The World Trade Organization, which today includes all major world economies, has humble beginnings but a rich history. Prior to the current era of free trade, international commerce was heavily regulated and profit from tariffs, or taxes on imports, was more sought than the benefits of rigorous competition. Up through the early 1930s international trade was typically regulated by high tariffs and strict quotas. Another limitation, according to economist Ben Bernanke, was the reliance on a strict gold standard where the value of all currencies was determined by a set value of gold bullion. This rigid system was thrown into chaos by the Great Depression.
The Smoot-Hawley Tariff Act of 1930 helped spark the free trade movement by failing spectacularly. The Act, intended to raise revenue for the United States by significantly increasing tariffs, only served to begin a reciprocal “tariff war” among major economies. International trade decreased as exporters refused to pay these elevated tariffs, lengthening the worldwide Great Depression. In 1934 the Reciprocal Trade Agreements Act lowered U.S. tariffs and granted “most favored nation” status to other countries that behaved in kind. Also during this time period most major economies, including the United States, left the gold standard, allowing for expansionary monetary policy.
However, not until after World War II did the era of free trade arrive. The War, which was influenced by economic desires and pressures, saw both Germany and Japan launch devastating offensives in hopes of getting oil. Germany wanted the oil fields controlled by the Soviet Union and did not want to pay Soviet-demanded prices after the failed Battle of Britain revealed that Adolf Hitler’s war machine would need massive amounts of fuel to win a lengthy war. Japan, similarly, was upset in 1941 over restrictive oil trading, with the United States, at the time a major oil exporter, having limited trade with Japan in retaliation for Japanese aggression and atrocities in China. After the devastating War nations wanted economic reform that would make wars for resources unnecessary.
Much of Europe lay devastated and the threat of Soviet domination loomed, with Joseph Stalin’s Red Army in control of everything between eastern Germany and the formal Soviet Union border. Eager to keep European nations from having to accept Soviet “assistance,” the United States and Britain sought a way to kick-start the economies of continental Europe. It was in this vein of trying to boost economic productivity and political unity, trying to turn western Europe into a unified bloc to counterbalance the USSR, that modern free trade was born. In 1948 the precursor of the World Trade Organization, the GATT (General Agreement on Tariffs and Trade) was passed with 23 member states, reports the BBC. After many rounds of GATT, with international meetings taking place in different locations each time and membership continually expanding, the GATT officially became the WTO in 1995.
The WTO expanded on the mission of GATT, which regulated trade in goods among members. Member states pledged to respect international law regarding imports, exports, and intellectual property issues, as well as commit to low tariffs and reduced trade barriers. The WTO oversees these agreements and commitments and works with nations to address their concerns.
Nations are monitored by the WTO to ensure that they are lawfully respecting the concept of open trade and, when disputes arise, the WTO also serves as a mediator, reports the WTO website. Nations can appeal to panels of WTO experts for advice and conflict resolution in the event of trade disputes.
Finally, the WTO works to encourage international trade among member states, serving as a diplomatic go-between regarding trade needs. It also assists in developing poor nations by trying to get leaders of wealthy nations, such as the G8 countries, to commit to infrastructure development projects in impoverished regions like Africa or South Asia. Summarily, the WTO serves as a sort of diplomatic club that tries to get nations trading with each other for mutual economic benefit.
Increased international trade, at least free and open trade, is considered economically advantageous through the concept of comparative advantage, which means that each nation focuses on producing the goods and services it can make most efficiently. By allowing each nation to focus on its best, most efficient exports the global supply of goods and services drastically increases, allowing for a higher quality of life.