The Old and the New: The Effects of the WTO on International Trade
(Draft. Comments welcome)
Soo Yeon Kim Niehaus Center for Globalization and Governance
Woodrow Wilson School of Public and International Affairs 445 Robertson Hall Princeton University
Princeton, NJ 08544-1013 [email protected]
&
Department of Government and Politics 3140 Tydings Hall
University of Maryland College Park, MD 20742
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Abstract This paper analyzes the effects of the World Trade Organization (WTO) on trade among its members in its first decade of existence, 1995-2004. The analysis focuses on a key variable: the timing of membership. The paper examines how trade among WTO members was affected by the regime’s accession rules and the timing of members’ entry into the WTO. The paper distinguishes between “standing members,” or those who were members of the GATT as well as the WTO, the “early adopters,” those who entered the regime during the Uruguay Round or in the first year of the WTO’s creation, and the “later entrants” who gained membership via the lengthy and complex accession process after 1995. The empirical analysis evaluates how WTO member trade has fared under the regime, both between members of the same group and between members of different groups. The paper assesses the effect of the WTO on trade creation, or the degree to which trade expanded after states entered into the regime. The results of the analysis show positive but divergent effects among the groups, suggesting that old and new members of the WTO have benefited in different ways from participation in the regime.
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The Old and the New: The Effects of the WTO on International Trade
“…the WTO has been termed a Mercedes Benz without gas.” (Ostry 1997, 202)
The World Trade Organization (WTO) was established in 1995, following the
Uruguay Round of negotiations under the General Agreement on Tariffs and Trade
(GATT). Its “clear” legal status and mandate was regarded as “the crossing of an
important threshold in international trade relations” (Gallagher 2005, 2). International
trade governance had been, until then, conducted under the auspices of the GATT, a
provisional agreement dating back to 1947. The WTO renewed and incorporated the
GATT negotiated in 1994, but in itself is a new legal entity that is not ‘provisional’ as the
GATT was but a formal intergovernmental agreement with the status of an international
treaty. In comparing the WTO to the GATT, the first obvious difference is the size of the
agreement itself: the WTO comprises 60 agreements, compared to ten under the GATT.
The WTO consists as well of some 60 different formal councils and committees, while
the GATT included less than one-third of this number even in its last years. It formalized
a great many of the subjects covered in the GATT in separate agreements, thus vastly
expanding the scope of the institutional arrangements.1 The WTO also linked these
1 Subjects such agricultural trade, trade in textiles and clothing, have been transformed into individual agreements under the WTO, each with its own detailed schedules, footnotes, and annexes. GATT’s Article XX(b), for example, which refers to measures ‘necessary to protect human, animal or plant life or health,’ was recast as the Agreement on Sanitary and Phytosanitary Measures (SPS). The Agreement on Subsidies and Countervailing Measures (SCM) addresses shortcomings of the GATT’s vague definition of an “export subsidy,” which had limited their effectiveness in disciplining discriminatory trade in agriculture. The Agreement on Safeguards prohibits ‘voluntary’ export restrictions that were thinly veiled practices of unscheduled import barriers, but also justified the use of safeguards for a legitimate trade adjustment program. The
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agreements as a “single undertaking,” requiring Members to accept the full set of
agreements concluded in the Uruguay Round.2
This paper analyzes the impact of the WTO on international trade. Whether the
WTO has been successful in expanding trade among its members is important for several
reasons. One is that there is a strong presumption that increased trade and trade
liberalization foster growth and development. This is especially applicable to developing
countries, which comprise the vast majority of new members that have joined the trade
body since its creation.3 If, however, the WTO has had little impact on expanding trade
among its members, it places at risk the next and perhaps more important outcome in the
causal sequence: economic growth and development. It thus presents a pressing case for
examining whether or not, and just how much, trade has flourished for WTO members.
Another equally important reason to analyze systematically the impact of the
WTO for international trade is distinctly political. The WTO is the “first construct in a
new post-Cold War architecture of international cooperation” (Ostry 1997, 238). The end
of the Cold War and the systemic change in political tensions between the United States
General Agreement on Trade in Services (GATS) extends GATT rules for trade in “intangibles,” to reflect the importance of the fast-growing service sector, which as of 2004, accounted for almost 20% of global trade. And the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides for minimum standards of protection for the intellectual property of WTO Members. 2 Reform of the multilateral system also became a major item on the agenda of the newly minted WTO. Although the word is nowhere to be found in the GATT, it is mentioned 10 times in the WTO Agreement on Agriculture alone, including the first line. It suggests that, more than the GATT, the WTO is more strongly directed toward affecting policy choices in member countries (Gallagher 2005, 8) 3 The transition economies of Eastern Europe may also be included in this group.
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and the former Soviet Union gives rise to questions regarding the “layer cake” (Ikenberry
2001) of institutions designed to solidify the Western alliance against the threat of Soviet
expansion. Reform of existing major international institutions such as the United Nations,
the International Monetary Fund, and the GATT, all long-standing legacies of the Cold
War, has become a major governance issue for this post-Cold War era of globalization.
The large-scale protests that have marked WTO meetings since Seattle 1999 have
focused attention on new issues such as labor standards, human rights, and the
environment. More relevant to this paper, however, is the greater attention brought to the
significant divide that exists between the developed and developing countries in the
global trade governance system, especially in the inequality of bargaining power that may
prevent the latter from more effectively asserting its interests. It has led to calls for
“leveling the playing field,” (Kapstein 2006), going so far as to call for an international
social compact that extends basic principles of economic justice to relations between
developed and developing countries.
This paper is motivated in great part by the criticisms lodged against the global
trade regime. Scenes of protest, antagonism, and resistance toward the WTO and the
globalization it represents have been regular occurrences at the organization’s meetings
since the 1999 WTO ministerial meeting in Seattle, with the exception of the ministerial
meeting in Doha, Qatar in 2001 that officially launched Doha Round, the first round of
trade negotiations to be launched under the auspices of the WTO. The ministerial
meetings in Cancun in 2003, and Hong Kong in 2005, were similarly attended by such
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protests.4 The spectacular displays of protest give rise to a profound puzzle: why so much
opposition to an organization that is intended to benefit all countries through free trade?
