Throwing the Baby Out With the Bathwater: Keep the WTO

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Lately there have been calls for the U.S. to pull out of the World Trade Organization (WTO). Some have gone even further, advocating for shutting down the entire enterprise. These arguments are sometimes accompanied by statements to the effect that a new WTO would be easy to create. This would be throwing the baby out with the bathwater.  Keep the WTO!

These claims are patently ridiculous. The WTO has done more to foster growth in international trade than any bilateral or multilateral trade agreement could ever hope to accomplish. Let’s begin by discussing research that estimates the benefits of the WTO. After that I’ll review the history of the organization. Scott Lincicome has done a terrific job of discussing some of this on Twitter. His two threads are at the end of this article (after the endnotes) as pdf files.

Before delving into the details, it’s worth reminding everyone of two central facts. The first is the fact that voluntary exchange must be mutually beneficial. Otherwise one of the parties would walk away from the offer. The same is true of international trade.

The second concept is one I’ve written about extensively: Ricardo’s theory of comparative advantage.[1] The basics are simple. Every country has a comparative advantage at producing something. If countries specialize in producing products at which they have a comparative advantage, total global output will increase and both countries will benefit. (For my previous work click here and here.)

Executive Summary

The conclusions from the empirical research are straightforward. The WTO has increased international trade by a very large amount. One estimate valued the WTO’s at $8 trillion in the year 2000 alone.[2]

As far as creating a new WTO, a history lesson is in order. The WTO was officially launched April 15, 1994. That’s about 3-1/2 years from start to finish during a period when the benefits of trade were obvious to everyone. It will take much longer today. Many WTO agreements include a clause that says, “This agreement may be revisited after 10 years.” My interpretation: the agreement will last approximately forever. My forecast: negotiating a replacement for the WTO will take 10 years.

The Benefits of Trade

Most of the research on trade’s benefits focuses on the percentage increase in global trade created by the WTO. While there is considerable disagreement about their exact value, one fact emerges. The WTO has increased trade by somewhere between 60 and 102 percent. Liu (2009) estimates 60%.[3] Tomz, et.al. (2007) estimate 72%.[4] Herz and Wagner (2011) estimate 86%.[5] Herz – Wagner also estimate the growth in trade between WTO member countries and nonmembers. Imports by WTO members from nonmembers were 48% higher while exports from members to nonmembers were 31% higher. In other words, the WTO has even benefited nonmember countries.

Topping the estimates are Subramanian and Wei (2007). They estimate that the WTO has doubled trade, increasing by 120%.[6] They are the source of the single-year benefits of $8 trillion. We can use their estimate of the dollar benefit to calculate benefits under each of the other estimates of trade growth. Even the lowest estimate exceeds $1 trillion.

“But Prof. Lima,” you ask, “aren’t there quite a few people on the planet?”

Thanks for asking. World population in 2000 was 6.1 billion.[7] Per capita benefits from the WTO range from $280 to $1,302. Table 1 shows my calculations of the WTO benefits using the percentages in each paper. Since Subramanian and Wei were the only ones to assign a dollar value to their effort, I used their figures as the benchmark for calculating the benefits for the other three works.

Benefits of trade

Benefits of trade

Now this is far from complete. More trade should allow greater specialization, increasing gross world product (GWP).[8] But economists recognize that there are costs to trade. These costs occur at both the micro and macro levels. Let’s first look at the macro costs.

Subramanian and Wei divide the world’s countries into two groups: developed and developing. They conclude that developed countries have benefited from the WTO while developing countries have been hurt. It has always seemed to me that different countries have different economic structures and policies. In developing countries, there is often a tendency toward protectionism, specifically restricting imports of certain products. This is often justified using the “infant industry” argument: an industry needs protection from foreign competition until it has grown to a sufficient size and had enough expertise to compete globally.

There are good reasons this does not work. Protected industries tend to be inefficient since there is little competition to encourage innovation and efficiency. If that happens, the industry will never be able to compete globally. They will be perpetually an infant industry.

