Does accession to the World Trade Organization (WTO) boost trade?
Does accession to the World Trade Organization(WTO) boost acceding members’ trade?
Outline:
One of the prime functions of the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT) is to promote international trade. However, the actual trade-enhancing effect of the GATT/WTO as institutions have been controversially discussed in the literature, with Rose (2004) famously alleging that there is no trade effect of joining the multilateral trading system. Yet WTO membership is growing incessantly – since it was established in 1995 a diverse set of 29 countries and customs territories, ranging from China to Tonga, have joined.
You will evaluate empirically whether newly acceding WTO members have seen their international trade flows increase. Bear in mind that accession negotiations may stretch over several years before reaching completion. There may also be a range of reasons why countries might wish to accede to the WTO, and motives for joining might conceivably differ for countries at different stages of their development process.
Methodology:
A linear model for bilateral trade flows as in Rose (2004, p.100) and Subramanian and Wei (2007) is a natural starting point. Apart from model specification, there are plenty of ways to cut through the data in interesting ways. Keep in mind that overall trade flows can be disaggregated along various dimensions (different sectors or products, new vs old goods, new trade partners etc.). An important aspect when it comes to accessions is to take into account the commitments actually made by the newly acceding member state.
Data:
Aggregate merchandise trade data can be source from the WTO Statistics website. More disaggregated data can be accessed from the Stat.OECD website. Information on tariffs and non-tariff barriers can be obtained from WITS through the World Bank’s Open Data portal, as can be various country characteristics via World Development Indicators. Geographical variables can be found on CEPII’s website.
Readings:
Rose, Andrew K. (2004), Do We Really Know That the WTO Increases Trade?, American Economic Review 94 (1), pp. 98-114.
Subramanian, Arvind and Shang-Jin Wei (2007), The WTO promotes trade, strongly but unevenly, Journal of International Economics 72, pp. 151–175.
Felbermayr, Gabriel and Wilhelm Kohler (2010), “Modelling the Extensive Margin of World Trade: New Evidence on GATT and WTO Membership,” The World Economy 33 (11), pp.1430- 1469.
Liu, Xuepeng (2009), GATT/WTO Promotes Trade Strongly: Sample Selection and Model Specification, Review of International Economics 17 (3), pp. 428–446.
WTO (2011), “Understanding the WTO,” 5th edition, Geneva.
Does accession to the World Trade Organization (WTO) boost acceding members’ trade?
International Finance and Business Economics: Essay
Name
Instructor
Institution
Date
Part a
The WTO is the international entity that is responsible for creating and supervising the rules that govern trade between countries that are members of the organization. The WTO dispute settlement system provides security and predictability of the multilateral trading system and the members are expected to respect the rights and obligations under various provisions of the agreements (treaties) and to clarify the current provisions of those agreements. Since one of the aims of the WTO was to ensure there is freer trade where trade bailers are eliminated, there has been debate on where the organization has boosted trade among members. This is important to determine most the effective policies and provisions of the WTO treaties that promote mutually beneficial trade among the member states.
The WTO promotes trade and trade liberalization has opened up more economies, but growth is uneven with the developed countries benefitting the most from being WTO members. Cross- county evidence on trade patterns is one of the main focuses of research on WTO/ GATT participation (WTO, 2011, p. 10). When quantifying changes in trade flows, researchers also look into how different sectors have changed in countries that became WTO members. There is inconsistency on whether WTO promotes and increases world trade and some studies have shown that there is little evidence to make the conclusion that it has promoted global trade (Subramanian and Wei, 2007, p. 152) and (Ross, 2004, p102).
Maintaining a commercial system based on rules that guarantee to and promote fairness, inclusion and fair play at a global stage is one of the features that led to more countries joining the organization. Strengthening the system, consensus building is equally important aspects of the system during agreeing to negotiations and this has helped to grow the multilateral trade system (WTO, 2011, p. 44). Eliminating trade barriers has garnered more interest WTO promotes open trade, and countries joining the organization focus on growing competitiveness and opportunities as member states. Nonetheless, it is the countries that diversify their export base, which are most likely to benefit from being WTO members as is the case with China with a robust manufacturing sector.
Methodology
The gravity model has been to evaluate the effects factors influencing trade flows, and the basis of the model is that trade between any two countries is proportional to the gross domestic product of these countries and is inversely proportional to the distance between them. The bigger a country’s economy is the more likely it is participate in trade and trading is not equally beneficial to the trading partners. Determining the volume of trade between two countries is necessary when researching on the effect of WTO membership on trade flows. another implication of the model is that countries that countries that are close to each other tend to trade more and have trade agreements that eliminate barriers and facilitate commercial flows. However, distance also includes other factors such as language and culture while trade barriers including various forms of protectionism affect international trade negatively.
China joined WTO in December 2001 and looking at the change trade patterns between China and the US would provide insights on whether accession to WTO increase trade follows. There is an assumption that both countries traded more as China was willing to open her economy, which affected both imports and exports. In Table 1, there is data on China trade balances with the US, exports and imports between 1999 and 2017 based on the World Bank statistics, and this is the total trade and there is no breakdown on various sectors.
Part B
In the research by Rose (2014), the researcher estimated the trade impact of countries participating in the World Trade Organization (WTO) , the General Agreement on Tariffs and Trade (GATT) as well as the Generalized System of Preferences (GSP) on the trade levels for the member countries and participants. The researcher pointed out that there were no significant changes the trade patterns for countries that joined WTO and its predecessor GATT. Despite the agreements having been adopted to promote trade and eliminate barriers in the multilateral trading system. By comparing the trade flow patterns between member states and non members states it was possible to assess the impact of signing the multilateral agreements on free trade (Rose, 2004, p. 99).
Rose (2004, p. 100-101) focused on the “Direction of Trade” (DoT) provided by the IMF for a period spanning 1948-199 and covering 178 countries and the data is comprehensive to cover world trade and trade patterns for five decades at a time when various countries joined the WTO. Rose (2004) expressed skepticism and doubt about the effectiveness of WTO, but the Multilateral trade agreements are still important to eliminate trade barriers and researchers have looked to the impact of these agreements on extensive margin (existence of a trading relationship) (Felbermayr and Kohler, 2010, p. 1432).
Rose (2004, p. 99) used the gravity model of international trade as the econometric approach to determine the impact of multilateral agreements on trade was and the approach has been used in other studies focusing on free trade agreements. Subramanian and Wei (2007, p. 156) also used the gravity model to determine whether the WTO promotes trade , and the model assumes that income is a positive determinant of bilateral trade, while distance is a negative determinant. There are various theoretical bases for the applicability of the model, which partly explains why it has been used to study the impact of trade flows among trading partners. Nonetheless, there are still estimation biases when the model has been adapted and derived to determine the changes in bilateral trade patterns when there are trade barriers, and when the barriers are eliminated. Many of the studies using the gravity model utilize the log-linear gravity equations and sometimes the zero bilateral trade flows as is the study by Felbermayr and Kohler (2010).
Changes in international trade flows among member countries are linked to increased cooperation and reduced barriers to trade. Agreements constraint how states behave including compliance and violation of the international agreements and since international laws affect state conduct, and can help explain when and how states comply with th...