# **II.  THE MULTILATERAL AGENDA**<sup>**1**</sup>

The trade policy instruments that emerged or grew in the 1930s included quantitative restrictions and prohibitions on trade, exchange controls, and state bureaucracies to overshadow the market with planning and to monitor financial and merchandise transactions. And following the Ottawa Conference of 1932, preferential tariffs on trade among members of the British Commonwealth were imposed, which harmed non-Empire economies.

Out of that inter-war experience came the conviction that a return to the beneficent noncooperative equilibrium of the nineteenth century was highly unlikely. Instead, leading economists in Britain and the US were convinced that liberal world trade required a set of multilaterally agreed rules and binding commitments based on non-discriminatory principles. A proposal for such an agreement was put to the British War Cabinet by Meade (1942), and was developed further at the Bretton Woods conference in 1944 (out of which grew also the IMF and World Bank). In the Anglo-American view, the postwar international economic system was to be constructed in such a way as to remove the economic causes of friction that were believed to have been at the origin of the Second World War. An important element in this vision was the establishment of a stable world economy that would provide all trading nations with nondiscriminatory access to markets, supplies and investment opportunities. Economists contributed significantly to the strong perception that there was a positive correlation between trade and peace, and, more specifically, between nondiscrimination and good foreign relations.

# **_GATT rules_**

The efforts in the latter 1940s to create an International Trade Organization (ITO), to complement the IMF and World Bank, were unsuccessful. The negotiations on the charter of such an organization, although concluded successfully in Havana in 1948, did not lead to the establishment of the ITO because the proposed organization was perceived by the US Congress as taking away too much of its national sovereignty. Nonetheless, many of the key elements of the ITO proposal were encapsulated in a General Agreement on Tariffs and Trade (GATT) that was signed by 23 trading countries—12 developed and 11 developing—in 1947 (before the ITO negotiations were concluded). These countries were anxious to pursue liberalization, and did not want to wait for the conclusion of the ITO talks. They created the GATT as an interim agreement that embodied many of the draft ITO disciplines. As the ITO never came into being, the GATT was the only concrete result of post-war efforts to create an international trade body. It took until the end of the GATT’s Uruguay Round to convert that interim institution into the permanent World Trade Organization (WTO), on 1 January 1995.

One of the fundamental pillars of the rules-based multilateral trading system over which the GATT and WTO preside is the most-favoured-nation (MFN) clause. This became enshrined in GATT Article I, as well as in several other WTO Agreements. It is considered fundamental because it reduces transactions costs in negotiating, and it counteracts imbalances in negotiating strength. Critics had pointed out that MFN need not lead to a government being willing to lower tariffs (at least directly), for in its unconditional form it requires a member to allow the same market access conditions as provided to its most favored trading partner. Among the early economists to respond to that claim was Viner (1931), who was writing in the midst of the Great Depression in America where reciprocal trade agreements or at most ones that contained conditional MFN clauses had been preferred by the

> 1 This section draws on, among others, Anderson and Hoekman (2002, Vols. 2 and 3), Anderson and Josling (2005) and Hoekman and Ozden (2005).

2