Modelling a multilateral trade organization: the ITO and the GATT
While the previous section has argued strongly in favour of a multilateral trade organization, this does not amount to a defence of the World Trade Organization. An international organization can take a variety of shapes, and may be guided by a spectrum of rules that have far-reaching implications for international power and wealth distributions. In this section, we briefly examine two models of a multilateral trade organization that were formulated by international negotiators: one that never actually materialized and one that did.
The International Trade Organization (ITO)
Following the end of the Second World War, international leaders were anxious to build safeguards and institutions into the international system that would protect the world from the recurrence of such disastrous events. The US took the lead in advancing the view that free trade provided an important mechanism for achieving world peace. US Secretary of State, Cordell Hull, was an eminent and influential exponent of this view: I have never faltered, and 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.
The Allies, particularly the US and Britain, began discussions about the reconstruction of the world economic order even before the war effort was over. In 1944, at the Bretton Woods conference, the US and Britain signed an agreement that provided the blueprint for the post-war economy. Three pillars were envisaged for the purpose of maintaining international economic cooperation: the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (or the World Bank), and the International Trade Organization (ITO). Following the bilateral trade negotiations between the US and Britain, successive multilateral conferences were held between 1946 and 1948. The outcome of this process was the Havana Charter, the draft agreement for the creation of the ITO, which was signed by 53 of the 56 countries participating in the conference.
Despite this promising multilateral commitment, the ITO never came into existence. The agreement required ratification in the US Congress before it could be implemented, and no other country was willing to commit to the rules of an ITO without the US aboard. But
US ratification proved to be problematic, despite its leading role in the genesis and evolution of the idea of the ITO. By 1948, the context that had initially led to the idea of the ITO had changed substantially. Domestically in the US, it began to appear extremely unlikely that the Republican Congress of 1948 would ratify the Charter despite the support that the Havana process had enjoyed from the Democratic presidency. International imperatives further demanded that the attention of the Congress be devoted to more immediate and pressing matters. Finally, in 1950, President Truman announced that he would not be submitting the Charter to the Congress for ratification. Given the preponderance of the US in the post-war economy, other countries decided that an ITO without the participation of the US would be meaningless.
Richard Gardner’s words about the ‘ignominious fate’ of the ITO resonate here: ‘It did not have a chance to die: it was simply stillborn.’ This outcome cannot be understood without a brief examination of the content of the Havana Charter. Within the expanse of its mandate and the details of its organization lay the seeds of its failure.
The ITO envisaged by the Havana Charter had a far-reaching mandate, and an elaborate organization to implement it. This expansive mandate was very much a product of the post-war context. The liberalizing ITO was charged with the tasks of solving many of the problems that we see today as belonging inside the borders of states, but which were especially serious concerns in the post-war years. Hence, besides covering the obvious area of commercial policy, the 106 articles of the ITO extended to areas of employment, economic development, restrictive business practices, and commodity agreements. It gave recognition to the importance of ensuring fair labour standards, and also incorporated provisions that allowed governments to address their development and humanitarian concerns.
The Havana Charter endowed the ITO with a detailed organizational structure to implement its mandate. It was envisaged explicitly as a specialized agency of the United Nations.
The articles provided detailed prescriptions regarding decision-making procedures. They also provided for the creation of an Executive Board of 18 members, to be voted for by two-thirds majority, with 8 places reserved for member countries ‘of chief economic importance’. Commissions would be created to perform the functions of the organization, which were to be appointed by the Executive Board and also report back to the Board. The Charter also gave the ITO the power of rule enforcement by building a clear dispute settlement process within it. In the event of a dispute, affected members were first required to consult among themselves.
The matter could then be taken to the Executive Board, which could arrive at a decision by majority vote. The Board could also refer the matter to the plenary conference of the ITO. Further, any member affected and dissatisfied by a decision of the Conference could refer the matter to the International Court of Justice.
