"Does the WTO promote trade?" is the research question that this literature review attempts to answer. The key word "promote" is taken to mean increase. The WTO is an abbreviation of the World Trade Organisation and has '164 members since 29 July 2016'[](WTO Members and Observers, no date) and was established in 1995 after the conclusion of many bargaining rounds and the existence of the General Agreement on Tariffs and Trade (GATT).
Market liberalism and nondiscrimination are the two essential principles of the WTO. 'Market liberalism provides the economic rationale for the trade system.' Having free markets and trade makes all nations better off: the ultimate belief that trade is good for all participating nations – regardless of wealth status. The concepts of comparative advantage and production possibility frontiers (PPFs) illustrate (theoretically) why trade is good for everyone – additionally, the argument of efficiency can be seen. 'Nondiscrimination ensures that each WTO member faces identical opportunities to trade with other WTO members.' Comprising two forms (nondiscrimination): Most-Favoured Nation (MFN) and National treatment. 'MFN, prohibits governments from using trade policies to provide specialist advantages to some countries but not to others'; National treatment 'prohibits governments from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms' (Oatley, 2019, pp. 24-25). Tariffs and import quotas are the two main methods of protectionism.
The underlying assumptions of trade liberalisation and – by extension – the WTO, have dominated economic and political theory for decades; an anti-globalist and populist wave has swept across the world in retaliation. Therefore, with a significant portion of the masses demanding a withdrawal from such methods of international governance/cooperation, we must consider why this is the case and I believe that by addressing the research question I can hopefully shine a light as to why this demand has risen. If trade truly is good for everyone… then why do people feel like they aren't benefiting? Here it must be acknowledged that trade is not everything. I believe the points I have raised in this paragraph to be contextually relevant given the time when this literature review was written.
Additionally, in regard to underlying theoretical assumptions, the gravity model of trade is assumed to hold true: sizes of economies and distance play important roles in trade volume between nations. The theory behind this model is logical: size attracts trade and distance is a hindrance. However, with advances in technology and transportation, distance is becoming a smaller obstacle to trade.
Therefore, with the political climate and advancements, it is important to look at this research question with the points raised in mind. New approaches may need to be taken in future studies and discussions in both the political and economic spheres.
Given the size of membership, trade being pivotal for the world economy and the essential principles of the WTO… the WTO has a crucial role in promoting (increasing) and ensuring trade. Moreover, with the emergence of the US-China trade war and the impact of COVID-19, it is important to consider the economic and political tools available to the world economy and individual economies. Furthermore, if the WTO does promote trade then why have the two largest economies (and WTO members) in the world been increasing tariffs on each other? Perhaps, the scope of the WTO is limited and needs reform; or perhaps the political climate has caused an anomaly. I hope this literature review will be able to address the issues raised.
This literature review is composed of: argument group 1, the supporting argument that the WTO does promote trade; argument group 2, the counter-argument that the WTO does not promote trade; and a broader reflective discussion/critical engagement regarding the argument groups previously mentioned. The argument groups provide a balance to the literature review and the reflective discussion/critical engagement provide a scrutiny to the arguments presented in each of the argument groups. Referenced research papers used economic and political theory and methods – such as econometric analysis (regressions) which enabled interpretations and conclusions to be made. Finally, I hope I will be able to come to a decisive conclusion and give a definitive answer to whether the WTO promotes trade. The importance of the research question cannot be understated: trade affects economies, jobs, standard of living and politics – to list an essential few.
2. Argument Group 1 – The WTO Does Promote Trade
Since the deemed controversial and renowned paper published by Andrew K. Rose (2004) argued that the WTO had not increased trade, there were various counterargument responses by academics to this bold claim; Rose's paper may seem irrelevant since it was written over 15 years ago however, it is relevant because his findings went against the standard economic and political beliefs surrounding world trade and the WTO – additionally, the paper has been sited hundreds of times since publications. Furthermore, it should be noted that the GATT took effect in 1948 and this means that papers published in the early 2000s have sufficient scope (data and findings).
This section answers the research question because it provides strong evidence that the WTO has resulted in an increase in (promoted) trade since World War Two (WW2).
2.1 Subramanian & Wei (2007)
The goal of Subramanian & Wei was to resolve the differences between the assumed gains of the WTO and Rose's contradictions against these cemented theories; according to the paper that due to the GATT/WTO world imports may have increased by around '120%... (about US$8 trillion in 2000 alone).' However, this '…has been uneven…' due to '…four asymmetries in the system…' of the WTO. There are two sides to trade: import and export. Their results indicated that being a member of the WTO did not result in large gains in imports of non-developed countries. Although, due to the gains from WTO membership on developed countries' imports this gave rise to large gains in the exports of non-developed countries. 'Developing country exports to industrial counties, on our estimates, were at least one and a half times greater because of the GATT/WTO.' They claim that by taking into account the asymmetries (that arose because of exemptions and differences in reciprocal liberalisation) and making other relevant adjustments, they found '…robust evidence that the WTO/GATT has promoted world trade in an economically and statistically significant way' (Subramanian & Wei, 2007, pp173-174).
