Do trade flows respond to nudges? Evidence from the WTO’s Trade Policy Review Mechanism

• Date: 01 August 2019
• Published date: 01 August 2019
• DOI: http://doi.org/10.1111/roie.12394
• Author: David J. Kuenzel

Rev Int Econ. 2019;27:735–764. wileyonlinelibrary.com/journal/roie

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735

© 2019 John Wiley & Sons Ltd

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INTRODUCTION

There is a large literature on both the institutional underpinnings and the trade impact of the WTO.

According to WTO theory (Bagwell & Staiger, 1999, 2002), members liberalize trade on a reciprocal

and MFN basis with the dispute settlement mechanism as underlying enforcement device in cases of

noncompliance. However, there is little known about the economic effects of members’ communica-

tions outside of official negotiations and dispute proceedings. In addition to being a negotiation forum

and guardian of trading rules, one of the less publicized but crucial institutional tasks of the WTO is

to ensure the transparency of its members’ trade policies. For this purpose, the GATT provisionally

Received: 24 October 2017

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Revised: 10 January 2019

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Accepted: 12 January 2019

DOI: 10.1111/roie.12394

ORIGINAL ARTICLE

Do trade flows respond to nudges? Evidence from

the WTO’s Trade Policy Review Mechanism

David J.Kuenzel

Department of Economics,Wesleyan

University, Middletown, Connecticut

Correspondence

David J. Kuenzel, Department of

Economics, Wesleyan University, 238

Church St, Middletown, CT 06459.

Email: dkuenzel@wesleyan.edu

Abstract

Relatively little is known about the economic effects of

WTO members’ communications outside of official nego-

tiations and dispute proceedings. This paper considers

whether interactions between members through the Trade

Policy Review Mechanism, the WTO’s prime transparency

institution, lead to subsequent changes in bilateral trade

flows. Trade policy concern submissions are more likely to

lead to positive trade responses when (i) the receiving coun-

try is less concerned about terms‐of‐trade losses, (ii) the

submitter is more willing to engage in WTO disputes with

the reviewed member to challenge controversial trade poli-

cies, and (iii) the submitting country challenges trade poli-

cies in the nonchemical manufacturing sector. Nudges

through the TPR process are not successful in raising agri-

cultural trade.

JEL CLASSIFICATION

F13, F14, F53

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KUENZEL

established in 1989 the Trade Policy Review Mechanism (TPRM), which has conducted periodical

reviews of members’ trade policies ever since. Officially enshrined in the statutes of the WTO in 1995,

the TPRM serves as a transparency‐enhancing vehicle and informal communication forum as TPR

materials are in general not intended to be used as evidence in any official WTO dispute proceedings.1

This paper investigates whether informal policy nudges through the TPRM, that is, the nonbind-

ing transmissions of policy concerns, affect bilateral trading relationships. Using information from

official GATT/WTO documents going back to 1989, I construct a bilateral dataset of submitted trade

policy concerns during TPRM proceedings. Employing a gravity regression framework, I then exam-

ine to what extent the participation in these nonbinding policy discussions translates to changes in bi-

lateral trade flows. In particular, I consider whether the submission of a concern during a trade policy

review subsequently raises a country's bilateral exports to the reviewed member. While the average

communicated trade policy concern has no significant trade impact, the results exhibit a substantial

degree of heterogeneity. Nudges through the TPRM are more likely to lead to positive trade responses

when (i) the receiving country is less concerned about terms‐of‐trade losses, (ii) the submitting mem-

ber has been an active pursuer of trade disputes against the importer in the past, and (iii) the submitting

country challenges trade policies in the nonchemical manufacturing sector. Nudges through the TPR

process are not successful in raising agricultural trade, which constitutes the most contentious area in

trade negotiations for many countries.

By considering the trade effects of bilateral communications through the TPRM, this paper con-

tributes in several ways to the WTO literature. First, it provides the first comprehensive empirical

analysis of the trade effects of the WTO’s prime trade policy transparency mechanism. Examining the

trade effects of the communications between members through the TPRM is a relevant exercise as it

can provide valuable input for a cost–benefit analysis of the current apparatus. Trade policy reviews

are both cost‐ and time‐intensive, and the steadily increasing membership imposes a considerable

burden on the WTO Secretariat. At the same time, the WTO Secretariat reports are frequently criti-

cized for not commenting on members’ compliance with WTO rules and for offering little concrete

guidance on trade policy reforms (see, e.g., Bown, 2009). The present paper can inform discussions

on the effectiveness of the TPRM by shedding light on the question under which circumstances WTO

members will experience positive trade effects from actively participating in the trade policy review

process.

Second, and more broadly, this study provides evidence that specific WTO institutions can in-

duce additional trade effects on a continuing basis. When assessing the effectiveness of the WTO,

these estimates need to be added to any potential membership effects that have been identified in the

previous literature and which usually rely on variations in trade flow patterns around GATT/WTO

accessions. The latter line of research started out with the seminal paper by Rose (2004) who found no

GATT/WTO membership effects on trade. Subsequent studies rejected or amended Rose’s finding in

several ways. Tomz, Goldstein, and Rivers (2007) found positive GATT/WTO effects on trade when

differentiating between de jure and de facto membership, while Subramanian and Wei (2007) suggest

that the WTO promotes trade strongly for developed economies but not for developing countries.

Eicher and Henn (2011) found that the latter result is not robust when accounting for heterogeneous

PTA effects; they point instead to countries with greater incentives to bargain over tariff reductions

as main beneficiaries of positive WTO effects. When accounting for both the intensive and extensive

margins of trade, Felbermayr and Kohler (2006, 2010) and Dutt, Mihov, and Van Zandt (2013) also

find evidence that the WTO enhances trade.2 I control for WTO membership throughout in the regres-

sions below and in line with the earlier research I find mixed effects depending on the exact empirical

specification.