The World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), were set up to promote world trade. Supporters say it is self-evident that global trade has been boosted by the removal of trade restrictions, but in a rare analysis of this question, Andrew Rose (Professor at the Haas School of Business of the University of California) called into question the effectiveness and, hence, usefulness of the WTO (see IMF Survey, August 18,2003). In a new IMF Working Paper, Arvind Subramanian (Advisor, African Department) and Shang-Jin Wei (Head of the Trade Unit, Research Department) attempt to reconcile the inconsistency between the apparent benefits of the WTO and Rose’s conclusion. And, in another Working Paper, Aaditya Mattoo (Lead Economist, Development Economics and Research Group, World Bank) and Subramanian propose a new architecture for the WTO that would foster development. They spoke with Christine Ebrahim-zadeh of the IMF Survey.
IMF Survey: Rose found no evidence that the WTO has increased world trade. Shang-Jin, Arvind, did you launch your own study to respond to his findings?
IMF Survey: How does your approach differ from Rose’s?
But perhaps most important, we do not just aggregate all trade but break it down into different categories: developed versus developing countries; developing countries that became members of the WTO after it was created versus pre-WTO (GATT) members; and trade in protected sectors, such as textiles and clothing and agriculture, versus trade in unprotected sectors. The reason for distinguishing between these various categories is that liberalization under the WTO has not been uniform. For example, industrial countries negotiated down their tariff barriers whereas developing countries availed themselves of “special and differential treatment” that allowed them the freedom not to liberalize. Similarly, while industrial countries reduced their barriers very substantially during the postwar period, they exempted their clothing and agricultural sectors.
IMF Survey: And what are your main conclusions?
IMF Survey: Does this imply that developing countries have indeed benefited from WTO membership?
IMF Survey: Do your findings have any implications for the future of the WTO?
IMF Survey: Much of the discussion surrounding the Doha Round has centered on the need to integrate more fully the needs and concerns of developing countries into the trading system. Aaditya, Arvind, you take a different approach by proposing a development-friendly WTO architecture. What purpose would this serve, and what would it look like?
Second, how can WTO rules foster liberalization while dealing with the inevitable political opposition? This task is particularly difficult because the rules will have to apply to a highly disparate membership, encompassing the United States and the European Union, on the one hand, and India and China, on the other. We believe that flexibility is a key principle. But flexibility is a two-edged sword: if there is too little, the implied rapid pace of integration may be politically unacceptable. But pushed too far, flexibility can easily degenerate into haphazardness.
We suggest a set of principles. For example, countries should not discriminate between domestic and foreign products and suppliers once the latter have entered the domestic market. Pre-entry restrictions are permitted, but there should be a presumption that they take the form of more efficient fiscal instruments like taxes rather than quotas.
IMF Survey: Which countries are likely to benefit from your proposed architecture?
IMF Survey: What would it take to put such a system into effect?
IMF Survey: Is that likely to happen?
If labor were to move across borders, the political difficulty would be even greater, but the benefits could be huge. Take health care. It seems obvious that with the aging of their population and the explosion in their health care costs, the United States and other industrial countries have a lot to gain by finding lower cost sources of healthcare provision. According to some estimates, the costs of a heart by-pass procedure in India are about one-twentieth of those in the United States. There is a strong case for eliminating restrictions in trade in medical services through WTO negotiations. So the sheer desirability of what we are proposing will, we hope, make it more likely to happen.
Copies of IMF Working Paper No. 03/185, “The WTO Promotes Trade, Strongly But Unevenly,” by Arvind Subramanian and Shang-Jin Wei, and IMF Working Paper 03/153, “What Would a Development-Friendly WTO Architecture Really Look Like?” by Aaditya Mattoo and Arvind Subramanian, are available for $15.00 each from IMF Publication Services. Please see page 29 for ordering details. The full texts are also available on the IMF’s website (http://www.imf.org).