'The panel data set covers 172 countries during the five-year period from 1950 to 2000…' and by looking at their empirical results 'Table 4 core regression: panel, 1950-200' (Subramanian & Wei, 2007, pp162-163) it can be seen that their log-linear regression produced a substantial number of statistically significant coefficients at the 5% significance level – including WTO member variables. The dependent variable is log real imports. The number of observations is greater than 50,000 and the R-squared value is greater than or equal to 0.74 for all models presented in the table. This table alone provides strong evidence that the WTO promotes trade. All tables in the paper that display the results from regressions have many statistically significant results: the correlations and findings are relevant.
The evidence from this paper provides a justification to the argument that the WTO has increased trade, but the impact was not even. Apparently, this '…is consistent with theoretical models of the GATT/WTO' (Subramanian & Wei, 2007, p151). Ultimately, the theory surrounding trade liberalisation and the implications were found to be correct.
Furthermore, by Subramanian & Wei using real imports this would have prevented any creation of a false portrayal of trade increasing because of an increase in nominal imports. A true comparison can be made when using real terms.
2.2 Liu (2009)
By using a panel dataset that included 210 countries or regions over 50 years and both positive & zero trade flows – with the number of observations totalling more than one million – and by using a different econometric method (Poisson Pseudo-Maximum Likelihood Estimator – PPML) to the traditional log-linear gravity model, Liu's paper found that the WTO does increase world trade at the intensive and extensive margins. According to the fixed-effects regression results, shown in Table 3, two members of the WTO would have a 60% increase in trade and a 23% increase if only one is a member. Supposedly, his '…estimates imply that US$41.6 trillion (1995 price) of the world import from 1948 to 2003 (one-third of the total world import over the same period) was attributed to the GATT/WTO' (Liu, 2009).
Figure 2 captures the scale of the growth of trade from 1948 to 2003; a line of best would indicate that trade has grown at an exponential rate in real terms (1995 US dollars). It is worth mentioning that during this period of time that the USSR collapsed and gave numerous new nations the chance to trade with the rest of the world – new trading relations were formed. Liu managed the problems that arose with his data, due to the formation of new trading relationships, by only including the country pairs in which there was complete data during the period.
The use of PPML estimator enabled Liu to address the issues surrounding homoscedasticity and normality that is seen in the Tobit model. The results (displayed in Table 3, full sample model 4) provide coefficients that are statistically significant at the 1% significance level – including the coefficients that indicate the increased levels of trade due to the WTO as previously mentioned. Therefore, given the significance levels, the size of the data and the method taken by Liu, it can be said that this paper provides substantial evidence that the WTO promotes trade strongly. The dependent variable is import: import data is more reliable.
2.3 Shortcomings of argument group 1
Both papers were published over 10 years ago; the data stops in years 2000 and 2003, a minimum of 17 years-worth of data has not been included. The political and economic landscape has changed dramatically since, as mentioned in the introduction. Therefore, due to the age of these papers, the findings and theories may be outdated. However, these papers can be seen as useful reflection and provide excellent direction for future research.
Moreover, other coefficients suggest that other independent variables have a larger impact on trade than the WTO membership. The remoteness variable in both of Liu's regressions (traditional and PPML) had one of the largest effects on trade; according to Liu's PPML regressions the following variables have a greater impact on trade than WTO membership: alliance, currency union, current colony and current colonizer. The same result is seen in Liu's results from log-linear gravity regressions.
3. Argument Group 2 – The WTO Does Not Promote Trade
In order to have a balanced and unbiased literature review, the literature review must include an argument that scrutinises the long-held beliefs involving trade liberalisation. By providing evidence and arguments against these beliefs the research question is being addressed directly because the beliefs of trade liberalisation are at the heart of the WTO. Additionally, the title of one of the papers referenced in this section is almost identical to the research question being addressed in this literature review.
3.1 Rose (2004)
This paper uses the gravity model of trade, a set of panel data that spans 50 years and includes 175 countries; there are over 230,000 observations in the paper. Rose states in his conclusion: 'I conclude that it is surprisingly hard to demonstrate convincingly that the GATT and the WTO have encouraged trade.' Based on the empirical evidence and once the gravity effects have been acknowledged, it is difficult to prove that WTO membership was the cause for the growth in trade and '…that the Generalized System of Preferences (GSP) extended from the North to developing countries approximately doubles trade' (Rose, 2004).