The problem is that macro studies tend to avoid the micro restrictions countries place on trade. Countries that do not benefit from trade often have enacted policies that prevent trade from helping them.

At the micro level, we also recognize that trade creates winners and losers. As Ricardo observed, the winners will be those industries that have a global comparative advantage. The losers will be industries that have a global comparative disadvantage. Workers, suppliers, and capital owners in the former group of industries will benefit from trade. Those groups in the latter set of countries will be hurt. In nearly all cases, there will be a net benefit for any given country. That implies there is enough benefit to compensate those who are hurt. The problems are identifying those hurt and finding appropriate ways to compensate them. One example is job retraining. Like most economists, I prefer cash grants with limited duration.

That’s enough number-crunching. Let’s see why the WTO is unlikely to be replaced.

A Brief History of the WTO[9]

The idea that building a new WTO would be fast and easy is laughable. The General Agreement on Tariffs and Trade (GATT) was set up in 1946, during the shadow of World War II. At that time, countries were eager to cooperate and rebuild the global economy. But there was a major flaw. GATT rules stated that if country A’s export subsidies cause “material injury” or “threat thereof” to a domestic industry of country B, then country B can apply countervailing duties or tariffs on its imports of product from country A. This left room for different interpretations, negotiation, and controversy.

Work on a replacement for GATT began in 1990 when Canada proposed the Multilateral Trade Organization. One year later, GATT’s Director General Arthur Dunkel released a draft agreement for the Uruguay Round of GATT negotiations.[10] By the end of 1993 the text of the Uruguay Round included a final charter for a World Trade Organization. The negotiations moved to Marrakesh. The Marrakesh Agreement, approved by 123 countries, established the structure of the WTO. It was signed on April 15, 1994. That’s about 3-1/2 years from start to finish during a period when the benefits of trade were obvious to everyone. It will take much longer today. (Actually, the success of GATT made the idea of a WTO easy to accept. Therefore it could be argued that the actual time to set up the WTO was 48 years.)

Conclusion

One area where there economists are in near-unanimous agreement is the value of trade. It has now been 203 years since Ricardo published his theory of comparative advantage. Specialization and trade increase total output and income. Voluntary exchange among countries implies that all participants must benefit. Otherwise some would decline the offer to trade.

Thinking about attitudes toward trade today, it could easily take another 48 years to replace the current WTO.

  1. Ricardo, David (1817). On The Principles of Political Economy and Taxation.  London: John Murray, Albemarle-Street. (third edition 1821)
  2. Subramanian, A. and Wei, S.-J. (2007) “The WTO promotes trade, strongly but unevenly.“ Journal of International Economics 72(1): 151–175.
  3. Liu, X. (2009) “GATT/WTO promotes trade strongly: sample selection and model specification. “ Review of international Economics 17(3): 428–446.
  4. Tomz, M., Goldstein, J.L. and Rivers, D. (2007) “Do we really know that the WTO increases trade? Comment.“ American Economic Review 97(5): 2005–2018
  5. Herz, B. and Wagner, M. (2011) “The ‘real’ impact of GATT/WTO: a generalized approach.“ The World Economy 34(6): 1014–1041.
  6. Subramanian, A. and Wei, S.-J. (2007), op.cit.
  7. Worldometer. https://www.worldometers.info/world-population/world-population-by-year/. Accessed May 16, 2020.
  8. A more common phrase is “world gross domestic product.” This has always bothered me. What does “domestic” mean in the context of the entire planet? Therefore I use GWP. If you prefer gross earth product (GEP), that’s fine with me.
  9. Much of the material in this section was adapted from Kenneth Reinert (2015) An Introduction to International Trade. Cengage Learning, 2015.
  10. GATT negotiations were called “rounds.” The process often lasted three years or more. Each round was given a name corresponding to the country in which the negotiation took place (Uruguay Round); or the city (Doha Round); or the political leader who pushed the round forward (Kennedy Round).

Mr. Lincicome’s thoughts.

 

 

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.