Antagonism towards the WTO, and the globalization it represents, made strange
bedfellows of environmentalists, consumer advocates, human rights activists, and labor
unions. While each had its own set of complaints, these opponents of the WTO were
united on one: “The benefits of the global economy are reaped disproportionately by the
handful of countries and companies that set rules and shape markets,” according to Jay
Mazur writing in Foreign Affairs about the Seattle meeting.5 Lack of progress in recent
trade talks have led to developing countries increasingly criticizing the Doha Round as
not a “development round” but a “market access round” benefiting the developed
economies.6
This paper assesses the institutional and empirical bases of these claims,
examining the rules of international trade embodied in the WTO and analyzing trade
flows among WTO members in its first decade of existence, comparing it chiefly to its
predecessor, the GATT. In terms of institutional rules, the paper focuses on the rules for
4 The Ministerial Conference is the highest decision-making body in the WTO. It holds decision-making authority on all matters under any of the multilateral trade agreements. The Ministerial Conference is mandated to meet at least every two years, bringing together all WTO members countries or customs unions. Under the WTO the Ministerial Conference has been held five times: Singapore, 9-13 December 1996; Geneva, 18-20 May 1998; Seattle, November 30 – December 3, 1999; Doha, 9-13 November 2001; Cancún, 10-14 September 2003; and Hong Kong, 13-18 December 2005. 5 President of the Union of Needletrades, Industrial, and Textile Employees (UNITE) and Chair of the AFL-CIO International Affairs Committee, as of 2000. 6 Developing countries are members of groups such as the G20, the G33, the Africa, Caribbean, Pacific (ACP) Group, Least Developed Countries (LDCs), the Africa Group, the Small Vulnerable Economies (SVEs), the NAMA-11, the Cotton-4, and Caricom.
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accession in the regime to distinguish between “standing members,” or those who were
members of the GATT as well as the WTO, the “early adopters,” those who entered the
regime soon after its creation, and the “later entrants” who gained membership via the
lengthy accession process. The empirical analysis evaluates how each group’s trade has
fared under the regime, both with members of the same group as well as other groups.
The analysis also concentrates on the extent of trade creation, or the degree to which
trade expanded after states entered into the regime. The results of the analysis show that
membership in the WTO has had divergent effects on international trade, expanding trade
for some members but having weak or even negative effects on others.
New Rules, Old Rules
The “designers” of the WTO intended the organization to be widely inclusive, in
terms of membership, its scope and domain of application. The WTO advocates universal
membership, and any state or customs territory that is fully autonomous in the conduct of
trade policy may apply to become a member of the WTO. They may do so in one of two
ways, one as a Contracting Party to the GATT and subsequently as an original member of
the WTO, and the other through the formal accession process following the establishment
of the WTO. Those in the latter group may also be distinguished in terms of the timing of
their membership, as the “early adopters” and the “later entrants.”
In spite of the inclusiveness of the WTO’s membership rules, they are far more
stringent than the accession requirements under the previous GATT system and intrusive
in terms of the liberalization programs that must be adopted by applicants. Original
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members of the GATT had simply to agree not to enact new legislation that would be
inconsistent with its principles and provisions, thus grandfathering existing trade
restrictions (Barton, Goldstein, Josling, and Steinberg 2006). Subsequent accession cases,
many of them newly independent countries, fell under the auspices of Article XXVI:
5(c), which only required that the country have “full autonomy” to conduct its
commercial relations.7
Accession under the GATT
It was the founding members of the GATT that set down the rules for accession of
new members into the regime. The 23 original members, or Contracting Parties,
examined the terms of GATT accession at the Annecy Round in 1949, immediately
following the first Geneva Round. Indeed, one of the main objectives of the meeting was
to examine more closely the terms of accession for new members. The Annecy Round
established the “Procedures Governing Negotiations for Accession,” to apply to
accession outside of tariff negotiations, and the “Model Protocol of Accession.” These
provisions specified that accession was to be based on negotiations on tariff schedules.
Accession for prospective members often took less time than it does under the
WTO, as accession was approved under the GATT solely on the basis of tariff schedules
and as a result once negotiations on tariff schedules were complete it was simply
7 “If any of the customs territories, in respect of which a contracting party has accepted this Agreement, possesses or acquires full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement, such territory shall, upon sponsorship through a declaration by the responsible contracting party establishing the above-mentioned fact, be deemed to be a contracting party.”
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incorporated into a formal document approving the accession of the particular applicant
and submitted for approval to existing members. The Working Party that was designated
played only a minimal role under the GATT’s accession procedures.8 It was limited to
fostering discussion on the particular accession case and to provide a forum for raising
issues related to the applicant. For the applicant country, it satisfied most of the accession
requirements through commitments to bind tariffs at a negotiated level. In this way
accession was relatively less cumbersome and complicated under the GATT, reflecting
the limited scope of the regime.
Nevertheless, it was also the case that industrial countries dominated accession
proceedings, especially when it came to negotiating accession for developing countries
(Hoda 2001, 74). In a few cases, accession was highly controversial, such as the most
famous case of Japan’s accession. When Japan became a GATT member in 1955, 40
percent of contracting parties invoked Article XXXV to withhold most-favored nation
treatment, thus making Japan a key exception in the non-discrimination principle and
affecting approximately 40 percent of its exports (Patterson 1966, 285-6). This was the
largest number of invocations of Article XXXV recorded against Japan, including
important trading states such as France and Great Britain, which feared competition from
Japan would hurt domestic markets. This exception to the GATT’s non-discrimination
principle nullified much of the benefits and preferential treatment that Japan could have
gained from accession.
