Does WTO membership increase trade?

Arnold Kling”: recent­ly drew atten­tion to the revi­sion of a paper by “Andrew Rose(home page)”: that ques­tions whether the GATT/WTO improves world trade. Rose “asks(link to paper on NBER site)”: 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.

chart showing WTO members share of world exports  data-recalc-dims= 85% since 1980">

Also, since that time, GATT/WTO mem­bers have de fac­to treat­ed almost all coun­tries out­side the group as though they were mem­bers because, most of the time, it made no sense to dis­crim­i­nate against the minor­i­ty play­ers in world trade (most­ly devel­op­ing coun­tries). The only reg­u­lar excep­tion was dis­crim­i­na­tion against ‘COMECON’ economies, that was, in fact, prac­ticed only by the USA, Cana­da and some north­ern Euro­pean coun­tries. What this means is that the set of ‘coun­tries acced­ing or belong­ing to the GATT/WTO’ and most of the set of ‘non-mem­bers’ enjoyed almost the same trade rela­tions before and after the mem­bers of the sec­ond set migrat­ed (as they have done) to the first set. The “GATT/WTO sys­tem” effec­tive­ly cov­ered all world trade dur­ing the sec­ond half of the twen­ti­eth cen­tu­ry. Even coun­tries that were not mem­bers of the Agree­ments were still cov­ered by the glob­al trade regime defined by GATT/WTO. If the envi­ron­ment of trade rela­tions doesn’t change much for these coun­tries, should we expect to see a big change in trade vol­umes? Prob­a­bly not. Which is what Rose’s study seems to con­firm. The GSP sys­tem, that Rose finds has had a big effect on trade growth, is a dis­crim­i­na­to­ry sub-sys­tem of GATT/WTO that first began to take effect in 1966. Unlike the GATT/WTO, the ben­e­fits of the GSP tar­iff reduc­tions are restrict­ed to a well-defined sub­set of coun­tries (non-OECD, non-‘transition’ economies) and no coun­try not in that set enjoys the GSP ben­e­fits to any extent. I’m guess­ing that that’s why Rose gets a result in the GSP case that is not present in the broad­er case. h4. Then why do coun­tries join WTO? Two rea­sons stand out . Prob­a­bly the most impor­tant rea­son is to acquire GATT/WTO treat­ment as a mat­ter of right. Although most mem­bers have nev­er sys­tem­at­i­cal­ly dis­crim­i­nat­ed against non-mem­bers, the non-dis­crim­i­na­to­ry treat­ment was not com­plete. It was offered only when it didn’t real­ly mat­ter. Here and there, the more sig­nif­i­cant or ‘cen­tral­ly planned’ economies that were not mem­bers of WTO found that they had to pay for non-dis­crim­i­na­tion as Chi­na found, for exam­ple, when the USA would annu­al­ly review it’s grant of Most Favored Nation treat­ment (‘nor­mal relations&#8217)to Chi­na. Chi­na usu­al­ly did ‘pay-up’ in the form of some degree of com­pli­ance with US requests on e.g. human rights issues. As a non-mem­ber at the end of the last round of WTO nego­ti­a­tions, Chi­na real­ized that it also risked miss­ing out on the ben­e­fits of the Agree­ment on Tex­tiles and Appar­el to elim­i­nate import quo­tas by the end of 2004. In most cas­es, the dis­crim­i­na­tion against non-mem­bers was inci­den­tal: it did affect over­all trade flows but was suf­fi­cient­ly irri­tat­ing to cre­ate polti­cial prob­lems includ­ing in the non-mem­ber coun­try. For exam­ple, the pro­ce­dures used against non-mem­ber exports in an anti-dump­ing inves­ti­ga­tions or in the use of import ‘safe­guards’ could be arbi­trary and prej­u­di­cial. Export restric­tions (e.g. of tech­nol­o­gy) could be used against non-mem­bers with greater ease than against mem­bers. The sec­ond rea­son for join­ing WTO may not ring true, at first: but there is a big and obvi­ous con­tem­po­rary exam­ple. WTO mem­ber­ships has been used by gov­ern­ments to shape and con­trol the way their own trade reg­u­la­tions are made. WTO mem­bers have oblig­a­tions that must be respect­ed when the gov­ern­ment makes reg­u­la­tions affect­ing trade. Sur­pris­ing­ly, gov­ern­ments often find this appar­ent lim­i­ta­tion on their own scope of action very con­ve­nient. They like to be able to place the ‘blame’ on the WTO rules for ‘pre­vent­ing’ them from acced­ing to the wish­es of a lob­by group. Oth­er governments—such as Chi­na today and the ‘tran­si­tion’ economies of East­ern Europe dur­ing the 1990’s—have used the con­cepts and pro­ce­dures embod­ied in the WTO rules as a yard­stick for mod­ern­iza­tion and the lib­er­al­iza­tion of their domes­tic econ­o­my. Nei­ther of these rea­sons for join­ing WTO implies a major impact on trade flows. h4. Why should it? Let’s turn Rose’s assump­tion on it’s head. Is there any rea­son to think WTO should increase trade?. Isn’t this a bit like expect­ing traf­fic laws to pro­mote good dri­ving or libel laws pro­mote