Do we really know that the WTO increases trade?

• Pages: 243-245

Page 243

Supporters of the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), argue that global trade can be boosted by encouraging countries to lower tariff barriers. But is there compelling evidence that the GATT/WTO has any impact on trade or trade policy?

In a new study presented at a recent IMF Institute seminar, Andrew Rose, Professor at the Haas School of Business at the University of California, Berkeley, finds very little.

Until now, Rose says, there has been no rigorous empirical examination of whether the GATT and the WTO, which were set up to ensure that trade flows as smoothly, predictably, and freely as possible, have succeeded in carrying out their mandates. Rose fills this gap and draws provocative conclusions.He finds remarkably little evidence that countries belonging to or joining the GATT/WTO have different trade patterns from outsiders-in other words, GATT/WTO membership has not systematically played a strong role in encouraging trade. Not all multilateral trade arrangements have been ineffectual, though; trade preferences extended to developing countries by developed countries under the Generalized System of Preferences (GSP) have approximately doubled trade.

Rose also finds that few trade policy measures are routinely associated with GATT/WTO membership.

Trade liberalizations, when they do occur, lag GATT/WTO entry by many years, and the GATT/WTO admits countries whose trade regimes are closed and remain closed for years. The exception to the rule is that WTO members tend to have slightly more economic freedom, as indicated by an index developed by the Heritage Foundation. The index ranks countries according to a range of factors that affect economic freedom and prosperity, such as government intervention in the economy, corruption, trade barriers, rule of law, regulatory burdens, banking restrictions, and black market activities.

No impact on trade

To make his argument as persuasive as possible, Rose uses widely accepted techniques. He starts by estimating the effect of GATT/WTO membership on international trade, using the standard "gravity" model of bilateral trade, based on the idea that the level of trade is inversely proportional to the distance between countries and directly proportional to their joint income (as measured by GDP). Using data spanning 1948-1999 for 178...