Unfortunately, by logrolling the diverse and often contradictory demands of all potential members of the ITO, the negotiators of the Havana Charter ended up with a final package that satisfied no one. The process for negotiating the Charter had, as its starting point, the US view that free trade was the remedy for a variety of post-war problems, including unemployment and economic instability. But in response to the war-torn economies of Western Europe, and particularly as a result of pressure from Keynesian Britain, the Charter also provided for detailed exceptions to this principle. As a result of British pressure, the Charter accepted the system of imperial preferences and provided escape clauses for countries experiencing balance of payment difficulties.
Trade-offs between the Americans and the British underlay the greater part of the negotiation process for the Havana Charter, until the London Conference in 1946. In London, however, developing countries (led particularly by Brazil, Chile, and India) disrupted the cosy consensus and demanded that the Charter include exceptions that allowed them to impose special quantitative and other restrictions to facilitate their economic development. These countries were successful, and many of their demands were incorporated into the development provisions of the Charter, including a special section that identified economic development as a central objective of the ITO. But the absence of these interlocutors from the negotiation table when the idea of the ITO was conceived meant that their demands were not fully integrated into the text.
They formed important additions to the document, and the list of exceptions in the Charter grew. Domestic constituencies within the US also ensured that exceptions were built into the broader commitment to free trade. Hence, for instance, the Department of Agriculture managed to secure an exception on quantitative restrictions and export subsidies so that US agricultural policies remained largely untouched by the ITO. The mix of commitments that resulted was contradictory, volatile, and unsustainable. Within the US, the Charter was severely denounced by, to use William Diebold’s terms, the ‘perfectionists’ and the ‘protectionists’ alike. For the perfectionists, the Charter comprised nothing but exceptions, and did not go far enough in removing the trade barriers of other countries. The protectionists, in turn, pointed to the adverse effects of higher low-cost imports. Interestingly, the ITO debate catalysed an unholy alliance of sorts between the perfectionists and the protectionists, with these traditionally opposed groups conveniently converging in their denunciation of the ITO for allowing too much scope for government controls and escape mechanisms for foreign economies. Faced with such opposition, the possibility that the Congress would agree to ratify the Havana Charter was slim. It is unsurprising that the ITO died before it was born.
The failures of the ITO negotiation process struck deep. The ITO had collapsed under the weight of its own ambitions. It taught trade negotiators and their political masters some important lessons about the reach that a multilateral trade organization could politically achieve at the time. It illustrated that any multilateral process risks derailment if it does not take into account the views of affected constituencies, whether they are domestic interests or smaller countries at the negotiating table. As we will see later, the lessons of the ITO experiment have acquired even greater resonance today, when the WTO is beleaguered by demands that it expand its regulation into domestic issues such as labour and the environment. More immediately after its demise and with far reaching consequences that extend to the present day, the failures of the ITO experiment helped negotiators identify the politically feasible. This political feasibility was to be found in the General Agreement on Tariffs and Trade.
The General Agreement on Tariffs and Trade (GATT)
As early as 1945, when discussions for the ITO were underway, the US proposed that a multilateral commercial treaty on tariff reductions be negotiated among the participating countries. The rationale behind this proposal was the recognition by the US administration that though an ITO (being a multilateral organization) would need ratification by the Congress, a trade agreement could be negotiated and implemented more easily under the authority granted to the Executive by the 1945 Reciprocal Trade Agreements Act. Simultaneously with the negotiations on the Havana Charter, negotiations on a multilateral tariff-reduction treaty entered into full swing at the Geneva Conference in 1947. The result of the latter set of negotiations was the General Agreement on Tariffs and Trade (GATT). This was to serve as an interim agreement until the ITO came into force, and covered issues that were to be included in the Commercial Policy chapter (Chapter IV) of the Havana Charter. It was signed accordingly by 23 countries, 11 of which were developing countries, in January 1948 and was to provide a provisional basis for multilateral cooperation until the ITO was formed. This temporary agreement provided the basis for the international trading system for 47 years.
