Yes, the WTO does liberalize trade

Perhaps I have found an answer to the question posed in my previous post‘s title.

Check out this Economist article for more discussion of the WTO’s effectiveness in liberalizing trade. The paper by Tomz, Goldstein and Rivers that it mentions exhaustively investigates the criterion Rose used to determine GATT participation. By using formal membership as the measure of GATT participation, Rose’s paper neglects the substantial participation by informal member nations:

The solution to this mystery lies in understanding who actually participated in GATT. We show that Rose has overlooked a large proportion of countries to which the agreement applied. By mistakenly classifying many countries as nonparticipants, when in fact they had both rights and obligations under the agreement, he systematically underestimates the effect of GATT on international trade. The purpose of this paper is to identify the full set of GATT participants and, once this institutional detail is understood, to show that GATT did indeed contribute to the substantial growth in postwar trade.

They find that “trade is approximately 72 percent higher when both sides of the dyad participate in GATT and nearly 31 percent higher when only one side participates.”

GATT created rights and obligations not only for contracting parties but also for countries and territories that did not appear on the formal membership roster. By treating colonies, de facto members and provisional members as if they were outside the organization, previous research has understated the institutional research and economic effects of GATT.

Once we account for all participants, our analyses show that participation in GATT— either as a formal member or as a nonmember participant–substantially increased trade. Grouping nonmember participants with nonparticipants causes a substantial downward bias in the estimated effect of GATT membership. When this misclassification is corrected, we find that the agreement proved beneficial for both formal members and nonmember participants, which traded at higher levels than countries outside GATT. These findings withstand a variety of sensitivity tests involving changes in sample definitions and estimation techniques. Overall, GATT exerted a positive effect on trade in nearly all time periods and for most groups of countries.

It would be hasty to dismiss the WTO.

1 thought on “Yes, the WTO does liberalize trade

  1. Peter Gallagher

    Jonathan,

    The Rose hypothesis has been knocked around for a couple of years. Tomz et al. are on the money, I think.

    I first took up Arnold Kling’s challenge on the Rose paper just after the Cancun Ministerial meeting here [http://www.inquit.com/24/does-wto-membership-increase-trade], offering arguments along the same lines as Tomz et al.

    But I now think that allowing the debate over WTO’s utility to drift down the back-alleys of regression analysis and into the black-holes of ‘gravity models’ leads nowhere. Or rather, it leads to arguments that will exclude most ‘stakeholders’ who don’t feel up to the math (I’m one, I confess).

    I tried a very different approach in a little story I wrote on the plane coming back from Cancun here [http://www.inquit.com/164/yes-virginia-the-wto-matters-a-great-deal]

    Best wishes,

    Peter

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