8 The well-known exception is Japan and the non-market economies.
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On the whole, however, accession was mostly straightforward and unproblematic,
especially for the 64 countries or ex-colonies that acceded automatically under Article
XXVI:5(c). It provided a means for former colonies to obtain GATT membership that
was somewhat outside the usual accession route. Where colonial powers were willing to
sponsor an application by a former colony for membership in the GATT, accession was
granted on an automatic basis on the “terms and conditions previously accepted by the
metropolitan government on behalf of the territory in question.”9 That is, tariff schedules
previously negotiated by the colonizer on behalf of its former colony, before the latter’s
formal membership, would continue to apply. Such provisions concerning former
colonies reflected the interests mostly of Europe’s colonizers vis-à-vis their respective
overseas territories.
Accession under XXVI:5(c) was thus close to automatic. Former colonies had
already been applying GATT provisions in their trade practices on an ad hoc basis and
hence the costs of de facto membership were low. The former colony merely needed to
get their former colonizer to sponsor their application for GATT membership, and
consequently, many former colonies were granted de facto membership indefinitely.10
De facto status was granted on the condition that GATT members would apply its rules
and provisions to de facto members on a reciprocal basis. It thus allowed newly
independent states with de facto GATT membership “to benefit from and apply on a
reciprocal basis, the provisions of the GATT, and, in particular, the rules for most favored
9 BISD 10S/73. 10 De facto status for many countries was retained until the establishment of the WTO, which eliminated this membership provision.
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nation treatment, even though they are not formal members.”11 De facto members
received, in turn, many of the benefits of the GATT, in spite of fewer obligations and
recourse members than formal members.12
Accession during the Uruguay Round
By the 1980s, and in particular the Uruguay Round, launched in September 1996
at Punta del Este in Uruguay, GATT members and especially the powerful developed
countries, directed their efforts toward expanding the agenda of trade liberalization. This
meant increasing the scope of GATT negotiations, and in this sense the Uruguay Round
was unique in that the negotiating agenda covered the widest range of trade issues.13
Negotiations now extended to textiles and agriculture, as well as new sectors such as
services, intellectual property, and investment. Accession during the Uruguay Round was
now to be affected by this new commitment to wide-ranging trade liberalization by
GATT members.
Variation in accession cases during the Uruguay Round can be largely explained
by the unique importance of the Round itself. It was, indeed, the most important Round in
the GATT’s history, as the results would substantially increase the scope of issues to be
governed by the trade regime, and trade governance was now to be directed by a formal
organization. Contracting parties, and especially the United States, “grew increasingly
11 L/2757 March 1967:2. 12 For example, while de facto membership participated in tariff negotiations and other GATT sessions, they could not vote nor have recourse to the GATT’s dispute settlement mechanism. 13 Negotiations involved 15 different issues/sectors.
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insistent upon the GATT accession process as a means of ensuring that the countries’
trade regime was consistent with the rules and principles of the system” (Van Grasstek
2001, 20). Increasing importance was attached to international trade regulation in
applicant countries, and this was reflected in accession cases during this period.
Accession under Article XXXIII and XXVI:5(c) came under increasing scrutiny,
subjecting accession applicants to a far more cumbersome and complex process than
would have otherwise been the case before the Uruguay Round.
Accession under the WTO
Under the newly established WTO, existing members, or contracting parties of
the GATT, agreed that all members should commit themselves fully to the
implementation of all agreements concluded during the Uruguay Round, precluding the
possibility of some members selectively opting out or implementing agreements under
lax conditions. Thus existing GATT members were subject to the requirement of a
“single undertaking” if they were to automatically accede from the GATT to the WTO.
This requirement applied to developing and least developed countries as well as to the
developed countries. A significant number of developing and least developed countries
struggled with the “single undertaking.”
As was the case for existing GATT members, new applicants to the WTO also
had to commit to the “single undertaking.” Unlike the GATT members, however, who in
their accession process had only to put forward tariff schedules to gain membership,
under the WTO applicants negotiated not only tariff concessions but also commitments in
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many different sectors. The wide scope of issues now covered as a result of the Uruguay
Round means that accession under the WTO is far more complex, with far-reaching and
long-term consequences for the applicant country. The inherent complexity of the
accession process under the WTO makes the experience far more rigorous and
demanding. Indeed, applicants are subject to pre-conditions before membership is
formally approved. This “WTO conditionality” involves the requirement that members at
the time of accession have a national economy that is consistent with WTO rules. Those
who have applied for membership but whose policies and regulations are not consistent
with WTO rules, are required to implement reforms in order to make them so.
In shifting trade governance from the GATT to the WTO, accessions are
governed by Article XII.14 The provision itself lacks precision (Abbott, Keohane,
Moravcsik, Slaughter, and Snidal 2001). It is vague, general, and contains no specific
accessions criteria, with the result that it may be subject to differing interpretations. Such
imprecision makes problematic the legal side of the accession process, but has also made
the accession process uneven, with each case differing from the next. Article XII
provides leeway for demands on the part of existing members. At the extreme, accession
becomes less about rule compliance than about the representation of existing members’
interests. Applicant countries may well find themselves with little negotiating power and
may be pressured simply to accept the terms of accession presented to them.
14 “Any State or separate customs territory possessing full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement and the Multilateral Trade Agreements may accede to this Agreement, on terms to be agreed between it and the WTO. Such accession shall apply to this Agreement and the Multilateral Trade Agreements annexed thereto.” This provision is from the Marrakesh Agreement Establishing the WTO.
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New accession cases under the WTO involves the establishment of a working
party consisting of major trading partners that oversees the application process and
stipulates the conditions necessary for the applicant to make its policies WTO-consistent.
