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Comment & analysis Print article | Email
A free trade club without benefits
By Andrew Rose
Published: November 7 2002 20:27 | Last Updated: November 7 2002 20:27

Economists disagree about a lot - but not everything. Almost all of us think that international trade should be free. Accordingly, the multilateral organisation responsible for liberalising trade, the World Trade Organisation, is the most popular international institution inside the profession, certainly compared with its obvious rivals, the International Monetary Fund and the World Bank. This makes much of the furore over the WTO unfathomable to most of us. But should we and the protesters really care about the WTO at all? Do we really know that the WTO, together with its predecessor the General Agreement on Tariffs and Trade, has promoted trade?

Maybe not. While theory, casual empiricism and strong statements abound, there is, to my knowledge, no compelling empirical evidence showing that the WTO has in fact encouraged trade. My latest research shows that WTO membership is not associated with enhanced trade, once standard factors have been taken into account. To be more precise, the trade patterns of countries acceding or belonging to the WTO do not differ significantly from those of non-members.

This finding is important, for two reasons. First, the mandate of the WTO is trade liberalisation. Second, the system is widely considered to be a success. While some might disagree that trade should be freed by the multilateral system, it is hard to find dissent from the view that trade has been liberalised by the system.

Not all multilateral trade institutions have been ineffectual. The Generalised System of Preferences extended from the north to developing countries approximately doubles trade. Thus we know that we have the data and methodology to measure the effects.

I have compared trade patterns for countries in the Gatt/WTO with those outside the system, taking other factors into account and using variation across countries (since not all countries are in the system) and time (since membership has grown).

Twiddling with the model, the data set, or the methodology does not affect the central conclusion: Gatt/WTO membership has economically and statistically tiny effects on trade. And there is no evidence that entry into the Gatt/WTO has had an effect on the ratio of aggregate trade to gross domestic product. The reason for this is that membership is not significantly correlated with measures of trade policy. In other words, there is almost no evidence that belonging to the Gatt/WTO has liberalised trade policy. It is therefore unsurprising that the system has not stimulated trade.

Take one example. In 1987, Indian tariff revenues reached 53 per cent of import values. India had been a founding member of the Gatt in 1948. Yet Indian tariff revenues have never fallen below 20 per cent of Indian imports, at least during the 25 years for which we have data.

Comparable tariff data exist for 91 countries in 1987. At that time 89 countries had lower tariffs than India. Twenty-three of those countries were not members of the Gatt but had tariff rates averaging 15.7 per cent. Gatt members collected tariffs averaging 11.4 per cent (a figure that is statistically indistinguishable from that of outsiders). Average tariff rates have been insignificantly different for members and non-members for all years since 1974.

Perhaps the Gatt has not had much of an effect on trade but the WTO will. Time will tell. In the meantime we should all question the assumption that the WTO has in fact liberalised trade or is in the process of doing so.

The writer is professor of economics at Berkeley's Haas School of Business and author of Do We Really Know that the WTO Increases Trade?


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