Natural logarithms are taken from all the variables used in the gravity model: the value of real trade between countries (dependent variable); sizes of the economies measured in real gross domestic product (GDP); and distance. The results from the regression in the "Default" model display what the traditional theory suggests it should (size creates attraction and distance reduces trade) and '…highly statistically significant…' Additionally, only when country effects are taken into account do the coefficients of WTO membership turn positive and become significant (Rose, 2004).
From the use of data and the analysis it is near impossible to determine if the GATT/WTO promotes trade (or not); therefore, it cannot be stated with a reasonable degree of certainty that the WTO promotes trade. The WTO has a role to play with trade nonetheless.
3.2 Choudhury (2019)
Being a member of the WTO is no guarantee of a reduction in corruption. It is a solidified belief that by becoming a member of the WTO there will be an increase in the standard of a country's governance, there is not sufficient evidence to prove this belief. Choudhury (2009) declares that 'contrary to popular belief, I find that WTO membership is likely to have no causal effect on domestic corruption overall. And, if anything, it is likely to increase corrupt practices, particularly among firms that are established post WTO membership and those that are government owned' (Choudhury, 2019, p. 151).
This paper provides an excellent counter argument to trade liberalisation and that the WTO promotes trade because, if corruption does not decrease and it (possibly) increases due to WTO membership, then the legitimacy of the beliefs in trade liberalisation come into question. If corruption increases, then trade does not make us better off as corruption is extremely negative and the legitimacy of the WTO servicing as a public good is also questionable. An explanation for the possibility of an increase in corruption could be down to the lateness of adoption of anti-corruption by the WTO, whereas other similar organizations to the WTO adopted these practices in the decade of the previous century. The WTO's Agreement on Government Procurement (GPA) came into force only 6 years ago. However, despite the honorable intentions of the GPA, less than 50 countries are tied to it (Choudhury, 2019). The scope and power of the GPA might have been overestimated.
Ultimately, Choudhury (2019, pp. 173-174) concludes that 'the causal impact of WTO status on corruption is (to my knowledge) an unanswered question… To conclude, I believe my analysis provides convincing evidence that WTO accession and membership may not have any causal effect on corruption overall, and certainly not improve the quality of governance as often postulated.'
3.1 Shortcomings of argument group 1
Rose's paper was published over 15 years ago, hence the discoveries, analysis and arguments might be outdated. However, if one considers the quality of the data and uses Rose's paper as a reflection of what has happened in the past, in regard to the WTO and trade, then Rose's paper has merit – especially for future research, critique of theoretical assumptions and policy recommendations.
Choudhury's paper, although written recently, does not come to a firm conclusion (as does Rose) whether the WTO's role in trade liberalization has been overstated. But, it warrants merit as the paper provides a substantial claim that it should not be assumed that the WTO and, by extension, trade liberalization reduces corruption. 'Moreover, the findings here ought to spur the development of richer, theoretical models of corruption to better understand the sources of important interactions between WTO status, corruption, and the domestic economic environment' Choudhury (2019, p. 174).
4. Reflective Discussion/Critical Engagement
One of the similarities between the papers was the use of the traditional gravity model of trade and, from the results, it is still relevant. Traditional log-linear regressions were used when evaluating trade. The number of observations in the data of each paper was gigantic: numbering the tens and hundreds of thousands of observations.
An additional similarity was the referencing of Rose's (2004) paper by the other papers; it was a groundbreaking paper that challenged assumptions and created, at the minimum, strong doubt in the long-held beliefs and assumptions involving world trade, trade liberalization and the WTO.
Numerous additional variables – in some models there were more than 25 variables – that displayed the effects on trade were presented. The vast variety of these variables enables a greater insight as to what should be considered when analysing what affects trade. These additional variables presented the argument that geography, history, politics and culture should be factored into trade relationships. Some of the additional and significant variables that should be considered in future research, as presented mentioned in Liu's (2009) paper: Land Adjacency, Landlocked, Island, Same Language, Same Religion, Colony, Colonizer, Current Colony, Current Colonizer, Common Colony, Remoteness, Regional Trade Agreement (RTA), Currency Union, Alliance and Hostility. These variables may have been the cause for the increases in trade and not the WTO.
Being landlocked makes distance a more relevant factor of trade as nations that are landlocked do not have their own coast line and, therefore, ports – resulting in natural geographical restrictions; warm water ports should be acknowledged as these enable trade throughout the year. Additionally, routes and access to the Atlantic, Pacific and Indian Oceans are key for world trade. For example, Russia is a country with coastline and a warm port in the Black Sea however, in order to get to this warm water port Russian ships must go via the Suez Canal, or pass Gibraltar, to access the Mediterranean Sea and then go past the narrow pass at Istanbul to finally arrive in the Black Sea. In this one example it can be seen that geography and politics play key roles in trade regardless of trade agreements that have been made.
