General Agreement on Tariffs and Trade:

Keynes'  original plan for fashioning the international economic system called for three organisations-the  International Monetary Fund  (IMF) that would provide short term financing for balance of payments (BOP) needs, the World Bank (WB) that would provide long term capital for reconstruction from war damage  and for economic development, and  the International  Trade Organisation (ITO) that would  establish the rules to  govern trade. The  final  conference negotiations for the establishment of the IMF and WB were held at Bretton Woods in New Hampshire, and hence  their name as the Bretton Woods Twins or the Bretton Woods Organisations (BWO). The negotiations for the IT0 were held in Geneva and  substantial agreement was  reached. But wide ranging amendments were introduced  at  the final conference at Havana where  the developing countries played  a more significant role than they had at Geneva while the war was still in progress.

The failure of IT0  to be ratified still led countries  to go ahead with part of the agenda. Tariff cuts were agreed on and  implemented through  a separate agreement, the General Agreement on Tariffs and Trade (GATT). This was only an agreement and did not set up a permanent and separate legal body. But over the years the functions of the GATT evolved and, though it did not have legal sanction as an institution, for all practical purposes, it acted as one. The main difference  of  the GATT with the  IMF and  the World Bank was  that whereas staff members of the IMF and the Bank negotiate with member countries, this is not so at the GATT, even today with the WTO, even though the WTO is a legally sanctioned organisation. In  the case of the GATTIWTO the member countries themselves negotiate the agreements. If  a  country  violates  the agreement it  is not  the WTO  staff that responds;  the  adversely affected member country must complain.

The rationale for establishment of GATT was to provide a rule based trading system. Such a system would be more certain and so encourage investment and growth of export industries.  When a country  has a  trade deficit,  it can pay for the excess of imports over exports either from accumulated reserved or by borrowing. In the 1930s,  during the Great Depression, countries had run out of foreign exchange  reserves and could not borrow from the international capital market. So a country having an excess of imports over exports could not pay for the excess imports and had to reduce imports. A country often did this by reducing imports, through quantitative restrictions (QRs).  Its imports were another country's, namely partner country, exports.  So the partner country would find its exports decreasing and so it, in turn, would reduce its imports. This would hurt the first country's exports forcing  it to further  reduce imports.

So a downward spiral was set up in which each country faced reduced exports, and lower employment and output  in  its  export  industries,  and  by  the multiplier process  in  other industries. Policy makers tried  to  reverse  this downward spiral and reverse it into an expansionary  spiral by an expansion of exports by reducing import restrictions.