Who needs the WTO?

New WTO boss Supachai: does he make a difference?

by Steve Schifferes BBC News Online economics reporter

The World Trade Organisation has done little to boost free trade, a leading academic researcher has said.

Professor Andrew Rose of the University of California at Berkeley says that membership of the WTO does little to increase trade flows.

Factors boosting trade

Regional trade pacts

Currency union

Common language

Common border

Special trade preferences

In the past 50 years, world trade has soared, growing more than 20 times, twice as fast as the world economy has grown.

Up to now, economists and officials at the WTO have assumed that the six rounds of world trade talks, which resulted in a massive lowering of tariff barriers to let in cheap imports, played an important role in this process.

According to Professor Rose's study, covering 175 countries between 1950 and 2000, there was no correlation between a country's membership of the WTO (which used to be called Gatt) and an increase in the volume of its trade.

The WTO has fought for free trade for 50 years

The argument comes at a difficult time for the WTO, which is struggling to implement the latest round of trade talks, launched one year ago at Doha, Qatar.

Rich governments pledged at that time to make sure that any new trade deal would benefit the world's poor countries.

But the new WTO trade boss, Supachai Panitchpakdi, faces an uphill struggle getting them to deliver, especially on agriculture.

Paradox

Professor Rose says that the reason for the lack of correlation is that even when countries join the WTO, they are not necessarily obliged to open up their markets.

He cites the example of India, which was a founding member of the international trade organisation but continued to raise its tariff barriers for many years.

In contrast, China, although not admitted to the WTO until 2001, opened its economy to Western investment in the 1980s and saw a huge growth in trade.

And, despite the effectiveness of negotiations aimed at lowering tariffs, Professor Rose says that all kinds of other trade barriers (which may be consistent with WTO rules) are still used to keep out goods which threaten livelihoods.

The recent steel tariffs imposed by the US on many of its trading partners, in order to prevent job losses at domestic steel plants, is a recent example.

Democracy and free trade

Although Professor Rose says he personally believes free trade benefits countries, he also agrees with his colleague Dani Rodrik that it is hard to reconcile the existence of nation states, democracy, and complete international economic integration.

Professor Rose argues that it is economic integration - or globalisation - that is far less complete than we have been led to believe, with all sorts of barriers, especially to developing country exports to rich countries.

His research also shows that certain types of trade deals do have huge benefits.

Regional deals

In particular, regional free trade deals, such as those between EU states, or between the US, Canada, and Mexico (members of the Nafta trade bloc), do boost to trade.

And currency unions, in his view, have just as big an effect - he predicts that the creation of the eurozone will drive further European economic integration.

Other things that facilitate trade between countries are a common language, a history of colonisation, and a common border.

Professor Rose says that trade deals specifically aimed at helping developing countries, such as the generalised system of preferences introduced in the 1960s, can also help lower trade barriers.

Limits of globalisation

In broad terms, Professor Rose's work points to the limits of globalisation.

Despite the rapid rise in trade volumes, world trade is far from "free", and there are even greater restrictions on the movement of capital, and especially labour.

In the late 19th century, the first great wave of globalisation transformed the transatlantic economy, leading to the rise of the US as an economic superpower.

Now, a similar process might be at work in East Asia.

But as the economic historian Nick Crafts has pointed out, the spread of globalisation has always been uneven.

Large, well-resourced countries with growing populations and internal markets, such as the US and now China, may be better placed to take advantage of the opportunities provided by globalisation than their smaller rivals.

Professor Rose was speaking at seminar organised by the Centre for Economic Policy Research in London. A copy of his paper can be ordered from their website.