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© P. Montalbano
INTERNATIONAL ECONOMIC POLICY AND
DEVELOPMENTAA 2017-2018
PROF. PIERLUIGI MONTALBANOpierluigi.montalbano@uniroma1.it
Topic 1 – The efficacy of the GATT/WTO system and DCs
© P. Montalbano
Integration & interaction link
• There has been lively debate among economists, on the effectiveness of trade
liberalisation, for centuries.
• Dissemination of the free trade doctrine occurred in Europe in the nineteenth
century (i.e. A. Smith, 1776; D. Ricardo 1815)
• The 1860 Cobden-Chevalier Treaty, and introduction of the ‘most favoured
nation’ (MFN) clause, played a key role in trade history in the second half of
the nineteenth century (Bairoch, 1976, 1989)
• Most favoured nation (MFN) is a status or level treatment awarded by one
nation to another in international trade. Each member treats all the other
members equally as “most-favoured” trading partners. If a country improves
the benefits that it gives to one trading partner (i.e. a lower customs duty rate
for one of their products), it has to give the same “best” treatment to all the
other partners of the agreement
process of trade liberalisation
phenomenon of increased world trade linkages
© P. Montalbano
• Following this treaty, between 1863 and the 1866, most European countries, through treaties signed with France or the UK, became part of a dense network of spontaneous and informal free trade agreements, which became known as ‘the network of Cobden-Chevalier Treaties’.
• In a period of 15 years, this led to the conclusion of 56 similar PTAs in Europe, liberalising trade (mostly on manufactured goods) to a large extent.
• This guaranteed the development of free trade among the main trading powers for around 20 years.
• Economic depression and the economic and social consequences of World War I opened the way to a return of protectionism.
The Cobden-Chevalier Treaty
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The ‘Mother of all Spaghetti Bowls’: The Cobden-Chevalier Network in 1875
Source: Lampe (2011)Note: Lines represent unconditional MFN-PTAs signed between 1857 and 1875
© P. Montalbano
From a theoretical standpoint:
• Both the traditional (Lerner, 1936; Stolper, Samuelson, 1941; Metzler, 1949; Bhagwati, 1959; Graaf, 1949; Johnson, 1950, 1960) and modern theoretical approaches (Helpman and Krugman, 1985; Venables, 1990) substantially agree that tariffs produce distorting effects on the economy, leading to a suboptimal allocation of resources.
• Tariff liberalisation, in introducing changes to relative prices, leads to a better allocation of resources and, thus, increased production and consumption.
• Some exceptions: the ‘infant industry’ case; the so-called ‘secondbest’ approach (domestic market failures)
Tariff liberalisation effects:Theoretical evidence
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From an empirical standpoint:Divergent positions and not clearly defined relationship between trade policy and trade growth. Recent analyses have produced contrasting results, which at times contradict the theory.
• Positive effect of tariff liberalization on trade growth (Balassa, 1965; Krueger, 1978; World Bank, 1987; Thomas, Nash and Edwards, 1991; Papageorgoiu, Michaely and Choski, 1992; Weiss, 1992; Helleiner, 1994; Joshi and Little, 1996; Bleaney, 1999; Ahmed, 2000; Madsen, 2001; Santos- Paulino and Thirlwall, 2004; Pacheco-Lopez, 2005);
• Weak or nullus effect (Baldwin and Lewis, 1978; Bhagwati, 1988; Unctad, 1989; Agosín, 1991; Clarke and Kirkpatrick, 1992; Ostry and Rose, 1992; Greenaway and Sapsford, 1994; Shafaeddin 1994; Jenkins, 1996; Nenci and Pietrobelli, 2008).
Tariff liberalisation and trade growth:Empirical evidence
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Impact of multilateral trading system on trade
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Multilateral integration
Since 1944, much of the reduction in tariffs and other trade restrictions came about through international negotiations.
• The General Agreement of Tariffs and Trade was begun in 1947 (23 countries) as a provisional international agreement and was replaced by a more formal international institution called the World Trade Organization in 1995 (now 160 members).
• The WTO and GATT have reduced tariffs substantially in the last 50 years
© P. Montalbano
Average of regional tariffs after World War II
Legend: Asia: (Burma, Ceylon, China, Egypt, India, Indonesia, Japan, the Philippines, Siam, Turkey); Core: France, Germany, United
KingdomEuro periphery: Austria-Hungary, Denmark, Greece, Italy, Norway, Portugal, Russia, Serbia, Spain, Sweden; Latin America: Argentina, Brazil,Chile, Cuba, Colombia, Mexico, Peru, Uruguay; Offshoots: Australia, Canada, New Zealand
© P. Montalbano© P. Montalbano
Average unweighted tariff rates by region
0
20
40
60
South Asia
Latin America and the
Caribbean
East Asia and the Pacific
Sub-Saharan
Africa
Middle East and North
Africa
Europe and Central
Asia
Industrialized economies
Percent
1980-851986-901991-951996-98
Source: Martin (2001)
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Impact of multilateral trading systemon trade
• Distinguished scholars assert that the beginning of a liberal trading
order started before the GATT/WTO, with the creation of the
network of MFN bilateral treaties (Bairoch, 1989; Irwin,1993;
O’Rourke and Williamson, 1999).
