In reply to my pessimistic evaluation of trade liberalization’s momentum, Alex Singleton says that I shouldn’t let the best be the enemy of the good, noting that CAFTA, while unpopular, was more politically feasible than unilateral liberalization.
I would normally reply that the realistic alternative to regionalism is multilateralism, not unilateralism, but I just read a paper (PDF) from Andrew K. Rose of Berkeley that argues that the conventional faith in the WTO is misplaced. Using a very traditional gravity model, Rose finds WTO membership to be both economically and statistically insignificant in affecting trade flows, with point estimates occasionally turning out negative. After demonstrating the robustness of this (non-)finding, he ponders:
Of course the most interesting issue that remains is why the GATT/WTO doesn’t seem to have had much of an impact on trade. It is natural to ask whether GATT/WTO members have systematically lower trade barriers. The answer seems to be negative; see Rose (2002). There are at least two possible reasons. The first is that the GATT/WTO has not typically forced most countries to lower trade barriers, especially developing countries that have received “special and differential treatment.” The second reason is that members of the WTO seem to extend most favored nation status unilaterally to countries outside the system, even though they are under no WTO formal obligation to do so. Ongoing research (Rose, 2002) indicates that the negative effect of GATT/WTO membership on trade may appear because membership simply has little effect on trade policy. [Berkeley (PDF)]
In discussing the negative effects of preferential trade agreements, I have sometimes described discriminatory trade policy as damaging the WTO. Dr. Rose’s paper is a good reminder that MFN and low barriers, not membership in the WTO, are the hallmarks of good trade policy. As is often noted, unilateral liberalization, whether spurred by the desire for improved economic performance or forced upon policymakers by a crisis, has occurred frequently during the last half century, but rarely received the attention that is showered upon reciprocal liberalization.
That said, dramatic unilateral liberalization would certainly capture public attention, and Mr. Singleton is likely right that it will not be politically feasible in the near future. As such, free traders ought to devote attention to making the WTO an effective force for liberalization.
According to this paper (http://www.stanford.edu/~tomz/working/TomzGoldsteinRivers2004.pdf) Rose has understated the effect of GATT because he only included countries with formal membership of the GATT. But not all non-member are outsiders. Many outsiders have the rights and obligations of GATT although they are not formal members. Nonmember participants are colonies and oversees territories, de facto participants and some states that acceded provisionally. If those countries are included the effect of GATT on trade turns positive, both for members as for non-member participants. Now in the end this paper as the papers of Rose suggest the same thing: the importance of the MFN-principle. As the authors state:
GATT requires developing countries to extend minimum tariffs to other participants, many of whom
were previously subject to higher rates. Through the simple application of the most-favorednation
principle, then, GATT broadens the geographic coverage of free trade: it widens the set of
countries to which minimum tariff rates apply.