This short story is based on research undertaken by Roy Santana, WTO Counsellor. It is not an official WTO publication. It subsequently became part of a paper: Roy Santana, "70th anniversary of the GATT: Stalin, the Marshall Plan, and the provisional application of the GATT 1947", Journal of Trade Law and Development, Volume 9, pp. 1-20.

A problem beyond preferences

Clayton's problem with the GATT negotiations went beyond the MFN clause and Sir Stafford Cripp's defence of the Ottawa Imperial Preferences. Several key provisions that appeared to set strong rules prohibiting or regulating protectionist measures were then followed by exceptions that, in practical terms, nullified their value. For example, Article XI of the GATT was meant to prohibit introducing or maintaining quantitative restrictions, broadly defined as prohibitions or restrictions other than tariffs or taxes, but was immediately followed by Article XII which would allow contracting parties to restrict the quantity of the value of imports in order to safeguard its external financial position and its balance of payments.

At the time, many of the countries negotiating the GATT faced acute balance of payments problems, including key markets such as the United Kingdom and practically all other European countries, which meant that the GATT would allow them to stop US exports. Even worse, the Protocol of Provisional Application contained a grandfather clause that would allow contracting parties to continue applying GATT-inconsistent legislation preceding the Agreement. What then was the point of having a trade agreement that would open the US market to imports without achieving reciprocal access in the other markets?

Clayton was not shy in expressing his frustration and was concerned that such a deal would not be approved by Congress. On 6 August 1947, he tasked Clair Wilcox, his deputy, to prepare a "short list" of margins of preference that the United Kingdom would have to eliminate, or else the United States would be walking away from the negotiations. Anticipating a negative answer from the stubborn Stafford Cripps, Clayton advised the administration to drop the negotiations with the UK and to seek a multilateral deal with the others. Politically, the blame would lie squarely on the British for not moving enough on the preferences.

The larger political picture

While Clayton's strategy was arguably sound from the trade perspective, it failed to take into account other geopolitical elements that had to be considered by the US administration before making a decision. Two people had the ultimate responsibility of deciding to walk away from the GATT: President Truman and Robert Lovett, Under Secretary of State who was closely following the discussions, and the political dimension was infinitely more complex than the relatively straightforward trade aspects.

Only two years before the deadlock with the United Kingdom, the leaders of the three victorious powers of World War II - Franklin D. Roosevelt, Churchill and Stalin - had failed to reach consensus at the Yalta Conference of 1945 on how to reconstruct Europe and maintain post-war security. The Western allies aspired to a security system based on democratic governments and the peaceful resolution of conflicts through international organizations, while the Soviet Union was determined to protect itself from foreign aggression by dominating the internal affairs of the countries bordering it, a strategy that eventually became known as the "iron curtain". A Cold War was emerging from the midst of growing tensions between the Soviet and the Western allies.

In 1947, the "Truman doctrine" was developed as a countermeasure to the Soviet Union's growing influence and with a view to containing communism. A key part of this doctrine was European Recovery Program, which would assist in the reconstruction of all European countries willing to participate. The program eventually became known as the Marshall Plan, in honor of General George C. Marshall, who at the time served as US Secretary of State. Both Clayton and Lovett reported to him. .

These major political events not only impacted on the GATT negotiations but, in fact were determinative of their outcome. When considering Clayton's proposal to walk away from the negotiations with the United Kingdom, the Department of State was keenly aware that the Soviets had been closely monitoring the discussions, and seemed ready to fully exploit the emerging disagreement to their advantage. A collapse of the GATT negotiations would have been disastrous to the US foreign policy plans and weakened one of its most important strategic relationships.

Based on derestricted US internal communications from that time, Prof. Thomas W. Zeiler concluded that it was national security officials, and not trade experts, who made the ultimate call. According to him, Robert Lovett successfully convinced President Truman that a "thin agreement" that would preserve international trade co-operation was instrumental to US foreign economic and security policy. As weak as it was, a General Agreement was "better than none".

