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 > 85% since 1980″ /> <br /> </div> <br /> </div>

<p>Also, since that time, GATT/WTO members have <em>de facto</em> 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 <em>covered all world trade</em> 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 <em>has</em> 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 <em>that’s</em> 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 <em>most important reason</em> is to acquire GATT/WTO treatment as a matter of right. Although most members have never <em>systematically</em> 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 <em>pay</em> 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 <em>second reason</em> 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 <em>should</em> 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 <em>not</em> 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 <em>domestic policy reasons</em> 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 <em>that</em> 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 <em>no</em> 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 <em>lot more</em> to it than that. My view is that the GATT/WTO system <em>is</em> 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 <em>contra</em> Arnold Kling. We may have to agree to differ. To others, I offer this little “<em>gedankexperiment</em>“: written just after the collapse of the Cancún meeting of WTO. It’s not great fiction but no worse than the romance of Rose.</p>

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