Prospective members must provide information on legislation relevant to issues within
the scope of the WTO, including such important sectors as intellectual property and
services as well as conventional trade barriers. It is both a lengthy and complex process,
in which the applicants engage in numerous trade negotiations to offer concessions to
members in return for the presumed benefits of WTO membership. An applicant’s
accession also requires approval by vote of a two-thirds majority of existing members.15
Classification of WTO Members
Given significant differences in accession processes and requirements between
the GATT and WTO, members of the trade regime may be broadly classified into three
main categories: “standing members,” “early adopters,” and “later entrants.” The
Appendix lists the countries in each group and their accession dates for the GATT and/or
WTO. The first group may be labeled “standing members,” consisting of former
members of the GATT, who obtained membership under the old accession rules and were
subsequently invited in the Agreement Establishing the WTO signed in Marrakesh in
April 1994, to join the new organization, subject to ratification of the Agreement, to
which is attached all other agreements, decisions, and understandings. That is, a GATT
contracting party could become an “original” member of the WTO on 1 January 1995
when it ratified the WTO agreement and the linked agreements in a “single undertaking,”
15 The voting requirement for approving membership is the same across the GATT and WTO systems: GATT Article XXXV and WTO Agreement Article XII.
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and accepted and annexed to the GATT 1994 and the GATS its commitment to
concessions on trade in goods and services. They comprise for the set of accessions
taking place under the WTO.
A second group of countries may be classified as “early adopters” of the WTO.
This group consists largely of those countries that gained membership during the
Uruguay round and the first year of the WTO (1995), and they are notable in two
different ways. First, these developing countries, and in particular those that became
members toward the end of the Uruguay Round, joined with a view to wielding influence
over the final set of agreements leading to the establishment of the WTO (Gallagher
2005, 13). Participation in the Uruguay round allowed them a voice, even not a powerful
one, in negotiating for rights and benefits under the new regime. Second, accession to the
WTO held definite advantages to being among the “early adopters,” especially for
developing countries. The complex accession process was especially challenging for the
least-developed country applicants, and they were granted leeway in meeting the
conditions for accession, commensurate with their level of development, financial or
trade positions, and administrative and institutional capabilities.16 In 1995, 21 least-
developed countries obtained approval for formal membership, as original members,
from the WTO’s General Council through this less stringent process.
16 The Uruguay Round’s Decision on Measures in Favour of Least-Developed Countries exempted least developed countries from commitments and concessions that are “inconsistent with their individual development, financial and trade needs.” (www.wto.org)
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The third group of WTO members, the “later entrants,” was subject to the more
complicated and full-fledged accession process, which entailed negotiating the terms with
existing WTO members. Though equal with all other Members once membership has
been obtained save for any special conditions negotiated during the accession process,
later entrants to the WTO were subject to the full acceptance requirement of all WTO
agreements and did not automatically qualify for the implementation concessions that
developing country members enjoyed at the time of the WTO’s establishment in 1995.
The accession process involved bilateral negotiations with WTO Members, which at
times have been more demanding, stringent, and intrusive in their requirements of
domestic reform. Negotiations dealt with a host of issues, such as an applicant’s trade
policies and practices, including issues such as market access concessions and
commitments on goods and services, and legislation for the enforcement of intellectual
property rights. Individual Working Parties are assigned to each case to evaluate the
reports from applicant economies detailing their commercial policies. Prospective
members must also negotiate with their most important trading partners among the WTO
members the terms and conditions of bound market access rights for goods and services,
which are exchanged a the time of formal accession. Such bilateral negotiations may take
years to complete. Though a special case whose accession proceedings began in 1987,
China’s accession process took 16 years to complete.
The Marrakesh Agreement Establishing the WTO was signed in April 1994 by
128 members. As of January 1, 1995, when the WTO came into existence, 76 economies
had qualified for accession to the WTO according to the conditions for membership. An
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additional 36 members completed the process involving mostly verification and
acceptance of national schedules, fulfilling the obligations for membership and allowing
them to accede by 13 December 1995. This brought WTO membership to 112 economies
by the end of its first year. Of the 51 economies that have applied for accession, 23 have
completed their accession procedures and attained membership: Ecuador (1996), Bulgaria
(1996), Democratic Republic of Congo (1997), Mongolia (1997), Panama (1997), Kyrgyz
Republic (1998), Latvia (1999), Estonia (1999), Jordan (2000), Georgia (2000), Albania
(2000), Oman (2000), Croatia (2000), Lithuania (2001), Moldova (2001), China (2001),
Chinese Taipei (2002), Armenia (2003), Former Yugoslav Republic of Macedonia
(2003), Nepal (2004), Cambodia (2004), Saudi Arabia (2005), and Vietnam (2007). As of
this writing, 31 more economies are queued for accession negotiations.17
Analysis
This study builds on a set of controversial findings in the literature that challenge
the trade-creating effects of the GATT and WTO. Among current studies, Rose (2004)
found that overall, trade “cannot be dependably linked” to GATT/WTO membership.
Upon closer examination, Rose (2004), Gowa-Kim (2005), and Subramanian and Wei
(2005), found that, when GATT members are divided into industrial and non-industrial
countries, GATT has had a positive and significant effect only on trade between the
former. That is, the GATT expanded trade among industrial countries but had little if any
17 Afghanistan, Algeria, Andorra, Azerbaijan, Bahamas, Belarus, Bhutan, Bosnia and Herzegovina, Cape Verde, Equatorial Guinea, Ethiopia, Holy See (Vatican), Iran, Iraq, Kazakhstan, Lao People's Democratic Republic, Lebanon, Libya, Montenegro, Russia, Samoa, Sao Tomé and Principe, Serbia, Seychelles, Sudan, Tajikistan, Tonga, Ukraine, Uzbekistan, Vanuatu, and Yemen.
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impact on trade between non-industrial countries or between industrial and non-industrial
countries. This is in spite of the “enabling clause,” or the special and differential
treatment accorded to the developing countries within the GATT regime. The unevenness
in the effect of GATT on trade flows is a product, inter alia, of the exclusion of
agriculture from the GATT regime, the creation of special rules for labor-intensive
industries such as textiles and apparel and the import-substituting industrialization
policies of LDCs. These findings have been challenged by Tomz, Goldstein and Rivers
(2007) and Goldstein, Rivers, and Tomz (2007), who argue that the GATT extended
rights and obligations to countries who were not formal members of the regime. Their
studies find that inclusive of these members with “institutional standing,” the GATT
significantly aided trade expansion in the post-World War II period.
The analysis presented here further develops the arguments and findings in the
existing literature in two ways. First, it focuses specifically on the impact of the WTO.
