How Globalization Was Built: GATT, the WTO, and Trade Liberalization

On June 17, 1930, President Hoover signed the Smoot-Hawley Tariff Act into law, raising American import duties on over 20,000 goods to the highest levels in the nation’s history. The consequences were catastrophic and immediate. Trading partners retaliated with their own tariff increases; world trade volumes fell by 65 percent between 1929 and 1934; and the global contraction that had begun as a financial crisis was transformed into the Great Depression by the collapse of the international trading system that bilateral retaliation produced. Smoot-Hawley did not cause the Depression, but it deepened and prolonged it in ways that shaped the thinking of every economist and trade official who designed the postwar international order. The architects of the General Agreement on Tariffs and Trade in 1947 were not constructing an abstract institutional vision; they were engineering safeguards against a specific catastrophe whose mechanisms they had lived through and whose consequences they intended never to allow repeated. The entire institutional architecture of postwar trade governance is the Smoot-Hawley lesson institutionalized.

The International Trade Organization was supposed to be the anchor of the postwar economic order, alongside the IMF and World Bank. The Havana Charter of 1948, which established the ITO, was an ambitious document — covering not just tariffs and trade in goods but also investment rules, commodity agreements, employment standards, and competition policy. The American delegation had been its principal architect, and it died in the American Senate, killed by a coalition of business interests that opposed the investment provisions and conservative legislators who objected to the employment mandates. Truman eventually withdrew the Charter from Senate consideration without a vote in 1950. The institutional vision that had animated three years of multilateral negotiation was abandoned, and what survived was a considerably more modest arrangement: the General Agreement on Tariffs and Trade, originally a provisional agreement among 23 countries pending ITO ratification, which suddenly became the only game in town.

The GATT was, by design, not an organization. It had no permanent secretariat in the conventional sense, no formal membership (countries “acceded” to the Agreement rather than joining an institution), no dispute settlement mechanism with real enforcement teeth, and no authority over the domestic policy instruments — subsidies, non-tariff barriers, regulatory standards — that increasingly mattered as tariffs fell. What it had was the most-favored-nation principle and the negotiating round architecture, and these two features proved sufficient to drive a generation of trade liberalization that the ITO’s more elaborate institutional structure was never able to attempt.

The most-favored-nation principle is the foundational norm of the multilateral trading system: any trade concession that one GATT member extends to any other must be extended to all GATT members simultaneously. This is what makes bilateral trade deals multilateralize. If the United States negotiates a tariff reduction with Germany, Japan and every other GATT member automatically receives the same concession without having to negotiate for it. This creates powerful incentives for multilateral rather than bilateral negotiation — bilateral deals are free-ridden upon by everyone else — and it prevents the discriminatory bilateral arrangements that had characterized interwar trade policy and contributed to the trade collapse of the 1930s. The MFN principle is not natural or inevitable; it is a political commitment to non-discrimination that required sustained institutional maintenance to survive the recurring temptation of major powers to carve out preferential deals with favored partners.

The GATT negotiating rounds reduced average tariff levels on manufactured goods from approximately 40 percent in 1947 to under 5 percent by the completion of the Uruguay Round in 1994 — an extraordinary achievement accomplished through eight discrete negotiating exercises, each building on the last. The early rounds — Geneva (1947), Annecy (1949), Torquay (1950-51) — were primarily bilateral negotiations whose results were multilateralized through MFN, covering relatively few products and achieving relatively modest reductions. The Kennedy Round of 1963-67, the first to negotiate across-the-board percentage cuts rather than product-by-product bargaining, reduced tariffs by an average of 35 percent and demonstrated that ambitious multilateral liberalization was achievable. The Tokyo Round of 1973-79 extended coverage to non-tariff barriers for the first time, producing “codes” on subsidies, technical barriers, government procurement, and customs valuation — though these codes were plurilateral rather than universal, applying only to the signatories who had chosen to join them.

The Uruguay Round of 1986-94 was the most ambitious multilateral trade negotiation in history, and its outcome — the establishment of the World Trade Organization as a true international institution in January 1995 — represented a genuine qualitative transformation in the governance architecture. The WTO brought services trade under multilateral rules through the General Agreement on Trade in Services. It created the Agreement on Trade-Related Aspects of Intellectual Property Rights — TRIPS — which established minimum standards for patent, copyright, and trademark protection that represented a major transfer of value from developing country consumers to developed country intellectual property owners. It partially liberalized agricultural trade, ending decades of special pleading that had kept farming outside the GATT framework. And it established the WTO’s dispute settlement system, which is the most legalized international economic governance institution ever created — a binding adjudicatory process with an Appellate Body, time-limited procedures, and the right of the prevailing party to retaliate through suspension of equivalent trade concessions if the losing party fails to comply with a ruling.