Regardless of the desire to trade, colonies are forced to trade with colonizers. And common colonies with have historical ties and relations. Colonial history is a significant factor.
Common currency increases trade because it makes trade easier if the same currency is used by both parties in a transaction: exchanging currencies can be difficult (technology advances have made things easier) and exchange rates can cause fluctuations in demand as free floating currencies cause exchange rates and, therefore, prices to fluctuate.
RTAs have increased trade. The European Union helped to create one of the biggest markets in the world.
Liu eludes to the breakup of the Soviet Union in 1991 in his paper possibly explaining the increases in trade because of the new trading opportunities that came with the collapse of communism: new nations, new governments and new relationships were formed that had not existed prior to 1991. A former world superpower that had a large closed economy had become an open economy.
Rose implies that other factors could explain the increase in trade… such as the advances in technology and transportation have made trade easier, more efficient and cheaper. Consider the changes in shipping: ships now use fuel and not coal; it's faster; ships use freight containers that can loaded onto trains and trucks with relative ease, loading and unloading goods is greatly more efficient today than when it was just after WW2. Furthermore, with the emergence of China's silk road project, trade between European countries and China will (theoretically) be more cost effective and efficient due to the freight being transported by rail and not ship: trains are cheaper and are faster than ships. The ability of airplanes to transport people and passengers has created more affordable and greater opportunities to travel. Finally, the increase in sophistication of electrical products and communication abilities have resulted in any individual or organisation to trade anywhere in the world – without the requirement to travel; this specific mention of technology advancement should be included in future regression models: for example, include variables that indicate internet speeds, internet accessibility, telephone signal strengths. Theoretically, if there is a greater output from efficiency gains then costs will be reduced, and, from the law of demand, the quantity of demand will increase – affordability will result in a promotion of trade.
5. Conclusion
Upon reflection of the evidence and arguments presented in the papers referenced in this literature review I have come to the conclusion that the WTO does not promote trade. Rose's arguments provide sufficient doubt to the WTO's effect on trade. The GATT/WTO may have increased trade in its early existence but there is not sufficient supporting evidence to the claim that the GATT/WTO has promoted trade over time. On balance, it is nearly impossible to prove that the WTO does promote trade and that the WTO does not promote trade; therefore, it cannot be stated that the WTO does promote trade. There is a difficulty in determining the effect of the WTO on trade.
If the WTO did promote trade, then they would have prevented the US and China from putting tariffs on each other and tariffs go against the principles of the WTO; this demonstrates the limited ability of the WTO to enforce its rules and its principles. Moreover, there is doubt in regard to WTO membership and corruption as shown by Choudhury's paper – producing additional doubt on cemented trade liberalization assumptions and the benefits surrounding trade. It is not possible to disagree that corruption is harmful and is illiberal.
Additionally, the GATT/WTO has existed during a time of human history in which there have been astronomical changes: emergence of new nations, the fall of empires, technological advancements and affordable travel. These variables, and ones of similar significance, must be used in future studies of trade and can be disregarded if found to be insignificant after appropriate econometrics has been applied.
To conclude, nations will determine: if they trade with other nations, how they trade and what they trade. The WTO cannot force a nation and people to trade. Various econometric methods and models must be used when analysing trade – however, the traditional gravity model of trade and associated variables should be kept. The gravity model is still relevant and theoretical assumptions have held. The assumptions of both trade liberalization and those of the WTO should be questioned and not taken as a certainty.
Bibliography
Choudhury, S (2019) 'WTO membership and corruption', European Journal of Political Economy, 60, p.00001806. doi: 10.1016/j.ejpoleco.2019.07.004
Liu, X., (2009) 'GATT/WTO Promotes Trade Strongly: Sample Selection and Model Specification', Review of International Economics, 17(3), pp. 428-446. doi: 10.1111/j.1467-9396.2009.00816.x
Oatley, T., (2019). International Political Economy. 6th edn. New York & London: Routledge, p.24.
K.Rose, A., (2004) 'Do We Really Know That the WTO Increases Trade?', The American Economic Review, 90(1), pp. 98-114. doi: 10.1257/0002828044322970724
Subramanian, A. & Wei, S.-J., (2007) 'The WTO promotes trade, strongly but evenly', Journal of International Economics, 72 (1), pp. 151-175. doi: 10.1016/j.jinteco.2006.07.007
WTO (no date) Members and Observers. Available at: https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm (Accessed: 11 December 2020)