• Other scholars debate the efficacy of GATT/WTO in liberalising
trade policy and increasing trade flows. They consider the role
played by the GATT/WTO system as not a determinant of world
trade promotion, arguing that the formalisation of the system did not
produce the expected results and did not lead to substantially
different results than those produced by the previous trading system.
• In this respect, we need to refer to the empirical contributions of
Rose (2004a, 2004b, 2005).
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Andrew K. Rose’s critique
Professor of Economic Analysis and Policy
University of California at Berkeley
http://faculty.haas.berkeley.edu/arose/
3 key papers:
1. Rose, Andrew K. (2004a) “Do We Really Know that the
WTO Increases Trade?” American Economic Review.
2. Rose, Andrew K. (2004b) “Do WTO Members have More
Liberal Trade Policy?” Journal of International Economics.
3. Rose, Andrew K. (2005c) “Which International Institutions
Promote International Trade?” Review of International
Economics.
© P. Montalbano
Rose AER 2004
Using a standard gravity model, Rose (2004 AER) estimates the effect of membership
in the GATT/WTO on trade
T is trade between countries i and j at year t
D is great-circle distance between the countries
Y is real GDP
X is a vector of other controls (population, dummies for common language, money,
and border, geographic characteristics, colonial characteristics, time dummies, etc.).
Coefficients of interest: γ1 and γ2, which measure the effects on trade of GATT/WTO
membership by both countries and one country respectively.
OLS estimates, panel of data covering over 50 years (1948-1999), 175 countries
© P. Montalbano
Rose JIE 2004
• Surprisingly, both coefficients, γ1 and γ2, were economically small and
statistically insignificant. He concludes that GATT/WTO had a limited role in the
promotion of world trade.
• Is it plausible?
• Second step of his research: testing if GATT/WTO membership had effect on trade
policy
• In Rose JIE 2004 , he used almost 70 measures of trade policy and liberalization to
see if membership in the GATT/WTO was actually associated with more liberal
trade policy.
• With one exception (the Heritage Foundation’s index of economic freedom) the
answer was a resounding no: GATT/WTO members just didn’t seem to have
measurably more liberal trade policy than outsiders.
© P. Montalbano
Rose RIE 2005
• Third step: In Rose RIE 2005 he compared the
GATT/WTO with two other significant international
institutions that are in the business of liberalizing trade,
the IMF and the OECD.
• He found that membership in the OECD had a
consistently large positive effect while accession to (but
not membership in) the GATT/WTO was also associated
with increased trade.
• Overall conclusions: no significant effects of
GATT/WTO membership on trade growth and trade
policy
© P. Montalbano
Rose’s critics
• Thanks to Roses’s works, there is now a growing body of
scholarly research that investigates the impact of the international
trade institutions on trade.
• Many scholars challenge his research (all of the critiques focus on
the AER 2004 paper).
• Key criticisms:
• inappropriate proxy for variable of interest;
• inappropriate data pooling;
• inappropriate handling of fixed effects;
• and selection bias.
© P. Montalbano
Rose’s critics: inappropriate proxy for variable of interest
• Low 2002 criticises Rose, challenging the quality of the trade flow
measurements, and claiming that the WTO’s mandate is broader than
simple trade liberalisation.
• Piermartini and Teh 2005 advance many reasons to explain Rose’s results:
- no request of significant reductions in trade barriers for DCs acceding
before the creation of the WTO in 1995;
- transition periods for tariff reductions are allowed;
- many countries already benefited from MFN treatment or preferential
tariffs before accession;
- many countries liberalized beforehand in order to facilitate accession;
- LDCs often export fuels and minerals which face little protectionism
© P. Montalbano
Rose’s critics: inappropriate data pooling
• Other scholars state that looking at all trade simultaneously masks the effects of the
GATT/WTO (no distinction of country and sector asymmetries in terms of de facto
liberalization).
• Subramanian and Wei (JIE 2007) - by introducing fixed effects and asymmetries between
countries and sectors in their gravity equation - find that GATT/WTO effectively promotes
trade but unevenly:
• a) GATT/WTO membership appears to have a significant effect on trade for
developed countries, but does not appear to have had a significant impact on the trade
of developing countries;
• b) GATT/WTO did not impact positively on trade in protected sectors, such as
agriculture and textile and clothing;
• c) WTO membership has a relatively stronger effect on new Members than on old
Members.
• Tomz et al. (AER 2007) show that Rose’s analysis overlooks a large group of countries to
which the trade agreement applies and classifies them incorrectly as nonparticipants
(colonies of formal Members, new sovereign states and provisional applicants to WTO) .
