A WTO Update

You can always tell when I’m spending less time obsessing about Venezuela and more time working on my dissertation by the volume of posts here. I’m preparing for a conference next months so I’ve been more or less immersed in WTO land…so this may be as good a time as any to vent on my other topic…

A better time, in fact, since the latest self-imposed WTO deadline is just two weeks away. April 30th is the latest, no joking, this-time-we-mean-it “deadline” to agree a detailed outline for a Doha Round deal. Of course, you could fill a barrel with no joking, this-time-we-mean-it deadlines the WTO has set itself and then missed – but there are good reasons to think the April 30th deadline is more real than most.

President Bush’s “fast-track authority” is set to expire in June 2007 and there’s no prospect of renewal. The conventional wisdom is that if the April 30th deadline slips, there will be no time to work out a complete deal by summer 2007, which would send the whole negotiating round into a kind of limbo until less protectionist winds start blowing in Washington.

At the moment, there’s no sign of a last minute breakthrough…which suits me just fine, last thing I need is these jokesters throwing my research into chaos by signing a deal while I’m spell-checking my final draft.

This latest deadlock is not particularly new. The last round of negotiations went through two near-death experiences very much like this one (one in 1989, then again in 1991) before finally emerging in 1994 – nine years after negotiations had been launched. The current round, which was launched in 2001, looks to take at least as long, if not longer.

It’s an odd place to hang out, WTO land. The thing that really strikes me, as I go about my research, is the huge gap between how important people generally assume the WTO to be and how important it actually is. Frankly, if I chose to do a dissertation about it it’s because I also figured the WTO was a big deal, but the deeper you get into the numbers, the more you wonder what the immense fuss is about.

Exhibit A is this increasingly infamous paper by Berkeley economist Andrew Rose. The guy ran an immense trade data set through a standard Gravity Model and found, to the embarrassment of trade diplomats near and far, that the WTO and its predecessor, the GATT, have made no difference at all in expanding trade. Published in the most prestigious Economics journal there is – the American Economic Review – and therefore checked, re-checked, peer-reviewed, and re-peer-reviewed to within an inch of its life – it can hardly be dismissed as shoddy scholarship.

Actually, a bit of a cottage industry seems to be springing up around Rose’s paper, as economists try to poke holes in it and salvage the notion that, y’know, the WTO isn’t just a colossal waste of everyone’s time. As far as I know, Rose’s findings have yet to be disproved.

Exhibit B is this report by the Carnegie Endowment for International Peace, and more broadly, the family of Applied General Equilibrium (AGE) models economists use to simulate the likely impact of a trade agreement. These are, basically, fantastically complicated systems of equations meant to approximate the operation of the world economy based on standard, neoclassical assumptions of perfect competition and constant returns to scale. The Carnegie research suggests that a successful Doha Round deal would expand worldwide economic welfare by $40 to $60 billion per year.

That sounds like a lot of money, but when you figure it in relative terms, you realize we’re talking about 0.15-0.20% of world income. That’s a fifth of a penny on the dollar! Even in the (totally unrealistic) scenario of full trade liberalization (i.e. zero tariffs and quotas for all products in all markets) we’re still talking about just a 0.53% boost in world GDP. The World Bank’s model, which seeks to capture dynamic efficiency gains as well as static gains, puts the income boost from full liberalization at just under 1% of world GDP, and gains from a plausible Doha deal at about 0.35%. However you tweak the model, these are not large numbers.

Surely, it’s possible to pick nits with these models – which don’t consider service liberalization or intra-industry trade arising from imperfect competition and increasing returns to scale. But then, nobody can figure out a way to put numbers to those things. For all their faults, the AGE models are the best models we have, and together with Rose’s historical research they tell a fairly convincing and consistent story: you can credit the WTO for preventing the sort of cataclysmic collapse in world trade flows we saw in the 1930s, you can credit it for bringing a measure of institutional predictability to world trade, but you can’t argue it has made (or is likely to make) a big difference in the world economy, whether for better or for worse.

Which, of course, brings us back to the start of the post…if a Doha Round agreement is likely to make little if any difference to the world economy, why do soooo many people get so fantastically hot-under-the-collar about the WTO? I think the answer hinges on two facts: first, while on aggregate the WTO doesn’t make much difference, for a few specific people working in a few specific industries in a few specific countries it does make a big difference, and second, those people have strong incentives to try to persuade the rest of us that the sky will cave in if the WTO does (or doesn’t) reach a new agreement.

At the same time, the WTO’s grandiloquent title tends to make it sound far weightier than it really is – would there really be massive street protests if the organization had been named more descriptively? Would Seattle had been trashed to protest a meeting of the International Standing Committee for the Partial Harmonization of Tariffs and Other Trade Practices? I doubt it.

(But then, would I have chosen to write a dissertation on such a body??…hmmmm…better not go there…)