Even before the 20th century, punitive restrictions on trade were quickly being lifted. In Europe, tariff barriers had receded significantly since the mid-1800s. However, the trend towards free trade became global and more permanent with the creation of new international organizations after the Second World War. These institutions were born out of the economic and geopolitical trouble of the interwar years and sought to resolve the lack of economic cooperation between nations. One of these post-war creations was the General Agreement on Tariffs and Trade, an ancestor to the modern-day World Trade Organization. These institutions helped change the terms of global trade. 

Getting to GATT

       While the nations of Europe and the United States had liberalized their trade policies substantially during the 19th and early 20th centuries respectively, this movement faltered after the First World War. In the lead up to the Great Depression, the US Congress passed a protective tariff called the Smoot-Hawley Tariff. Other countries followed suit with protective tariffs of their own. In Britain, the trend away from free trade took a different form, a system of “Imperial Preference” that gave dominions of the British Empire preferential access to each other’s markets at other nations’ expense. 

       Favorable terms of trade for British dominions was formalized with the Ottawa System of Imperial Tariff Preferences. While the nationalistic desire to form closer ties between the constituent parts of the British Empire was partially behind the Ottawa Agreements, so too was the desire to retaliate against protectionism elsewhere and protect British industry. Tariffs rose across countries in the interwar years and the results on world trade were substantial. Though it is difficult to separate the effect of the tariffs from the wider economic slump brought on by the Great Depression, it is worth noting that global trade fell 65% in the years after the Smoot-Hawley Tariff. 

       Both during and after the Second World War, both Britain and America had come to realize the destructive effects of evaporating trade. Thus, the pendulum was preparing to swing back in the direction of liberalization. This became particularly evident in the meeting between British Prime Minister Winston Churchill and the American President, Franklin D. Roosevelt, off the coast of Newfoundland in 1941. This conference, which took part in the midst of the war, resulted in the famous Atlantic Charter. The document outlined the post-war vision of the Allies, or rather of Britain and America specifically, even though the United States was still neutral. 

       Predictably, many of the points outlined in the Charter dealt with promoting peace, disarmament, and democracy. However, perhaps surprisingly, two of its eight principal points were purely economic in nature and one was on the topic of trade specifically. 

“Fourth, [the United States and Britain] will endeavor, with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity” – Atlantic Charter, 1941

       The Atlantic Charter set the stage for the General Agreement on Tariffs and Trade (GATT), which along with the IMF was one of the most important of the post-war world’s new economic institutions. However, GATT was not the first attempt at re-writing the terms of world trade after the war. The first major trade negotiations were those around the International Trade Organization (ITO).

       The ITO was the pride and joy of the British economist John Maynard Keynes. Crafted during the Bretton Woods Conference in 1944, the ITO would have gone beyond merely reducing tariffs and other trade barriers; it sought to provide a firm foundation for perpetuating economic cooperation between nations. Included in its mission would have been maintaining labor standards and full employment in member states. It also would have been complemented by institutions that discouraged nations from running perpetual trade surpluses, accomplished via a new international currency for global trade, called the bancor, and a novel clearing system to go with it. 

       Those concerned today about the role of the US Dollar as the world’s reserve currency and its distorting effects on trade would wonder what happened to the ITO. Despite multiple attempts at ratification, it was abandoned after its founding treaty was voted down by the US Congress, not the first nor last major international agreement to be brought to its knees before the American legislature. 

General Agreement on Tariffs and Trade

       Nonetheless, the motivation to rebuild the foundations of world trade was great, and even if the end product was doomed to be less ambitious, negotiations continued. In 1947, the result was the creation of the General Agreement on Tariffs and Trade (GATT). The principal goal of GATT was to unwind preferential trade zones like the British Imperial Preference system and reduce barriers to trade more broadly. The means of doing this was requiring that member states treat other members equally in terms of market access; essentially GATT would give each member ‘most favored nation’ status with respect to all other GATT members. 

       However, the idealism that characterized the post-war world did not last long. This time, the British wavered; they were concerned about the effects of liberalized trade on an economy slow to get back on its feet after the war. Sir Richard Stafford Cripps, the President of the British Board of Trade, argued that Britain and the Commonwealth (its dominions like Canada and Australia) needed time to adjust, in order to avoid large trade deficits and a balance-of-payments crisis. 

       Two developments brought about a resolution to this dispute. One was the further watering down of the agreement’s ambitions; the language on barring preferential tariff regimes was weakened so as to allow Imperial Preference to continue, albeit with limits. Second, the United States, Britain, and other signatory countries began to see the Cold War looming on the horizon. The Cold War mindset that was setting in as the Iron Curtain fell brought about greater unity among the nations present. 

       Though the agreement reached in 1947 pales in comparison to earlier ambitions, it was nonetheless a broad agreement. GATT was signed by 23 nations from every continent. Nations from Belgium to Brazil signed on, as did India, which had been independent for only a few months. Along with the Bretton Woods Agreements, GATT was among the most extensive economic agreements between nations ever conceived, let alone ratified. In addition to 45,000 tariff concessions, its provisions still required that each member confer ‘most favored nation’ status to other members, albeit with some exemptions to placate the British Commonwealth. Further, GATT also prohibited various types of trade barriers altogether, again with exceptions for emerging economies and nations experiencing balance-of-payments crises.

       Whatever its limitations, GATT has nonetheless been given credit for increasing international trade. Despite the Cold War splitting the world in two, global trade volumes grew by an average of 8% a year in the 1950s and 1960s, faster than world GDP growth. The dispute settlement component of GATT also saw the resolution of trade disputes ranging from issues as varied as British tariffs on ornamental pottery imports to Canadian quotas on imported eggs. Multiple rounds of GATT conferences led to further reductions in tariffs in the decades since and the last one held led to the creation of the World Trade Organization (WTO) in 1994, which went on to replace GATT.

World Trade Organization

       The WTO swapped the ad hoc conferences that existed under GATT with a formal institution. It also expanded the scope of cooperation, from simply focusing on tariffs and import quotas on physical goods, to areas like intellectual property rights and IT products. The organization is also broader in membership; with 33 new members, the organization now includes the vast majority of the world’s nations accounting for 98% of its international trade. The WTO has been criticized for everything from its inclusion of countries with questionable trade practices like China to its inability to resolve disputes related to the agricultural subsidies and trade barriers used by many developed economies. Regardless, it has still received substantial credit for resolving disputes and thus preventing the spirals of retaliatory tariffs that characterized trade relations between nations in the pre-GATT era.  


       The WTO brings the story of the advancement of free trade to the present day. While perhaps not directly related to finance, trade liberalization has been one of the most notable trends in the last 150 years of economic development, with great consequences for finance. The balance of trade is just one half of any country’s balance of payments; its opposite number is the capital account, a record of the financial flows between nations. Thus, trade is linked to everything from foreign direct investment to the values of floating currencies, obviously important financial concepts in a globalized world. An understanding of finance at an international level is closely tied to trade and their histories and inextricably linked.

Further Reading

1. Amadeo, Kimberly. “How GATT Saved the World.” The Balance, Dotdash, 28 Jan. 2019.

2. “Atlantic Charter.” The Avalon Project, Yale Law School, avalon.law.yale.edu/wwii/atlantic.asp.

3. Drache, Daniel. “The Short but Significant Life of the International Trade Organization: Lessons for Our Time.” Centre for the Study of Globalisation and Regionalisation, ser. 62, Nov. 2000. 62.

4. “History of the Multilateral Trading System.” World Trade Organization, World Trade Organization.

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