The World Trading System The Road Ahead

• Author: Simon J. Evenett
• Position: Was a member of the team that produced the World Bank's World Development Report 1999/2000

All countries have much more to gain than to lose from opening up their markets. As a new round of trade talks begins, the international community should make a commitment to pursue further trade reforms.

Even though many aspects of globalization-capital flows, migration, and environmental problems-have captured worldwide attention in the 1990s, for more than a century the driving force behind global integration has been growing trade in goods and services. At the close of the twentieth century, however, the global trading system is at a crossroads. Will the momentum of trade reform be sustained in the agriculture and services sectors, which are critical to the future economic prospects of developing countries? Or will nations succumb to a growing backlash against reforms, retreating behind their borders and squandering opportunities for growth?

Benefits of trade

Traditionally, trade liberalization has benefited developing countries through two important channels. First, when tariffs are lowered, relative prices change and resources are reallocated to production activities that raise national incomes. The tariff reductions implemented after the Uruguay Round of trade talks was concluded in 1994 raised national incomes by an estimated 0.3-0.4 percent. Second, much larger long-run benefits accrue as economies adjust to technological innovation, new production structures, and changing patterns of competition. These benefits will be as important in the future as they have been in the past.

In addition, new empirical research indicates that trade liberalization has powerful effects on the performance of firms:

* Increased imports were found to discipline domestic firms in Côte d'Ivoire, India, and Turkey, forcing them to bring prices closer to marginal costs, thereby reducing distortions created by monopoly power.

* Trade liberalization can permanently raise a firm's productivity, as the firm gains access to up-to-date capital equipment and high-quality intermediate inputs at lower prices. Some firms in Korea and Taiwan Province of China, for instance, increased productivity by diversifying their use of intermediate inputs.

* Productivity rises when businesses are exposed to demanding international clients and the "best practices" of overseas competitors. Domestic firms may also benefit from the opportunity to reengineer foreign firms' products. Indeed, differences in the productivity of exporting and nonexporting firms often diminish once the latter begin selling products abroad, as studies from Colombia, Mexico, Morocco, and Taiwan Province of China show.

Promoting liberal trade regimes

World trade owes its robust development to the international institutions that have encouraged countries to remove or lower trade barriers. The General Agreement on Tariffs and Trade (GATT) carried out this role for five decades, until its successor, the World Trade Organization (WTO), was established in 1995. The WTO, which has its headquarters in Geneva, serves the developing countries' interests by facilitating trade reform, providing a mechanism for settling disputes, strengthening the credibility of trade reforms, and promoting transparent trade regimes that lower transaction costs.

These benefits explain why developing countries have joined the WTO in increasing numbers. In 1987, 65 developing countries were GATT members. In 1999, WTO includes among its members 110 developing and transition countries whose exports account for approximately 20 percent of world...