1 A Brief History of the World Trade Organization

As we discussed in Chapter 1, during the period between the First and Second World Wars, unusually high tariffs between countries reduced the volume of world trade. When peace was reestablished following World War II, representatives of the Allied countries met on several occasions to discuss the rebuilding of Europe and issues such as high trade barriers and unstable exchange rates. One of these conferences, held in Bretton Woods, New Hampshire, in July 1944, established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, later known as the World Bank. A second conference held at the Palais des Nations, in Geneva, Switzerland, in 1947 established the General Agreement on Tariffs and Trade (GATT), the purpose of which was to reduce barriers to international trade between nations.1

Under the GATT, countries met periodically for negotiations, called “rounds,” to lower trade restrictions between countries. Each round is named for the country in which the meeting took place. The Uruguay Round of negotiations, which lasted from 1986 to 1994, established the World Trade Organization (WTO) on January 1, 1995. The WTO is a greatly expanded version of the GATT. It keeps most of the GATT’s earlier provisions but adds rules that govern an expanded set of global interactions (including trade in services and intellectual property protection) through binding agreements. The most recent round of WTO negotiations, the Doha Round, began in Doha, Qatar, in November 2001.

Although the goal of the WTO is to keep tariffs low, it allows countries to charge a higher tariff on a specific import under some conditions. In Side Bar: Key Provisions of the GATT, we show some of the articles of the GATT that still govern trade in the WTO. Some of the main provisions are as follows:

1. A nation must extend the same tariffs to all trading partners that are WTO members. Article I of the GATT, the “most favored nation” clause, states that every country belonging to the WTO must be treated the same: if a country imposes low tariffs on one trading partner, then those low tariffs must be extended to every other trading partner belonging to the WTO.2
2. Tariffs may be imposed in response to unfair trade practices such as dumping. As we discuss in the next chapter, “dumping” is defined as the sale of export goods in another country at a price less than that charged at home, or alternatively, at a price less than costs of production and shipping. Article VI of the GATT states that an importing country may impose a tariff on goods being dumped into its country by a foreign exporter.
3. Countries should not limit the quantity of goods and services that they import. Article XI states that countries should not maintain quotas against imports. We discuss exceptions to this rule later in this chapter.
4. Countries should declare export subsidies provided to particular firms, sectors, or industries. Article XVI deals with export subsidies, benefits such as tax breaks or other incentives for firms that produce goods specifically for export. The article states that countries should notify each other of the extent of subsidies and discuss the possibility of eliminating them. During the Doha Round of WTO negotiations, the elimination of agricultural subsidies has recently been discussed.
5. Countries can temporarily raise tariffs for certain products. Article XIX, called the safeguard provision or the escape clause, is our focus in this chapter. Article XIX lists the conditions under which a country can temporarily raise tariffs on particular products. It states that a country can apply a tariff when it imports “any product…in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers.” In other words, the importing country can temporarily raise the tariff when domestic producers are suffering due to import competition.The steel tariff of 2002–2004 is an example of a tariff that was applied by the United States under Article XIX of the GATT (and the tire tariff of 2009– 2012 was applied under a related provision that focused on U.S. imports from China, discussed later in the chapter). European governments strenuously objected to the steel tariffs, however, and filed a complaint against the United States with the WTO. A panel at the WTO ruled in favor of the European countries. This ruling entitled them to retaliate against the United States by putting tariffs of their own on some $2.2 billion worth of U.S. exports. This pressure from Europe, along with pressure from companies in the United States that had been purchasing the cheaper imported steel, led President Bush to remove the steel tariffs in December 2003. Later in the chapter, we discuss the steel tariff in more detail, and see how Article XIX of the GATT is reflected in U.S. trade laws.
6. Regional trade agreements are permitted under Article XXIV of the GATT. The GATT recognizes the ability of blocs of countries to form two types of regional trade agreements: (i) free-trade areas, in which a group of countries voluntarily agrees to remove trade barriers between themselves, and (ii) customs unions, which are free-trade areas in which the countries also adopt identical tariffs between themselves and the rest of the world. We discuss regional trade agreements in a later chapter.