The dispute settlement system was the Uruguay Round’s most significant institutional innovation, and understanding it is essential to understanding why the WTO crisis of the 2010s mattered so much. Under the old GATT, dispute settlement required consensus to adopt panel reports — meaning the losing party could block adoption of a ruling against it indefinitely. Under the WTO’s “negative consensus” rule, panel and Appellate Body reports are adopted automatically unless all members, including the winning party, agree to block them. This is a genuine delegation of legal authority to an international institution, moving well beyond the diplomatic negotiation model that had characterized GATT dispute resolution. Between 1995 and 2020, the WTO dispute settlement system handled over 600 disputes, establishing a body of international trade jurisprudence that has influenced trade policy far beyond the formal parties to any individual case.

The Doha Development Round, launched in November 2001 in the aftermath of the September 11 attacks — with deliberate symbolism about the value of international cooperation — was supposed to be the fifth major GATT/WTO negotiating round and the one that would finally deliver meaningful gains for developing countries through agricultural liberalization and reduced barriers to developing country exports. It died slowly across the following decade. The proximate cause of failure was the impossibility of reaching agreement between the major trading powers — the United States, European Union, and the emerging bloc of developing countries led by India, Brazil, and China — on agricultural subsidies and market access. The deeper cause was the exhaustion of the political consensus that had driven trade liberalization since 1947. Domestic constituencies that had accepted liberalization when it meant competition among developed economies became far more resistant when it meant competition from Chinese factories paying wages a fraction of Western levels. The political economy of trade liberalization had changed fundamentally, and the multilateral negotiating framework was not designed to accommodate this change.

The crisis that became undeniable in the 2010s had two distinct components that are often conflated but require separate analysis. The first was the substantive impasse of the Doha Round — the inability of major WTO members to agree on further liberalization. This is serious but not unprecedented; the GATT experienced comparable impasses and eventually negotiated through them. The second, more structurally threatening development was the United States’ decision, beginning in 2017 and continuing through subsequent administrations, to block the appointment of new judges to the WTO Appellate Body. By December 2019, the Appellate Body had fallen below the three-judge quorum required to hear appeals, effectively paralyzing the dispute settlement system. The United States’ stated objections concerned what it characterized as the Appellate Body’s judicial overreach — its tendency to issue advisory opinions beyond the strict requirements of the cases before it and to develop binding precedent through case law in ways that the United States had not agreed to when it joined the WTO.

The deeper motivation was strategic rather than legal. The United States had concluded that the WTO dispute settlement system, as it had evolved, was insufficiently protective of American trade policy tools — particularly the use of tariffs and trade remedies against Chinese exports — and that binding adjudication prevented the exercise of the economic pressure that the US-China relationship increasingly required. A dispute settlement system that constrained American unilateral action was, from this perspective, not a feature but a bug. The institutional crisis of the WTO was therefore less a failure of institutional design than a symptom of the breakdown of the political consensus — shared American, European, and Japanese interests in an open rules-based trading system — that had sustained the institution since its founding.

The fragmentation of the multilateral system into bilateral and regional arrangements — the proliferation of preferential trade agreements, from NAFTA to the Trans-Pacific Partnership to the EU’s network of bilateral deals — is partly cause and partly consequence of the WTO’s impasse. Preferential agreements allow major powers to negotiate terms more favorable to their specific interests than multilateral negotiation permits, but they undermine the MFN principle that makes multilateral liberalization self-sustaining. Every preferential deal creates discrimination against non-parties and reduces the incentive for multilateral cooperation by providing an alternative route to market access. The WTO’s founders understood this dynamic and included provisions allowing regional agreements as an exception to MFN — but they could not have anticipated the scale of preferential agreement proliferation that their successors would build.

The WTO’s balance sheet across its first three decades is better than its critics acknowledge from the left or the right. Global average tariffs fell from roughly 40 percent in 1947 to under 5 percent by 2000, a transformation that expanded world trade volumes by a factor of thirty. The dispute settlement system resolved hundreds of trade conflicts peacefully that would otherwise have generated bilateral friction and potential retaliation cascades. The institutional framework for services trade and intellectual property, however imperfect, established the basis for negotiations that bilateral arrangements are now extending. The failures are real: Doha’s collapse, the exclusion of meaningful development gains from the WTO’s rules, the capture of TRIPS by pharmaceutical industry interests, and the inability to discipline currency manipulation as a trade policy tool. These are serious and costly failures. But they are the failures of an institution that succeeded at its foundational purpose — preventing the return of Smoot-Hawley and the trade wars of the 1930s — for seven decades, which is not nothing. The question is whether the institutional foundations that enabled that success can survive the political conditions that now threaten them.