Abstract
We quantify the effects of GATT/WTO membership on trade and welfare. Using an extensive database covering manufacturing trade for 186 countries over the period 1980–2016, we find that the average partial equilibrium impact of GATT/WTO membership on trade among member countries is large, positive, and significant. We contribute to the literature by estimating country-specific estimates and find them to vary widely across the countries in our sample with poorer members benefitting more. Using these estimates, we simulate the general equilibrium effects of GATT/WTO on welfare, which are sizable and heterogeneous across members. We show that countries not experiencing positive trade effects from joining GATT/WTO can still gain in terms of welfare, due to lower import prices and higher export demand.
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Source: Direction of Trade Statistics (DOTS), WTO
Source: Direction of Trade Statistics (DOTS), WTO.
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Notes
In the early years, the GATT represented a club of mostly industrialized countries. Over the years, membership has increasingly covered the entire world; in 1995 the freshly created WTO had 127 members; today it counts 164 member states.
We refer to Esteve-Pérez et al. (2020) for a recent literature survey.
While the methods to obtain the general equilibrium estimates are standard, we are not aware of any study that analyzes the welfare effects of GATT/WTO.
The 23 founding members were: Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, United Kingdom, and the United States.
A comprehensive overview of applied tariff levels is available in the World Integrated Trade Solution (WITS) database.
Following the first theoretical foundation of gravity in economics by Anderson (1979), a series of prominent papers derive the structural gravity model from alternative micro-foundations, e.g., Anderson and Wincoop (1979) and Eaton and Kortum (2002). The gravity model has also been derived at the sectoral level, on the demand side, e.g., Anderson and Wincoop (2004) and on the supply side, e.g., Costinot et al. (2012), and with intermediate goods, e.g., Caliendo and Parro (2015). Given the purpose of our study to obtain benchmark GE welfare effects of GATT/WTO, we employ the most simple and transparent traditional version of the structural gravity model with one sector and without taking into account intermediates and asset accumulation.
Note that Eq. (4) underscores the importance of domestic trade flows as it is a restatement of the market clearing condition \(Y_i=\sum _i X_{ij}\) which always includes domestic trade flows.
Starting with Cheng and Howard (2005), the literature has debated whether to use interval data instead of data over consecutive years for gravity estimations. We follow Egger and Filip (2022) who recommend using consecutive-year data. This improves estimation efficiency and avoids arbitrary dropping of observations. Moreover, the use of pooled/consecutive-year data better captures the adjustment of trade flows in response to trade policy changes.
Including domestic trade flows has many advantages, ranging from theoretical consistency to econometric identification; see Yotov (2022) for a recent survey.
We refer the reader to Larch et al. (2019) for further details on the dataset. A list of the 186 countries in our sample appears in Table 3 in Web Appendix.
Data on bilateral distance, contiguous borders, colonial ties, and common language were taken from CEPII, c.f., Mayer and Soledad (2011).
As noted earlier Larch et al. (2019) is the single exception, of which we are aware of, that also uses domestic trade flows.
This finding is consistent with the results from Eicher and Henn (2011), who find that the effect of the WTO membership on trade is only positive before the formation of RTAs and among proximate developing countries. However, it is different from the results in Subramanian and Wei (2007) who argue that GATT/WTO increases trade more for developed countries. In addition to differences in the estimating samples, we believe that the different methodology (of including domestic trade flows) is a driving force behind the differences with these studies.
This resulted in the dropping of a total of 40 countries, which are indicated with an ‘*’ in Table 3 in Web Appendix. As can be seen from Table 3 in Web Appendix, the dropped countries are usually very small economies or former Soviet republics. Thus, Fig. 5 presents 107 of the 143 GATT/WTO that we obtain initially.
For Taiwan we use 2006 values, the most recent year with trade data for Taiwan in our dataset.
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We thank the Bertelsmann Foundation for financial support.
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Felbermayr, G., Larch, M., Yalcin, E. et al. On the heterogeneous trade and welfare effects of GATT/WTO membership. Rev World Econ (2024). https://doi.org/10.1007/s10290-023-00520-6
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DOI: https://doi.org/10.1007/s10290-023-00520-6