Overcoming the differences

By September 1947, as anticipated by US negotiators, the United Kingdom refused to accept the final "short list" that had been prepared by Wilcox. Following instructions of the highest order, the US delegation came ready to accept the UK proposal to rebalance the deal by withdrawing concessions that they had initially tabled, thereby diminishing the US contribution. However, Clayton and his team were not ready to give up without having a final try. Mindful of the leverage given to the United States by the Marshall Plan, Clayton and his team made a final attempt to convince the United Kingdom to eliminate at least some of those preferences.

Unmoved, Stafford Cripps replied that the UK Cabinet had a "large number of people who would not shed tears if the negotiation broke down altogether". According to Prof. Zeiler, Sir Stafford Cripps had correctly guessed the political importance that the United States attached to the GATT and had bet that the Secretary of State, George Marshall, would prevent Clayton from walking away. Marshall instructed Clayton not to insist on the immediate elimination of the imperial preferences and to accept what the United Kingdom was able to offer. With those instructions, technical officers were sent to Geneva in October 1947.

Winthrop Brown, from the US delegation, and James Helmore, from the UK Board of Trade, were tasked with fleshing out the final details. Their work became known as the "Brown-Helmore proposals", whichset the basis on which the GATT negotiations were concluded by late October 1947. The formal exchanges between the United States and the United Kingdom were recently derestricted by the WTO and can be consulted here.

The text of Article I of the GATT 1947 remains a testament of Clayton's lost battle against the Ottawa Imperial Preferences. Whileparagraph 1 sets the rule that the US team would have liked to prevail, it is then followed by four paragraphs and six annexes with exceptions. Contracting Parties were allowed to retain tariff preferences, but the margin of preference would have to be bound (i.e. existing discriminatory treatment could be retained, but not increased). Article I:2(a) of the GATT expressly states that the MFN clause shall not require the elimination of any preferences among territories in Annex A, which lists the Commonwealth territories. As a result, GATT schedules of concessions were designed with two parts: Part I for the MFN bound rates of duty and Part II with the bound margins of preference.

The events that took place between 1946 and 1948 had a profound impact on the professional lives of those involved in the negotiations. According to Prof. Zeiler Clayton had such a hard time digesting what he considered a terrible deal that he resigned shortly after the conclusion of the talks citing personal reasons.

The aftermath

Although it is tempting to draw lessons from these often-ignored historical events and the overall political context in which the GATT negotiations took place, it is perhaps more enlightening to focus on how quickly things changed as fortune had bigger plans for that "thin agreement" that Clayton so much despised. When the US Congress refused to ratify the Havana Charter in 1950, it not only killed the possibility of having an International Trade Organization, as had been originally envisaged, but also placed the GATT as the last bastion of multilateral trade rules. The tariff preferences that Stafford Cripps so ardently defended were quickly dismantled in the first three rounds of tariff negotiations that followed (Annecy 1949, Torquay 1951 and Geneva 1955-56) once the Commonwealth economies began recovering. This was largely made possible by the Marshall Plan and the increased security, transparency and predictability for traders that resulted from the General Agreement.

The GATT was not the perfect agreement, but rather the agreement of what was possible at that time. The rest is well-known: the GATT morphed into the bedrock on which the multilateral trading system was built and developed, including through the establishment of the World Trade Organization in 1994.

* Roy Santana is a Counsellor of the Market Access Division of the WTO. His opinions should not be attributed to the WTO.

Acknowledgements: The author would like to thank Dolores Halloran, János Volkai and Trineesh Biswas for their insightful comments and suggestions on an earlier draft. This short story was inspired on research by Prof. Thomas W. Zeiler (1997), "GATT Fifty Years Ago: U.S. Trade Policy and Imperial Tariff Preferences", Department of History, University of Colorado at Boulder. For more detailed information on the issue, see Douglas A. Irwin, Petros C. Mavroidis, Alan O. Sykes, "The Genesis of the GATT", Cambridge University Press, 29 May 2009.

The next part of this series can be found here.

The first part of this series can be found here.