“Arnold Kling”:http://econlog.econlib.org/archives/000449.html recently drew attention to the revision of a paper by “Andrew Rose(home page)”:http://faculty.haas.berkeley.edu/arose/ that questions whether the GATT/WTO improves world trade. Rose “asks(link to paper on NBER site)”:http://ideas.repec.org/p/nbr/nberwo/9273.html whether the WTO matters at all. Before him, he says, despite mountains of pro- and anti- GATT/WTO rhetoric, this crucial question has been buried by bluster, theory, and ‘casual empiricism’. bq. But should we – and the [anti-globalization] protestors – really care aboutthe WTO at all? Do we really know that the WTO and its predecessor the General Agreement on Tariffs and Trade (GATT) have actually promoted trade? (p.1) Professor Rose apparently sees himself in the role of the child who pointed out the nakedness of the Emperor. It’s a great rhetorical platform if you’ve got a high-profile target and a plausible line of attack and Rose has both. Here is how he summarizes his project: bq. In this paper, I provide the first comprehensive econometric study of the effect of the postwar multilateral agreements on trade. It turns out that membership in the GATT/WTO is not associated with substantially enhanced trade, once standard factors have been taken into account. To be more precise, countries acceding or belonging to the GATT/WTO do not have significantly different trade patterns than non-members. (p.1) I have two responses to this. First, I don’t think that Rose’s analysis shows what he says it shows. Second, I don’t accept his premise that the value of the WTO lies in whether it promotes trade. It doesn’t seem to enter Rose’s mind that the multilateral system might have been assigned another role. For example, while setting the stage for his investigations, Rose quotes (on p.2 of his paper) the WTO’s own summary of its role that he seems to think shows the WTO is claiming “that the multilateral trading system boosts trade.” But Rose apparently doesn’t understand the WTO’s claim. What the WTO says in the quote Rose uses is that it’s role is “… to help trade flow smoothly, freely, fairly and predictably”. This doesn’t say that the WTO believes it “boosts trade.” Nor does the WTO bumpf about international trade growth since 1948—quoted by Rose—make any claim for the GATT/WTO’s agency in this growth. I think the WTO is really about something other than the growth of trade volumes and that the phrase Rose quoted summarizes this role pretty accurately. But I’ll return to my view of what the WTO is for below because the question Rose is asking is an interesting one that deserves examination, even if it doesn’t determine, as far as I am concerned, whether we should “really care about the WTO at all”. So let’s start by looking at Rose’s main argument. h4. Does WTO increase trade? Rose looks for the effects of WTO membership by considering some ‘before and after’ cases. His hypothesis is that if GATT/WTO membership has an effect on trade then other things being equal it should show up as a difference in the trade flows after a country joins the GATT/WTO compared to flows before it joined or, possibly, as a difference between the trade flows of members and non-members. He finds that there’s no difference. So WTO membership cannot be said to promote trade. In a nutshell, that’s it. Most of Rose’s 20 pages or so are taken up with detailing the “other things being equal” condition and with a sort of ‘check’ case in which he applies his method to a sub-set of the global multilateral system, the ‘Generalized System of Preferences’ (GSP). This is a system of special low tariff rates that developed countries voluntarily apply to imports from developing countries. Unlike GATT/WTO, Rose’s comparison technique does present some significant changes in trade volumes in the case of the GSP, so Rose concludes that there’s nothing wrong with his methodology. bq. …countries acceding or belonging to the GATT/WTO do not have significantly different trade patterns than non-members. Not all multilateral institutions have been ineffectual; I find that the Generalized System of Preferences (GSP) extended from the North to developing countries approximately doubles trade h4. So, do I believe this result? Yes, as far as it goes. I’m not an expert in the ‘gravity model’ of trade but I see no reason to doubt Rose’s mathematics or his careful provision for the ceteris paribus bits and pieces. I believe him when he says that he can’t detect any significant difference between being a member of GATT/WTO and not being member. In my view, however, the result doesn’t show what Rose thinks it shows: that the WTO makes no difference. I think Rose adopted a highly questionable premise in the design of his experiment that does not support his conclusion. Rose’s experiment depends on his contention that there exist two well-defined sets of countries one of which comprises countries inside the multilateral trade system established by GATT/WTO and another that comprises countries outside the system. The distinction that Rose implies—but does not demonstrate—is that one set of countries enjoys GATT/WTO benefits and the other does not. But if there is no such distinction between the two sets of countries then Rose’s hypothesis that a change should be observed (trade flows should increase above the expected trend) when a country ‘migrates’ from one set to the other doesn’t make sense. In fact, at the end of his paper, Rose half acknowledges the possibility that he’s built his bold theory on sand. bq. Perhaps the GATT and WTO have acted as an international public good, freeing trade for all countries independent of whether they are members or not. Perhaps; one canZt use data to test this hypothesis, since there is no data for the counter-factual GATT-free world (p. 23) h4. Rose’s distinction without a difference Since the 18 economies of the WWII victors and some of their colonies founded the GATT in 1948, there has been no time when the majority of world trade (or even a big proportion) was taking place entirely outside the set of GATT/WTO members.
April 18, 2004 – 10:00 am