Given the establishment of a formal organization to govern trade, the greatly expanded
scope of issues now covered under the regime, the question arises as to its consequences
for trade among its members, both old and new. Second, the analysis is devoted in
particular to examining how developing countries have fared under the regime,
differentiated by the timing of their membership. The rationale for distinguishing
between “standing members,” “early adopters,” and “later entrants,” is due to the
increasingly complex and, in particular, intrusive dimensions of accession proceedings.
Trade negotiation rounds under the previous GATT regime emphasized the reduction of
“barriers at the border,” as members bargained over tariff rates and quantitative
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restrictions, and less attention was directed to the compatibility of domestic laws with
WTO agreements. The more stringent accession requirements of the WTO, on the other
hand, call for the active enactment of legislation that is WTO-consistent, reflecting
perhaps the changing view that trade liberalization policies legislated in the domestic
political arena must precede any trade-creating benefits conferred by inclusion in the
regime. From this perspective, then, the expected trade-creating benefits of the WTO
should be greater the later one joins the regime.
Data
The sample analyzed consists of pairs of countries, or dyads, observed annually
between the years 1948 to 2004, covering the GATT era and the first ten years of the
WTO. Trade is measured by the sum of the exports and imports from country a to
country b. The trade data, calculated in constant U.S. dollars (2000), were obtained from
IMF’s Direction of Trade Statistics (DOTs).18 Countries comprising the dyads include
members of the interstate system, as identified by the Correlates of War 2 Project
(COW2) and subject to data availability.19 The sample is limited to system members as
data on the political variables described below exist only for these states. The variable of
18 Trade values were converted to constant U.S. dollars (2000) using the U.S. GDP (chained) price index, obtained from the GPO: http://www.gpoaccess.gov/usbudget/fy05/sheets/hist10z1.xls)
19 The COW2 Project defines a system member as a state that is i) a UN member; or ii) its population exceeds five hundred thousand and it receives diplomatic missions from at least two major powers. Correlates of War Project. 2005. State System Membership List, v2004.1. Online, http://correlatesofwar.org.
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interest, WTO membership, is defined in terms of formal membership where countries
have completed the process of accession.20
The model is as follows: Log(Tradeijt) = α + β1 Log(GDPi * GDPj)t + β2 Log(GDPPCi * GDPPCj)t + β3 Log(Currency Union)ijt + β4 Log (PTA)ijt + β5 (GSP)ijt + β6 (Democracy)ijt+ β7 (Alliance)ijt + β8 (WTO Years)ijt + β9 (Colonial History *WTO Years)ijt + β10(Standing Members *WTO Years)ijt + β11(Early Adopters *WTO Years)ijt + β12(Later Entrants*WTO Years)ijt
+ + εtt Yeartδ∑ ijt
The dependent variable is the (natural) log of bilateral trade volume: exports from
and imports between country i and country j in a given year t. Among the explanatory
variables on the right-hand side are the logged products of the two countries’ GDP and
per capita GDP (GDPPC), both in constant U.S. dollars (2000).21 PTA and Currency
Union equal one if the two countries belong to the same preferential trade agreement or
20 Differences exist in the way studies have coded for membership. Gowa and Kim’s (2005) GATT membership variable makes reference to Tomz, Goldstein, and Rivers (2007), which argued that institutions such as the GATT extended rights and obligations broadly to nonmembers, creating “institutional standing” for current and former colonies of the contracting parties and some countries in the process of accession. Gowa and Kim code these as GATT members as long as they are system members, that is, as of their year of independence, and states in the process of becoming GATT members. Goldstein et al. constructed their membership variable from GATT archival material, and they have kindly made their data available for this paper. The roster of informal members identified in Gowa and Kim, therefore, may not exactly replicate those in Goldstein et al. The WTO eliminated this provision of de facto membership and required countries either to submit to accession proceedings or lose their benefits. 21 Data on GDP and GDP per capita were obtained from the Penn World Tables, 6.2.
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share the same currency in a given year, and zero otherwise.22 GSP equals one if one
country is a beneficiary of trade preferences given by the other under the Generalized
System of Preferences, which were special agreements negotiated under the auspices of
the United Nations Conference on Trade and Development (UNCTAD) to aid developing
countries expand their trade vis-à-vis the developed world. Democracy equals one if both
countries in the dyad score 6 or greater in Polity IV’s democracy index, and Alliance
equals one if both countries are members of the same alliance.23
The variables of interest include WTO Years, which is a dummy variable that
equals one for the years since the establishment of the WTO (1995) to 2004, and several
interaction variables that combine WTO Years with the three member groups. Standing
Members equals one if both countries in the dyad were GATT members who joined
before the start of the Uruguay Round (1986); Early Adopters equals one if both
countries joined during the Uruguay Round and were members in 1995; and Later
Entrants equals one if both countries joined the WTO after 1995 and thus subject to the
full-fledged accession process. Each of these member group variables is combined with
WTO Years in interaction terms, to capture the effect of the WTO on their respective
trade. The variables represent not only each group on its own before and after the WTO
22 Data on PTAs were obtained from Mansfield and Pevehouse (2000) and updated using information from the WTO and Arashiro (2005). Data for Currency Unions were obtained from Rose (2004) and extended using Cohen (2004). 23 Formal alliances include mutual defense pacts, non-aggression treaties, and ententes. Data for democracy were obtained from the Polity IV database: http://www.cidcm.umd.edu/polity/. Data on alliances were obtained from the COW2 Project: http://cow2.la.psu.edu/, version 3.03 (Gibler and Sarkees). Alliance data from 2000 were extended to 2004 for this analysis.
21
was created, thus making the WTO a “treatment” for these groups. In addition, the model
specifies effects of the WTO on trade between Standing Members & Early Adopters,
Standing Members & Later Entrants, and Early Adopters & Later Entrants between 1995
and 2004 (WTO Years). The model includes as well year fixed effects using dummy
variables for each year (except one) in the sample. These account for unmeasured factors
that are year-specific, such as the oil price shocks of the 1970s and 1980s, and the years
toward the end of the Cold War (1989-1991), that are expected to affect the trade of all
countries.
