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It's explained that Wutai actually started the war. Basically, Godo would rather have run a global empire than an isolated city-state, so he began a campaign for worldwide influence. Meanwhile, President Shin-Ra had his own plans for world domination in mind, so the two forces clashed. We basically know the rest; after some fighting, Wutai was put firmly in its place and became a shadow of its former, gloriously ambitious self, and Godo resorted to sending his daughter out into the world to steal materia in large quantities and bring it back to fortify the homeland once more.