Dan August A.

Galliguez October 13, 2018

SST 299 Special Topics in Global Economics ID No.: 1700546

A Reflection to the Research Entitled “Do We Really Know that the WTO
Increases Trade?” by Andrew K. Rose

INTRODUCTION
Trade and foreign policy have been linked throughout history, with foreign policy
often resembled to promote trade interests. Countries are using its military power to
protect its trade interest to other neighboring countries such as in the case of China when
it maintained the Silk Road, as sign of valuing trade. Trade is indeed so important that it
can promote economic development and peaceful relations among nations. This peace
and security are desired by almost all nations. This desire drove the creation of today’s
global economic system.
World Trade Organization (WTO) is an intergovernmental organization
established to supervise and liberalize which international trade. WTO was officially
commenced on January 1, 1995 under the Marrakech Agreement, signed by 123 nations
in Marrakech, Morocco on April 15, 1994 succeeding the General Agreement on Tariffs
and Trade (GATT), which was created in 1947 in the expectation that it would soon be
replaced by the International Trade Organization (ITO). This plan did not materialize but
GATT contributed remarkably in liberalizing world trade.
From being provisional in nature, GATT system evolved over 47 years to become
a de facto global trade organization that eventually involved approximately 130 countries.
Through various negotiating rounds, the GATT was extended or modified by numerous
supplementary codes and arrangements, interpretations, waivers, reports by dispute-
settlement panels, and decisions of its council.
During the negotiation ending in 1994, the modifications and clarifications during
the Uruguay Round or the GATT 1947 plus a dozen of other multilateral agreements on
merchandise trade made the GATT 1994. This became the integral part of the agreement
that established the WTO. World Trade Organization has six key objectives. Number six
of which is to increase trade among countries thereby helping the developing countries
benefit fully from the global trading system. But, do WTO really increases or encourages
trade? This question is being researched and explained by Andrew K. Rose in his work
entitled “Do We Really Know that the WTO Increases Trade?
This paper attempts to give a reflective analysis on the work of Andrew K. Rose.
The next part of which is the summary of his research stating evidences that GATT/WTO
has an effect on the increase of trade among countries. Last part of this paper is the
reflection and conclusion of the writer analyst.
SUMMARY
The paper entitled “Do We Really Know that the WTO Increases Trade? By
Andrew K. Rose estimates the effect on international trade of multilateral trade
agreements: The World Trade Organization (WTO), its predecessor the Generalized
Agreement on Tariffs and Trade (GATT), and the Generalized System of Preferences
(GSP) extended from rich countries to developing countries. A. K. Rose used a standard
“gravity” model of bilateral merchandise trade and a large panel data set covering over
fifty years and 175 countries, in an attempt to search evidences that membership in
GATT/WTO will double trade.
A.K. Rose first conducted a comprehensive econometric study of the effects of the
postwar multilateral agreements on trade and he found out that membership in the
GATT/WTO is not associated with doubling of trade, in fact countries acceding or
belonging to the organization do not have significantly different trade patterns than non-
members. Interestingly, he found out further that the Generalized System of Preferences
(GSP) extended from the North to developing countries approximately doubles trade. He
then therefore concluded that membership in GATT/WTO have no strong empirical
evidence that it played a strong role in encouraging trade.
To prove his argument, A.K. Rose explained the reliability of his “gravity” model to
effectively search the effect of multilateral trade agreements on international trade. First
part of his model finding the trade patterns for countries in the GATT/WTO by using the
distance between the countries and their joint income along with the number of extra
conditioning variables that affect trade like culture, geography and history and then
compared this to those outside the system. He then proved the reliability of his model and
reported that estimated effects of distance and output are sensible, economically and
statistically significant, and reasonably consistent across studies and the gravity model
explains most of the variation in international trade.
He then discussed the trade data since Second World War. It is reflected in his
data set that the trade has grown quickly from 1948 through the end of the sample in 1999
in an average of over eight percent annually. This growth is not due to the membership
in GATT/WTO but rather as a result of the great economy of each rich and developing
countries. Furthermore, he found out that there is little evidence that GATT/WTO entry
has a strong significant effect on the ratio of aggregate trade to GDP.
He explains also in his model the gravity effects that countries that are farther apart
trade less, while economically larger and richer countries trade more. Countries belonging
to the same regional trade association trade more, as do countries sharing a language,
or land border. Landlock countries trade less, as do physically larger countries. A shared
colonial history encourages trade. From these gravity effects, A.K. Rose reiterated that
membership in the GATT/WTO have no substantial effect on trade but extension of the
GSP from one country to another seems to have a large positive effect on doubling of
trade. The only exception is trade for South Asia, where the GATT/WTO effect is
economically large but statistically marginal. GATT/WTO has somewhat important effect
on trade of industrial countries but it is not overwhelming statistically significant, and even
its economic importance is less than dramatic.
REFLECTION AND CONCLUSION