In constructing the membership variables, this paper utilizes four different
classifications of membership that are found in the literature. The first classification
employs the official GATT/WTO date of membership. The second employs Rose’s
(2004) classification, which includes colonies paired with their colonizers as part of the
GATT’s founding member group. The third classification is that of Tomz, Rivers, and
Goldstein (2007), which includes de facto and provisional members as well as formal
membership. Finally, the Gowa-Kim (2005) classification utilizes information from both
Rose and from Tomz et al. to construct its set of informal and formal members.
The analysis employs fixed effects regression analysis to examine changes in
bilateral trade before and after the WTO’s establishment. This is appropriate for two
reasons. First, it accounts for heterogeneity among the units, thus controlling for
idiosyncratic features of a country-pair’s relations that are not captured by more objective
and generalizable factors such as economic size. Second, the comparisons that the
22
analysis seeks to make are longitudinal rather than cross-sectional. That is, the paper
focuses on the extent to which trade increases, decreases, or remains unaffected when
countries become members of the WTO. It is less concerned with whether WTO
members trade more with each other than with non-members, since by 1995 and certainly
with the inclusion of more member countries, the vast majority of countries in the
international system. This makes comparisons between members and non-members less
meaningful, and hence the use of fixed effects analysis is more appropriate to assess the
longitudinal impact of trade within each dyad.24
Results
Table 1 presents the results of the analysis. The four columns represent the
different membership classifications: 1) official GATT/WTO membership; 2) Rose
(2004); 3) Tomz, Rivers, and Goldstein (2007); and 4) Gowa-Kim (2005). Each column
reports the effect of WTO membership among members of the main groups--Standing
Members, Early Adopters, and Later Entrants and for mixed pairs of various
combinations of these groups. By and large, trade among members of each group varied
following the creation of the WTO. Pairs consisting of Standing Members increased
anywhere from about 7.5 percent to about 12.8 percent depending on the member
classification; Early Adopters saw more than a 60 increase in their trade when using the
TRG and Gowa-Kim classifications but no significant effect is shown for the less
24 The use of fixed effects regression analysis, however, precludes inclusion of time-invariant variables, such as distance, land area, island status, landlocked status, contiguity, common language, and colonial history, which are standard control variables in models of trade. Also excluded from the analysis are the dummy variables for the three member groups’ main effects, since these also do not vary over time.
23
inclusive classifications; trade among Later Entrants increased by more than 47 percent.
In terms of trade with members of other groups trade between a pair of countries
consisting of a Standing Member and an Early Adopter increased anywhere from about
11 percent to almost 32 percent depending on membership classification. Trade among
Standing Members and Later Entrants also increased, varying between about 28 to 30
percent, and trade between Early Adopters and Later Entrants increased by 36 to 66
percent depending on membership classification. These estimates are statistically
significant, suggesting the membership in the WTO have had a varied but positive impact
on trade creation.
Results for the control variables are consistent across the two models and with
findings in current studies. Estimates for GDP and GDP per capita are positive and
statistically significant, demonstrating the importance of the size of the economy on trade
flows. Country pairs sharing the same currency increase their trade by about 57 percent,
and this result is statistically significant. Common membership in a preferential trading
arrangement also increases trade between two countries, by almost 20 percent. Country
pairs in which one country enjoys preferential treatment for its goods under the GSP
system has no significant impact on trade. Among the political variables included in this
analysis, democracy has a positive effect, increasing trade by 26-28 percent when both
countries in a dyad are democracies. Common membership in a formal alliance, however,
is inconclusive, as the results show a significant and positive effect under only one
classification--the formal membership classification of the GATT/WTO.
24
Table 2 presents the results of the analysis from additionally classifying countries
according to level of development, contrasting the effect of WTO membership on various
combinations of industrialized and non-industrialized countries within the member
groups.25 They illustrate the distribute consequences of the WTO on trade among its
members and focus specifically on how the WTO has affected trade among industrialized
and non-industrialized countries. For these mixed pairs of countries, only the group
consisting of Standing Members experienced an increase in their trade, ranging from
about 14 to 18 percent. Mixed pairs consisting of Standing Members and Later Entrants
show no statistically significant change in trade during the WTO period. For
industrialized and non-industrialized country pairs consisting of Standing Members and
Early Adopters, the WTO years show a decrease in their trade, ranging from 22 to 32
percent depending on membership classification.
Separating out industrialized and non-industrialized country pairs affected
changes as well in the effects of other member groups. The remaining Standing Members
show a decrease in trade of about 8 percent that is statistically significant; Early Adopters
also show a decrease of about 47-50 percent of trade that is statistically significant; and
there is no significant effect on trade for Later Entrants. In contrast, pairs consisting of
Later Entrants and Early Adopters see an increase in trade of 43-50 percent that is
statistically significant for the more inclusive TRG and Gowa-Kim classifications.
25 The list of industrial countries includes the following 21 countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
25
Conclusion
This paper presents an analysis of the effects of the World Trade Organization
(WTO) on trade among its members in its first decade of existence, 1995-2004. The
analysis focuses on a key variable: the timing of membership. The paper examines how
trade among WTO members was affected by the regime’s accession rules and the timing
of members’ entry into the WTO. The paper distinguishes between “standing members,”
or those who were members of the GATT as well as the WTO, the “early adopters,” those
who entered the regime during the Uruguay Round or in the first year of the WTO’s
creation, and the “later entrants” who gained membership via the lengthy and complex
accession process after 1995. The empirical analysis evaluates how WTO member trade
has fared under the regime, both between members of the same group and between
members of different groups. The paper assesses the effect of the WTO on trade creation,
or the degree to which trade expanded after states entered into the regime. The results of
the analysis show positive but divergent effects among the groups, suggesting that old
and new members of the WTO have benefited in different ways from participation in the
regime. They also indicate that there may be strong distributive consequences of
membership in the WTO, as the effect on trade varies as well between mixed pairs of
industrialized and non-industrialized country pairs.