truth­ful­ness? The WTO rules exist main­ly to min­i­mize con­flicts between gov­ern­ments over trade poli­cies. That’s why they were invent­ed by the USA and its allies in 1948: as part of a vision of a world in which trade dis­crim­i­na­tion, embar­goes and block­ades of access to resources would no longer lead to glob­al war as they had in the recent past. That vision was an exten­sion of the attempts that Roo­sevelt was mak­ing even as late as Novem­ber 1941 to cool the dis­putes with Japan over trade and resources embar­goes by means of a non-dis­crim­i­na­to­ry trade pact. It was re-cast as a glob­al goal by Roo­sevelt and Churchill in the “Atlantic Charter”: in July of that year The GATT/WTO rules do not say that you have to lib­er­al­ize your trade bar­ri­ers. GATT and WTO have presided over eight rounds of nego­ti­a­tions between mem­ber gov­ern­ments in which they’ve decid­ed joint­ly to reduce trade bar­ri­ers. But that is not in the rules them­selves: they’re draft­ed (delib­er­ate­ly) to allow gov­ern­ments to main­tain trade pro­tec­tion as long as it meets cer­tain basic principles—mostly non-dis­crim­i­na­tion between oth­er mem­ber coun­tries or between imports and domes­tic-ori­gin goods. Under GATT/WTO pro­ce­dures, the incen­tives to bring down bar­ri­ers to trade are sup­posed to be deals offered by your trad­ing part­ners (to cut their bar­ri­ers in return for your own cuts). This seems to work. Glob­al tar­iff aver­ages have been cut from aver­ages of 60% to under 6% since 1948. h4. Tar­iff cuts aren’t dri­ven by WTO The GATT/WTO’s role in the deci­sions of gov­ern­ments to liberalize—at least since the 1970s—is a bit of a fairy tale. Gov­ern­ments like to be able to point to nego­ti­at­ed reduc­tions else­where as a motive and a “reward” for cut­ting their own bar­ri­ers. But over the years most governments—particularly in small­er economies that have lim­it­ed nego­ti­at­ing ‘leverage’—have cut their trade bar­ri­ers for domes­tic pol­i­cy rea­sons and not in the con­text of a GATT/WTO trade round. For exam­ple, all through the peri­od of the late eight­ies and nineties when the GATT/WTO was embroiled in the lengthy Uruguay Round of trade nego­ti­a­tions, unable to reach agree­ment on cuts to pro­tec­tion for agri­cul­ture and ser­vices and indus­tri­al trade, the devel­op­ing countries—big (like India) and small (like Malaysia)—were busi­ly open­ing up their mar­kets by mak­ing uni­lat­er­al trade bar­ri­er cuts that far exceed­ed the cuts they were being asked to make in the nego­ti­a­tions. In fact, the GATT/WTO coop­er­ates with this uni­lat­er­al approach to cut­ting tar­iffs by allow­ing gov­ern­ments to ‘bank’ the con­ces­sion made to export­ing economies for lat­er use (in GATT jar­gon, this con­ces­sion is called a ‘bind­ing’ and it can be called up and put into play even years after the uni­lat­er­al tar­iff cuts are made). h4. E pur si mou­ve So WTO doesn’t aim for increas­es in trade, doesn’t require mem­ber gov­ern­ments to cut their trade bar­ri­ers and gives ‘points’ to gov­ern­ments that cut their tar­iffs for rea­sons that have much more to do with the health of their own economies than the lev­el of world trade. Is this begin­ning to sound like Rose is sim­ply ask­ing the wrong ques­tion? Well, Rose hasn’t been deterred. He’s at it again ask­ing anoth­er ques­tion to which he should already know the answer: “Do WTO Mem­bers have More Lib­er­al Trade Policy”: I haven’t read this paper, but I’ll make a pre­dic­tion. Except for post-Uruguay Round acced­ers (such as Chi­na) Rose’s method will undoubt­ed­ly show no evi­dence of more open­ness in the five years after acces­sion than there was in the five years pri­or to acces­sion. And even in the case of China—where the tar­iff cuts that real­ly made a dif­fer­ence to the Chi­nese mar­ket took place from the mid-1990’s—the change before and after 2001 acces­sion date will not be that big. h4. ‘Make work’ for lawyers and bureau­crats? Arnold Kling’s view is that the GATT/WTO is lit­tle more than ‘make work’ for lawyers and bureau­crats. Well I’m reluc­tant to say that there is no such make-work going on. One could as eas­i­ly say this of, say, the gov­ern­ment of any coun­try. But in my view there is a lot more to it than that. My view is that the GATT/WTO sys­tem is the “pub­lic good” that Rose acknowl­edges on page 23 of his paper is not testable using his approach. I’ve argued this before[⇒ relat­ed sto­ry] on this site con­tra Arnold Kling. We may have to agree to dif­fer. To oth­ers, I offer this lit­tle “gedankex­per­i­ment”: writ­ten just after the col­lapse of the Can­cún meet­ing of WTO. It’s not great fic­tion but no worse than the romance of Rose.

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