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.

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.