26
Table 1. The Effect of the WTO on International Trade : By Group Dependent Variable: Bilateral Trade
(1) (2) (3) (4)
Membership Classification:
WTO Rose TRG Gowa-Kim
GDP 0.886** 0.873** 0.857** 0.856** (0.049) (0.049) (0.049) (0.049) GDP per capita 0.256** 0.269** 0.292** 0.294** (0.048) (0.048) (0.048) (0.048) Currency Union 0.571** 0.571** 0.574** 0.575** (0.118) (0.117) (0.117) (0.117) PTA 0.197** 0.196** 0.197** 0.197** (0.028) (0.028) (0.028) (0.028) GSP 0.028 0.027 0.027 0.027 (0.031) (0.031) (0.031) (0.031) Democracy 0.277** 0.274** 0.263** 0.258** (0.023) (0.023) (0.023) (0.023) Alliance 0.117* 0.116 0.117 0.116 (0.060) (0.060) (0.060) (0.060) WTO Years -1.659** -1.634** -1.617** -1.619** (0.133) (0.133) (0.133) (0.133)
Colonial History* WTO Years -0.499** -0.497** -0.490** -0.490** (0.074) (0.073) (0.071) (0.071)
Standing Members* WTO Years 0.128** 0.104** 0.077* 0.075* (0.038) (0.038) (0.037) (0.037)
Early Adopters* WTO Years -0.010 0.106 0.618** 0.653** (0.130) (0.168) (0.127) (0.140)
Later Entrants*WTO Years 0.476* 0.478* 0.478* 0.479* (0.242) (0.242) (0.242) (0.242)
Standing Members & Later Entrants 0.301** 0.296** 0.280** 0.276** (0.059) (0.059) (0.058) (0.058)
Early Adopters & Later Entrants 0.357** 0.409** 0.577** 0.658** (0.132) (0.141) (0.153) (0.158)
Standing Members & Early Adopters 0.114* 0.169** 0.281** 0.317** (0.046) (0.050) (0.054) (0.055)
Constant -45.016** -44.626** -44.199** -44.194** (1.722) (1.724) (1.720) (1.718)
Observations 223610 223610 223610 223610
R-squared 0.88 0.88 0.88 0.88
Robust standard errors in parentheses; * significant at 5%; **significant at 1%; Fixed effects regression analysis using areg in Stata 9.2. Year effects included but not reported.
27
Table 2. Effects of the WTO on Trade: Industrial and Non-Industrial Country Pairs Dependent Variable: Bilateral Trade
(1) (2) (3) (4)
Membership Classification: WTO Rose TRG Gowa-Kim GDP 0.886** 0.888** 0.881** 0.881** (0.051) (0.051) (0.051) (0.051) GDP per capita 0.272** 0.272** 0.281** 0.281** (0.050) (0.050) (0.050) (0.050) Currency Union 0.534** 0.533** 0.532** 0.532** (0.121) (0.121) (0.120) (0.120) PTA 0.186** 0.182** 0.183** 0.182** (0.028) (0.028) (0.028) (0.028) GSP 0.045 0.048 0.049 0.049 (0.031) (0.031) (0.031) (0.031) Democracy 0.299** 0.303** 0.298** 0.297** (0.023) (0.023) (0.023) (0.023) Alliance 0.123* 0.124* 0.126* 0.126* (0.059) (0.059) (0.060) (0.060) WTO Years -1.557** -1.555** -1.552** -1.548** (0.135) (0.136) (0.136) (0.135) Colonial History*WTO Years -0.467** -0.476** -0.484** -0.485** (0.077) (0.077) (0.076) (0.076) Standing Members* WTO Years
-0.029 -0.057 -0.083* -0.088**
(0.034) (0.033) (0.033) (0.033) Industrial & Non-industrial Country Pair: Standing Members
0.138** 0.161** 0.183** 0.184**
(0.044) (0.043) (0.043) (0.043) Early Adopters*WTO Years: -0.147 -0.041 0.466** 0.493** (0.128) (0.167) (0.125) (0.139) Later Entrants*WTO Years 0.333 0.328 0.330 0.326 (0.241) (0.241) (0.241) (0.241) Industrial and Non-industrial Country Pair: Standing Members & Later Entrant * WTO Years
0.020 0.014 0.015 0.011
(0.064) (0.064) (0.064) (0.064) Later Entrants & Early Adopters * WTO Years
0.217 0.261 0.428** 0.503**
(0.131) (0.139) (0.152) (0.157) Industrial and Non-industrial Country Pair: Standing Member & Early Adopter* WTO Years
-0.314** -0.319** -0.221** -0.226**
(0.048) (0.054) (0.060) (0.062) Constant -45.248** -45.327** -45.165** -45.177** (1.776) (1.775) (1.773) (1.772) Observations 223610 223610 223610 223610 R-squared 0.88 0.88 0.88 0.88
28
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Appendix 1. WTO Member Groups
