Since its inception in 1995, the World Trade Organization (WTO) has regularly been in the news. There have been optimistic stories of expanding WTO membership that emphasize that freer trade generates numerous benefits for consumers. Newspapers report on the details of WTO entry negotiations for important countries like China and remind us of the gains from trade. At other times, media reports might lead us to believe that disputes among WTO members are about to tear the organization apart. Disagreements between the U.S. and the European Union (EU) over everything from U.S. corporate taxation, to genetically modified organisms, to special steel tariffs make headlines worldwide. Finally, some groups seem unconvinced by and resentful of claims that free trade makes the entire world better off. Huge numbers of people from environmental and labor groups gather at various international meetings of heads of state and government ministers to protest globalization in general and the WTO in particular. Some representatives of developing countries are concerned that they have liberalized their trade and agreed to intellectual property protection for developed country products but have received almost no additional access to agricultural markets in the industrialized world.
What are we to make of all this? What is the WTO? What is it trying to accomplish and why? How does the world trading system function? Why are there so many disputes among countries that belong to the WTO?
This article provides an overview of the General Agreement on Tariffs and Trade, better known as GATT, and the WTO system. In the first section, I present a brief history of GAIT and the WTO. In the following section, I discuss the fundamental principles that underlie the post-WWII world trading system and explain how these principles work to increase welfare. In the third section, I describe the numerous exceptions to GATT's requirement of nondiscrimination, or equal treatment, and review the economics literature that seeks to explain the rationale for and consequences of these exceptions. Then, I present a short summary of dispute resolution within the WTO.
A brief history of the WTO and GATT
The World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT) have been enormously successful over the last 50 years at reducing tariff and other trade barriers among an ever-increasing number of countries. The predecessor to the WTO began in 1947 with only 23 members; today it has 146 members, comprising approximately 97 percent of world trade. (1) See box 1 for a timeline of GATT and the WTO. (2)
Although the WTO, established in 1995, is relatively young for an international institution, it has its origins in the Bretton Woods Conference at the end of World War II. At this conference, finance ministers from the Allied nations gathered to discuss the failings of World War I's Versailles Treaty and the creation of a new international monetary system that would support postwar reconstruction, economic stability, and peace. The Bretton Woods Conference produced two of the most important international economic institutions of the postwar period: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). Recognizing that the beggar-thy-neighbor tariff policies of the 1930s had contributed to the environment that led to war, ministers discussed the need for a third postwar institution, the International Trade Organization (ITO), but left the problem of designing it to their colleagues in government ministries with responsibility for trade. (3)
By the late 1940s, representatives of the American government had met several times with representatives of other major nations to design a postwar international trading system that would parallel the international monetary system. These meetings had two objectives: 1) to draft a charter for the ITO and 2) to negotiate the substance of an ITO agreement, specifically, rules governing international trade and reductions in tariffs. …