Number 24, of Economic Studies Series

A history of the liberalization of international trade from the end of World War II up to the latest moves by World Trade Organization (WTO).

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The aim of liberalizing international trade as a means of increasing production and welfare of all countries carried out by the main international economic bodies has characterized the trend in the economy over the past fifty years, to the point where exports have gone up to represent 26.4% of world gross domestic product (GDP) in 1998 from 8% in 1950. The process of liberalization in international trade has been slow and plagued by difficulties and has given place to a complex regulatory framework which ended up in 1995 with creation of the World Trade Organization (WTO). This globalization process, however, has not been without criticism and difficulties. The Ministerial Conference of the WTO held in Seattle in 1999 was a good example.

Aware of the importance of international trade as an instrument of development, the complex problems posed by the process of globalization of the economy and its consequences for the inhabitants of developed countries as well as the poor countries, ”la Caixa” Research Department has decided to devote a volume of its Economic Studies Series to this crucial matter. In volume No. 24, entitled Regulation of International Trade: from GATT to the WTO prepared by Prof. Montserrat Millet, of the Faculty of Economic Sciences, University of Barcelona, an exhaustive examination is made of the general framework surrounding international trade in recent years while setting out the main future challenges of the WTO.

After examining the causes behind the process of liberalization of international trade and its consequences for economic growth, the study moves directly onto a detailed description of the development of the institutions which have regulated international trade over the past 50 years. Further on, it deals in detail with the basic content of the main matters which have been subject to regulation so that we can evaluate the degree reached in freedom of world trade. Finally, the study puts forth the main future challenges presented by the WTO in the area of international trade relations.

Regulatory institutions for international trade

Following World War II, a policy was developed to favour cooperation and avoid conflict. As a result, a new economic order arose which established a system of international relations based on institutionalized multilateral co-operation in international economic organizations with the aim of progressively liberalizing international trade. The Bretton Woods Conference in 1944 established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, better known as the World Bank) which would be charged with co-operation in the area of monetary and financial matters. Still to be created was an institution charged with regulating trade relations.

The International Trade Organization (ITO) was to be the first attempt in this respect but its establishment was frustrated by the U.S. proposal to negotiate multilateral customs reductions. These negotiations between 23 countries gave rise to the General Agreement on Tariffs and Trade (GATT) in 1947. Its mission was to regulate international trade while the ITO was being signed and ratified, something which did not take place because of the opposition of the U.S. Congress to certain articles in its constituent agreement known as the Charter of Havana. As a result, international trade continued to be regulated by an agreement which developed on the basis of rounds of negotiation. At the eighth round of negotiations, however, the magnitude and complexity of the matters facing GATT made it necessary to strengthen its position, which gave rise to creation of an institution which provided international trade with the status it deserved. Finally, in 1994 the document approving constitution of the WTO was signed in Marrakech and this came into force on January 1, 1995.

The objectives of the WTO coincide with those of GATT but broadened toward preservation of the environment and aiding development. Its framework includes previous agreements, modifications thereto and new agreements. Its work is to facilitate the application, administration and proper functioning of the agreements, to act as a forum for negotiation between member countries, to administer understanding for resolving differences, to administer the mechanism for examining trade policies, and to co-operate with the IMF and the World Bank to increase the coherence of economic policy on a world scale.

Long road to liberalization of world trade

The path of trade liberalization, both under GATT and the WTO, has gone through successive stages. While in the beginning action taken was related to the process of reduction of customs duties on industrial products, later on, partly because of the success obtained, the operations of these bodies tended toward the establishment of regulations to deal with unfair trade practices instituted in order to overcome non-customs barriers. Adoption of the Technical Obstacles to Trade Code, in force since 1980, and the Subsidies and Compensatory Duties Code which came out of the Tokyo Round are clear examples of this trend.

Similarly, the process of liberalization and regulation of international trade went beyond the initial area of industrial products to cover other sectors. The Uruguay Round dealt with trade in agricultural products, approved regulations for modifying the traditional protectionist scheme for textiles and introduced a body of regulations dealing with trade in services, specifically the General Agreement on Trade and Services (GATS), made up of a general text applicable to all services and appendices regulating trade in services which, because of their characteristics, required separate treatment. This involved movements of people to provide services, financial services, telecommunications and air and sea transportation.

In addition, beyond the regulation of trade transactions, international agreements attempted to deal with such important matters as direct foreign investment and intellectual property rights by establishing a body of rules which would guarantee conduct that would not have negative effects on international trade. The agreement on Trade-related Investment Measures (TRIMS) deals with such important matters as the incompatibility of requiring companies with foreign capital participation to obtain supplies in the local market or link imports of a company with its exports. Similarly, Trade-related Intellectual Property Agreement (TRIPS) came out of the need to combat the growing trade in false merchandise, that is to say imitations of brand and patented products, without having respected a patent or negotiated any license to it.

Future challenges for WTO

The goals achieved in the process of international trade liberalization in recent years have been of great importance but the task still to be carried out remains a major one. The WTO is faced both with old questions and new challenges. In this respect, the future agenda of the WTO still gives priority attention to such classical matters as the regulation of international investment and policy on free competition while also dealing with other relatively new aspects, such as protection of the environment and labour standards, which are turning out to be decisive in the definition of world trade. In addition, especially as a result of the failure of the Ministerial Conference of the WTO held in Seattle in 1999, global protest also appears as an element in the system which naturally enough affects the future development of this body.

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