Standing Members (GATT & WTO Entry Dates) Australia 1/1/1948 1/1/1995 Belgium 1/1/1948 1/1/1995 Canada 1/1/1948 1/1/1995 France 1/1/1948 1/1/1995 Luxembourg 1/1/1948 1/1/1995 Netherlands 1/1/1948 1/1/1995 United Kingdom 1/1/1948 1/1/1995 United States of America 1/1/1948 1/1/1995 Cuba 1/1/1948 4/20/1995 South Africa 6/13/1948 1/1/1995 India 7/8/1948 1/1/1995 Norway 7/10/1948 1/1/1995 Zimbabwe 7/11/1948 3/5/1995 Myanmar 7/29/1948 1/1/1995 Sri Lanka 7/29/1948 1/1/1995 Brazil 7/30/1948 1/1/1995 New Zealand 7/30/1948 1/1/1995 Pakistan 7/30/1948 1/1/1995 Chile 3/16/1949 1/1/1995 Haiti 1/1/1950 1/30/1996 Indonesia 2/24/1950 1/1/1995 Greece 3/1/1950 1/1/1995 Sweden 4/30/1950 1/1/1995 Dominican Republic 5/19/1950 3/9/1995 Finland 5/25/1950 1/1/1995 Denmark 5/28/1950 1/1/1995 Nicaragua 5/28/1950 9/3/1995 Italy 5/30/1950 1/1/1995 Germany 10/1/1951 1/1/1995 Peru 10/7/1951 1/1/1995 Turkey 10/17/1951 3/26/1995 Austria 10/19/1951 1/1/1995 Uruguay 12/6/1953 1/1/1995 Japan 9/10/1955 1/1/1995 Ghana 10/17/1957 1/1/1995 Malaysia 10/24/1957 1/1/1995 Nigeria 11/18/1960 1/1/1995 Sierra Leone 5/19/1961 7/23/1995 Tanzania 12/9/1961 1/1/1995 Portugal 5/6/1962 1/1/1995 Israel 7/5/1962 4/21/1995 Uganda 10/23/1962 1/1/1995 Trinidad and Tobago 10/23/1962 3/1/1995 Gabon 5/3/1963 1/1/1995 Kuwait 5/3/1963 1/1/1995
Central African Republic 5/3/1963 5/31/1995Burkina Faso 5/3/1963 6/3/1995Cameroon 5/3/1963 12/13/1995Congo 5/3/1963 3/27/1997Chad 7/12/1963 10/19/1996Cyprus 7/15/1963 7/30/1995Spain 8/29/1963 1/1/1995Benin 9/12/1963 2/22/1996Senegal 9/27/1963 1/1/1995Mauritania 9/30/1963 5/31/1995Madagascar 9/30/1963 11/17/1995Côte d'Ivoire 12/31/1963 1/1/1995Jamaica 12/31/1963 3/9/1995Niger 12/31/1963 12/13/1996Kenya 2/5/1964 1/1/1995Togo 3/20/1964 5/31/1995Malawi 8/28/1964 5/31/1995Malta 11/17/1964 1/1/1995The Gambia 2/22/1965 10/23/1996Burundi 3/13/1965 7/23/1995Rwanda 1/1/1966 5/22/1996Guyana 7/5/1966 1/1/1995Switzerland 8/1/1966 7/1/1995Yugoslavia 8/25/1966 Barbados 2/15/1967 1/1/1995Korea, Republic of 4/14/1967 1/1/1995Argentina 10/11/1967 1/1/1995Poland 10/18/1967 7/1/1995Ireland 12/22/1967 1/1/1995Iceland 4/21/1968 1/1/1995Egypt 5/9/1970 6/30/1995Mauritius 9/2/1970 1/1/1995Zaire 9/11/1971 Romania 11/14/1971 1/1/1995Bangladesh 12/16/1972 1/1/1995Singapore 8/20/1973 1/1/1995Hungary 9/9/1973 1/1/1995Suriname 3/22/1978 1/1/1995Philippines 12/27/1979 1/1/1995Colombia 10/3/1981 4/30/1995Zambia 2/10/1982 1/1/1995Thailand 11/20/1982 1/1/1995Maldives 4/19/1983 5/31/1995Belize 10/7/1983 1/1/1995
31
Early Adopters (GATT & WTO Entry Dates) Hong Kong 4/23/1986 1/1/1995 Mexico 8/24/1986 1/1/1995 Antigua and Barbuda 3/30/1987 1/1/1995 Morocco 6/17/1987 1/1/1995 Botswana 8/28/1987 5/31/1995 Lesotho 1/8/1988 5/31/1995 Tunisia 8/29/1990 3/29/1995 Venezuela 8/31/1990 1/1/1995 Bolivia 9/8/1990 9/12/1995 Costa Rica 11/24/1990 1/1/1995 Macao 1/11/1991 1/1/1995 El Salvador 5/22/1991 5/7/1995 Guatemala 10/10/1991 7/21/1995 Mozambique 7/27/1992 8/26/1995 Namibia 9/15/1992 1/1/1995 Mali 1/11/1993 5/31/1995 Swaziland 2/8/1993 1/1/1995 Saint Lucia 4/13/1993 1/1/1995 Czech Republic 4/15/1993 1/1/1995 Slovak Republic 4/15/1993 1/1/1995 Dominica 4/20/1993 1/1/1995
Saint Vincent & the Grenadines 5/18/1993 1/1/1995Fiji 11/16/1993 1/14/1996Brunei Darussalam 12/9/1993 1/1/1995Bahrain 12/13/1993 1/1/1995Paraguay 1/6/1994 1/1/1995Grenada 2/9/1994 2/22/1996United Arab Emirates 3/8/1994 4/10/1996Guinea Bissau 3/17/1994 5/31/1995Saint Kitts and Nevis 3/24/1994 2/21/1996Liechtenstein 3/29/1994 9/1/1995Qatar 4/7/1994 1/13/1996Angola 4/8/1994 11/23/1996Honduras 4/10/1994 1/1/1995Slovenia 10/30/1994 7/30/1995Guinea 12/8/1994 10/25/1995Djibouti 12/16/1994 5/31/1995Papua New Guinea 12/16/1994 6/9/1996Solomon Islands 12/28/1994 7/26/1996
Later Entrants Ecuador 1/21/1996 Bulgaria 12/1/1996 Democratic Republic of the Congo 1/1/1997 Mongolia 1/29/1997 Panama 9/6/1997 Kyrgyz Republic 12/20/1998 Latvia 2/10/1999 Estonia 11/13/1999 Jordan 4/11/2000 Georgia 6/14/2000 Albania 9/8/2000 Oman 11/9/2000
Croatia 11/30/2000Lithuania 5/31/2001Moldova 7/26/2001China 12/11/2001Chinese Taipei 1/1/2002Armenia 2/5/2003Former Yugoslav Republic of Macedonia (FYROM) 4/4/2003Nepal 4/23/2004Cambodia 10/13/2004Saudi Arabia 12/11/2005Viet Nam 1/11/2007
32