The coverage of the GATT was minuscule in comparison to the far more ambitious ITO; in fact, it was no more than the commercial policy chapter of the ITO with a weak dispute settlement mechanism. The original document made no mention of employment, development, restrictive business practices, or commodity agreements, let alone covering issues such as labour standards. Unlike the Havana Charter, this extended to domestic constituencies through its rules on the monopolistic practices of firms, the GATT applied only to governments. Its mandate stood firmly outside of the boundaries of states and dealt only with tariff barriers. Part I of the agreement established the principle of non-discrimination by requiring that all contracting parties accord Most Favoured Nation (MFN) status to each other (though exceptions such as imperial preferences and regional agreements were permitted). It also included the schedules of tariff concessions.
Part III covered procedural aspects, including accessions, amendments, and withdrawals. The substantive obligations were included in Part II. But as the GATT had been agreed to only on a provisional basis, the Protocol of Provisional Application allowed an important exception for the implementation of Part II. As per this protocol, signatory governments were required to apply Part II only ‘to the fullest extent not inconsistent with existing legislation’.
This meant that contracting parties could claim ‘grandfather rights’ for any pre-existing legislation and would not be required to implement the particular GATT rule.
If the coverage of the GATT presents a striking contrast to the ITO model, perhaps even more interesting was its legal nature. The GATT was little more than a negotiating forum, held together by a multilateral treaty signed by contracting parties (rather than members of an organization). To refer to joint action by the members acting as a collective body, the term ‘CONTRACTING PARTIES’ (in the upper case) was used, as opposed to ‘organization’ or even ‘membership’. GATT analyst Gilbert Winham has described it as a ‘formally-contracted, rule-oriented, non-organizational form of cooperation in international affairs’. The GATT lacked the legal personality that international organizations enjoy, and it could not authorize collective action against individual countries.
This primarily contractual rather than organizational character of the GATT had some important practical implications for its everyday functioning. Initially, the contracting parties would meet once or twice annually, but in 1951 an inter-sessional committee was formed specifically to organize airmail or telegraphic ballots to vote on certain kinds of import restrictions. This was replaced by a Council of Representatives in 1960. Again emphasizing its provisional nature, the GATT Secretariat was known as the Interim Commission for the International Trade Organization (ICITO). All GATT proceedings were driven by the contracting parties, in which the role of the Secretariat was minimal. Its dispute settlement mechanism was also weak. It eventually evolved from a working party of nations that provided a ruling in the early GATT years to a panel of experts. But all panel reports had to be adopted by the CONTRACTING PARTIES through consensus, and the losing party could (and did) block or delay this adoption process.
In terms of actual decision-making, the agreement entitled each contracting party to one vote. Article XXV.5 further stated, ‘Except as otherwise provided for in this Agreement, decisions of the CONTRACTING PARTIES will be taken by a majority of votes cast.’ In practice, however, the GATT evolved the norm of decision-making by consensus; that is, a decision would be arrived at if none of the parties present objected to it. These decisions were usually reached in the so-called Green Room meetings, which worked by invitation only. Tariff negotiations were conducted primarily on the Principal Supplier Principle: the principal suppliers and consumers of a particular product would negotiate tariff reductions and then extend the concessions to all contracting parties.
The result of this non-existent organizational structure of the GATT was that adherence to it was less expensive than would have been the case for the ITO. Given these minimal costs of participation, particularly for developed countries, it is not surprising that the GATT survived for as long as it did. But the weakness of the institution also meant that it did little to address the power asymmetries that severely disadvantaged developing countries in their trade relations. The onus of negotiating and implementing agreements fell on the members themselves, with little help from the Secretariat. Developing countries found themselves ill-equipped to participate effectively in this theoretically one member-one-vote treaty due to their limited technical capacity.
They found themselves further handicapped as they were excluded from the key decision-making consultations that took place in the Green Room (the exceptions were Brazil and India, which were original members of the GATT and regular invitees to the Green Room meetings). These limitations of process were important in themselves in creating a feeling of marginalization from the GATT among its weakest members. But they also translated into the substance of the GATT, with adverse outcomes for developing countries.
