongside market control. Similar debates are being raised even today, in the after-math of the economic crisis of 2008, where world leaders are brainstorming for solutions to combat world recession. Furthermore, the modern day relationship between the WTO and BWIs such as the World Bank and IMF remain highly complex. In order to understand the nature of trade and finance regulation, Bretton Woods and its debates remain highly useful. 4. Summary Beginning with the early inter-war period, nation states had shown desire to regulate their international trade and finance through institutional efforts. The period between which witnessed severe economic turmoil, further promoted their efforts to cooperate in regulation of trade and finance, in-order to further prevent wars. The inter-war period was characterised by several discriminatory policies adopted by the states, for example- beggar thy neighbour, imperial preferences in regulating tariffs, imposing high tariffs and indulging in competitive devaluation. These practices along with the prevailing macro-economic conditions characterised by the great depression (1929) and the destruction caused by the two world wars, finally led members of the US, UK and allied powers to convene the Bretton Woods conference. The conference (1944) successfully created two institutions for financial regulation and economic development- IMF and IBRD. However, a similar organisation to regulate trade- ITO could not be finalised. The reasons for the failure of ITO s birth were its ambitious charter, which member states especially the US found too intrusive to domestic

18 regulation. Instead GATT which was initiated by 23 member states in 1947 continued to gain strength in the period that followed. Despite its provisional application, it created an initial trade package deal, tariff concession and subsequent trade liberalisation, before being finally succeeded by the modern institution of the WTO. Though historical, Bretton Woods and its efforts hold contemporary relevance. It provides an insight into the political economy of the inter-war period. It further emphaises the role of regulation in economic liberalisation, a debate which has resurfaced in the light of the on-going global economic crisis.