From what I understand, the WTO provide liberal, secure and predictable access
to foreign markets for the goods and services of exporting enterprises thereby promoting
smooth flow, and free trade throughout the world through its trade agreements like in the
case of trade in South Asia. Its rule-based system promotes the expansion of international
trade. This allows business enterprises to work within the parameters of clearly identified
arrangements and it can create a safer trading arena for everyone. Through various
agreement, I believe, it can also prevent trade protectionism and lower trade barrier.

But, trade always depends on the arrangements or agreement of trading countries.

I guess no country will trade to other country if they do not study first the implication of
doing so. I think many things should be considered first before a country could go into a
trade to other countries. One of these things that should be considered is the exchange
rates of trading countries. I would like to take Philippines and U.S. as an example of this
situation. We all know that the difference in exchange rates of Dollar and Philippine Peso
is extremely high. And it is very costly for the Philippines to buy U.S currency with her
home currency and therefore how expensive it is for the Philippines to purchase goods
from the U.S. For instance, if only a peso could buy more dollar, PH would be able to
import more goods. But, exchange rates are in a constant or continuous state of
fluctuation, which can affect not only the PH but the way all nations trade. When the value
of a currency goes down with respect to other currencies, the country with the currency
that is losing value typically imports fewer goods and exports more goods.

Another thing we believe about WTO’s goal is by promoting free trade thereby
eliminating harmful trade protectionism. There is one country that imposes the most
restriction on trade and it is not China, Mexico, or Japan. According to a report from
Credit Suisse on globalization, one of the pioneers of WTO is also the most protectionist
nation. It is the U.S. The USA imposes the highest number of protectionist measures.
There are also other members of WTO that practice “trade restrictive activity” and they
are members of the so called G20 countries’ stealth trade protectionism.

Moreover, I would agree with A. K. Rose in his findings that acceding to

GATT/WTO have no considerable effect on increasing trade among its members. It is
true that there are benefits on being a member of the GATT/WTO but those benefits can
only be used to the best advantage when companies fully understand the accession
process and the changes it implies in trade.

Other findings of A.K. Rose that I agree with is that, geographical position has an
effect on trading countries. Mid-latitude for instance has moderate climate, coastal areas,
the transportation is convenient, good for development of international trade. High-latitude
climate cold, inland mountainous area traffic block, adverse to the development of
international trade. One good example is Japan to "trading", it has to do with its island
position. In addition, is advantageous to the development of bilateral trade between
neighbors. On the contrary, Philippines geographical position is also advantageous but it
is always the issue of terrorism, security reasons and some political factors that greatly
scares investors and traders.

Natural resource is also one of the factors that can affect international trade. If one
country has rich natural resources, it has the potential to trade internationally their national
export commodities or primary products. But it is all depends on how this country utilized
its natural resources and its policies on trading primary products.

Finally, I believe that economic development level can directly affect a country's
foreign trade commodity structure and the position in international trade. The United
States, Japan and the European Union's national economic development level, for
example, is high, and so their imports and exports is also high. Developing countries like
Philippines relatively have backward economy, foreign trade is relatively less.

From all this scenario, I therefore conclude that membership to GATT/WTO has
nothing to do with the doubling of trade. Meaning acceding to GATT/WTO will not assure
that the trade of these countries to its co-members will also increase. Even if these
countries are member of the organization, they always set their own conditions when it
comes to international trades and those conditions may or may not acceptable to other
co-members. Aside from this conditions, internal issues of countries such as political
factors and internal security greatly affects international trade. Any countries bilateral or
multilateral trade is also affected by geographical position, natural resources, economic
development level. The most important factor is the Generalized System of Preferences
(GSP) for it provide economic growth and progress in the developing countries. GSP help
these countries to increase and diversify their trade with the United States and other rich
countries. It provides additional benefits for products from least developed countries to
be marketed to other trading partners or countries. Therefore, it promotes doubling of
trade.