Rose ignored these informal GATT participants (de facto), and thus under-estimated its
impact. They argue that the GATT/WTO membership has had substantial positive effects
on trade.
© P. Montalbano
Rose’s critics: inappropriate handling of fixed effects
Most of Rose’s regressions do not include country-specific fixed
effects in the gravity equations
• Subramanian and Wei (2007) reveal the weakness of Rose in
not taking account of the results obtained by Anderson and
van Wincoop (2003), the “multilateral resistance effect” - on
the introduction of fixed effects by country within the
gravitational equation.
• Many of Rose’s critics include fixed effects for either
countries or country-pairs (see next table).
• They usually find significantly positive estimates of the effect
of membership on trade
© P. Montalbano
Rose’s critics: sample selection bias
• Selection bias due to omission of zero trade observations.
• He didn’t explicitly deal with the extensive margin of trade
(whether a pair of countries trades at all).
• Helpman et al. 2005, argue that disregarding zero trade
observations has important consequences for the empirical
analysis, as it generates biased estimates.
• Felbermayr and Kohler (2010) and Liu (2009) argue that members
of the GATT/WTO have systematically more trading relationships,
so that ignoring the effect of membership on the extensive trade
margin (i.e. losing information on those who start new trade
relationships) leads one to under-estimate the impact of the
GATT/WTO.
© P. Montalbano
The state of the art on this issue. Comparing recent results
The subsequent studies have provided mixed results not only about the overall impact
of the GATT/WTO on trade, but also on the channels through which the effect
operates, and the potential asymmetries that may exist across groups of countries and
periods.
Most recent estimates, effect of Gatt/WTO membership on bilateral trade
AuthorsSub-periods/rounds effect
Zero flows
negative positive intensive extensive industrialized developing
Liu (2009)
x x x
positive in pre-Kennedy year (1948-
1963) and post-Uruguay Round (1995-
2003) x
Felbermayr and Kohler (2010) x x no effect positive effect
negative during the Gatt, positive
during WTO x
Eicher and Henn (2011) no effect no effect negative effectno effect at all
Chang and Lee (2011) x
Herz and Wagner (2011)x
positive in all roundsx
Dutt et al (2013)moderatly
x (product
margin)
positive (product
extensive margin)
positive (product
extensive margin) x
Overall effectTrade margins (country
pairs) Countries effect
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Possible explanations of Rose’s results
Why membership in the GATT/WTO doesn’t deliver more trade?
• Developing Countries. GATT historically made few demands on most countries in
terms of trade liberalization, since most entrants were developing countries eligible
for “special and differential treatment”. If accession to the GATT/WTO doesn’t
force countries to liberalize, why should one expect accession to have a
measurable impact on trade? And if accession isn’t the time when the GATT/WTO
forced countries to liberalize, is the GATT/WTO really an effective agent of
liberalization?
• Sectors. The GATT/WTO has made almost no progress in liberalizing areas of
great protectionism, such as agriculture and textiles.
• MFN Status. MFN status is often given freely away
• NTBs. Non-tariff barriers have often been increased as substitute protectionism
• Ceteris Non Paribus. There are many other reasons why trade has grown, including
declining transportation/communication costs, higher productivity growth in
tradeables, and so forth.
© P. Montalbano
Rose’s critics 2
• Hufbauer, 2002 suggests that the correct test for the success of the
GATT/WTO would be to compare the expansion of trade in
historical periods when clubs with liberalisation mandates were
born, with those periods when such clubs did not exist, rather than
an analysis limited to examining the current system.
• Nenci 2011 tests the GATT/WTO results in terms of trade
liberalisation and trade growth with respect to previous periods
characterised by a ‘nonstructured=institutionalised’ (or even
absence of a) regime. The analysis is conducted at the aggregate
level for the period 1871–1986 (23 countries, historical
reconstruction of tariff data) and at panel level for the period
1961–2000 (same countries, standard data sources).
© P. Montalbano
Nenci 2011
Two research questions:
1. Has tariff liberalisation accelerated the growth of world
exports?
2. If so, has the GATT/WTO produced significant results
in terms of trade liberalisation and trade growth with
respect to previous periods?
© P. Montalbano
Nenci 2011 results
• Existence of a well defined and stable relationship between the reduction
in tariff barriers and growth in trade in different eras: results confirm the
existence of a long-run relationship at world level. This is relevant and
significant in the period pre-World War II, but gradually loses importance
and significance after 1950.
• Effectiveness of the current multilateral trading system in promoting
liberalisation and growing involvement of countries in world trade: by
testing different trade Rounds, the GATT/WTO international trading
system does not seem being particularly effective (partly in line with
Rose’s works).
• Greater tariff liberalisation does not appear to have been the main cause of
the extraordinary growth in trade flows that occurred in the post-World
War II period (but MTS important for ensuring rules and behaviours
among major players).
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