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GATT and WTO – Meaningless for world trade?
02/2003
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Research news
GATT and WTO – Meaningless for world trade?
Is global free trade a key to affluence for all the world's nations? Classic economic theory claims it is but not everyone thinks the theorists are right. One thing that no one has ever disputed, however, is that the Generalized Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) to which it gave rise have contributed significantly to the liberalisation and prodigious growth of world trade over the last fifty years. That is why free trade's apologists see the GATT and WTO as key international institutions and critics of globalisation perceive them as a threat to development and the environment.
According to economist Andrew K. Rose at the University of California, though, both the free traders and the critics of globalisation have got it wrong. In a study published in September 2002, Rose claims there are a whole host of reasons why trade between one pair of countries is greater and grows faster than between two others – and GATT or WTO membership is not one of them. In the words of Rose: "That is, countries joining the GATT/WTO neither have significantly different trade from non-members, nor do they experience increases in trade, holding other factors constant."
Rose reached this astonishing conclusion after conducting a regression study on trade patterns between 175 countries over the last fifty years. He took as his starting point the standard gravity model, which says that the bigger two economies are and the shorter the distance between them, the greater the volume of trade they will conduct. Rose adds to this model a number of other factors which can influence trade between two countries – including cultural proximity, a common language or the fact of being signatories to a regional free trade agreement – and examines their importance in comparison to GATT/WTO membership. His conclusion: "Simply taking into account standard gravity effects essentially eradicates any large effect of the GATT/WTO on bilateral trade."
Rose's calculations are accepted by economists. But according to Uwe Schmidt, an economist and trade expert at the German institute for development and peace INEF, his American colleague's conclusions need to be viewed with caution. This is because they are based on highly aggregated data and make no distinction between countries that take their responsibilities as GATT/WTO members seriously and those that don't. Rose himself concludes that GATT/WTO membership has a significant trade-boosting effect for the industrialised nations – something which Schmidt reckons is hardly surprising since industrial economies are much more open than those of developing nations, which have been able to claim many exemptions, especially under the old GATT.
In other words, Rose may well be right when he says GATT and WTO have made little contribution to the growth of world trade over the last fifty years. But it would be wrong to go farther and draw the politically loaded conclusion that it doesn't matter whether a country joins the WTO and abides by its rules or not. Because in certain cases Rose finds that GATT and WTO definitely have promoted bilateral trade – so free traders can carry on heaping praise on the two institutions and their opponents can continue to criticise them. (ell)
Andrew K. Rose: Do we really know that the WTO increases trade?
Internet: www.mas.gov.sg/resource/download/MASOPo24-ed.pdf
Byline: "Research news" is a special new section in which we report and comment in brief on the latest research findings with a bearing on development issues. To make it a regular feature, we need input from researchers. Ideas for articles are invited.
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