The Principal Supplier Principle was one negotiating process that resulted in the automatic exclusion of developing countries from the agenda-setting process, and developed countries were able to pack the agenda with issues of interest to themselves. Admittedly, the concessions negotiated through the Principal Supplier Principle were extended to all the other contracting parties, but often these concessions were on products in which developing countries lacked an export advantage. Products that mattered as significant exports from developing countries were excluded from the mandate of the GATT through a variety of exceptions. The most infamous of these were agriculture and textiles. The GATT had previously permitted quotas and export subsidies on agricultural products. These rules on agriculture were further weakened and special waivers added to allow non-tariff barriers and quantitative restrictions. The US was the first to make use of such a waiver in 1955; the GATT agricultural regime was in fact sufficiently loose even to permit the existence of Europe’s Common Agricultural Policy. In the case of textiles, with the accession of Japan in 1955, domestic industries in several developed countries demanded the right to impose import restrictions on cheap textile exports from Japan. A variety of techniques were used to enable this protectionism, including the use of ‘Voluntary Export Restraints’ from the exporting countries. This protectionist regime eventually crystallized into the Multi-Fibre Agreement of 1974.
Finally, development concerns that had been incorporated into the Havana Charter were non-existent in the original GATT. Part IV on Trade and Development was added on to the GATT in 1965 after some intense lobbying by developing countries within the GATT, the UN General Assembly, and the United Nations Conference on Trade and Development (UNCTAD). It recognized the principle of non-reciprocity, but its language was weak and it delivered few concrete measures to address development-related concerns. Given these procedural and substantive weaknesses of the GATT as an international institution, developing countries were quick to dismiss it as a ‘rich man’s club’ and sought alternative forums such as the General Assembly and the UNCTAD to enunciate their demands.
The dissatisfaction and marginalization of the vast majority of developing countries notwithstanding, the GATT continued to exist for over four decades. In part, this longevity, especially remarkable given the difficult history of its unborn predecessor, derived from its ability to suit the needs of the major traders of the Western world. It covered the commercial interests of the developed countries, without making any intrusions into their domestic jurisdictions. Its weak institutional structure in terms of negotiation processes, decision-making procedures, and dispute settlement mechanism meant that developed countries would not resent its gentle bindings. In other words, the weaknesses of the GATT were critical in ensuring the commitment and participation
of the major traders – the US, the European Community, Canada, and Japan (also known as the Quad group) – and thereby producing a far more meaningful treaty than an ITO without the US would have been.
The first four rounds of GATT negotiations dealt primarily with tariffs on goods. The weak institutional procedures of the GATT also allowed it sufficient flexibility to innovate and adapt to at least some international changes. Beginning in the Kennedy Round (1964–67), and more extensively in the Tokyo Round (1973–79), the GATT introduced a system of plurilateral codes (that is, codes signed on a voluntary basis by some countries rather than all the contracting parties) on issues that addressed newer forms of protectionism. Its rules were extended to include sanitary and phytosanitary barriers to trade, technical barriers to trade, and other forms of Non-Tariff Barriers. The accession of developing countries also recorded a jump in this period. The GATT was growing in its mandate and size. In response to the changing comparative advantage of the developed countries, the Uruguay Round (1986–94) brought the so-called new issues within the mandate of the GATT: services, Trade-Related Intellectual Property Rights, and Trade Related Investment Measures. In return for agreeing to these inclusions, developing countries were promised concessions on agriculture, textiles, and industrial goods.
The temporary arrangement of the GATT had not only survived for 47 years, it had flourished. Admittedly, it was a far less ambitious project than the ITO, and its lack of organizational structure generated several problems, especially as far as developing countries were concerned. But the same weaknesses of the GATT also ensured its political viability. The limited mandate of the GATT meant that it was not ridden with the many contradictions and impossible political compromises that the ITO was, while countries showed a greater willingness to commit to a treaty than have their hands tightly bound by a much more intrusive organization with a powerful dispute settlement mechanism. Developing countries, despite their frequent complaints about the exclusionary GATT system, were falling over each other to accede to the organization.
Here was a model for a multilateral trade regime – if not an organization – that seemed to be working. Yet, in 1995, the old GATT was replaced with a new organization: the World Trade Organization.