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July 23, 2008

Who Benefits from the WTO?

The trade organization doesn’t treat rich and poor nations the same, but all members can gain from collective negotiations.



Almost from its start, the World Trade Organization (WTO) has been controversial. The WTO has its origins in the General Agreement on Tariffs and Trade (GATT), a treaty signed by the United States and 22 other countries in 1948 that was intended to promote trade by eliminating tariffs. By 1994, 125 countries had joined the GATT, and they decided to upgrade their arrangements by creating the WTO, an international organization that would have a greater authority and a more efficient mechanism to adjudicate trade disputes among its members.

Divisions soon arose, however, between developed and developing nations, rooted in questions about which group benefited more from liberalizing trade. Today, supporters of the WTO argue that its success is self-evident: it has increased global trade and continues to fulfill its mission. Detractors say that the WTO’s approach helps rich countries at the expense of poor countries. (But this criticism hasn’t stopped many developing nations from trying to get in; most famously, China sought admission for 15 years before finally making the cut in late 2001.)

An influential 2002 paper declared that any benefits from the WTO were an illusion since the trading volume between members and nonmembers differed little. Professor Shang-Jin Wei, working with Arvind Subramanian of the Peterson Institute for International Economics and Johns Hopkins University challenged this finding in a recent paper.

Wei and Subramanian found that the WTO has an enormous effect on member countries — world imports were higher in those countries by roughly 120 percent, or about $8 trillion dollars in 2000 alone, thanks to its provisions. But the researchers found that these benefits were not distributed evenly. “The WTO makes a huge difference,” Wei says, “but not in a symmetrical pattern — and that’s intentional. It has always been nonuniform, by design.”

The researchers discovered several key differences in how the WTO functions for developed and developing nations. One key difference they found is that the WTO does boost trade more for rich countries than for poor countries. Although this may seem unfair, it follows directly from the GATT’s structure. “During much of GATT’s history, developing countries were given a free pass,” Wei says. “They didn’t have to do much to reduce their trade barriers. It was the principle of ‘special and differential treatment.’ So it’s no surprise that you don’t see much of an effect on developing countries’ trade volume.”

Things are different for developing nations that joined the GATT later or joined once the WTO had replaced the GATT, and the researchers argue that such countries have gained the most. “In the latest round of negotiations, members tightened up the ascension criteria,” Wei explains. “Countries that joined the GATT after 1990 or joined the WTO had to implement more reforms, and these nations have seen faster growth in their international trading volume.”

Wei noted the case of China, a new WTO member that has seen explosive growth in the last 35 years and especially in the last decade, an effect he attributes in part to the reforms China instituted in its years of seeking WTO membership. “Some older member countries that didn’t have to undergo reforms haven’t derived many more benefits than nonmembers and probably fewer than newer members,” Wei adds.

The researchers also examined which economic sectors benefited from trade liberalization. Although the WTO was purportedly intended to remove trade barriers, many sectors were exempt, including agriculture, steel, clothing and textiles. The researchers found that those sectors that were subject to negotiated reforms under the GATT/WTO saw greater increases in trade volume.

The researchers’ findings have implications for future WTO negotiations, including the ongoing Doha round. “There are asymmetries in the WTO, but countries can organize exchanges,” Wei says. “Developing countries should be willing to undergo reforms in exchange for rich countries’ dropping their own barriers, particularly in agriculture.”

In many cases, Wei says, negotiations need more finessing than a simple bilateral agreement — for example, the United States wants to expand its banking business in India, which wants to export more agricultural products to the European Union, which in turn wants to increase its manufacturing and banking exports to the United States and India. “In this case, countries may be reluctant to take down their trade barriers on their own,” Wei says. “But they can work within the WTO system to negotiate for a coordinated reductions in trade barriers across these countries. It doesn’t guarantee success — and negotiations can take years — but coordinating countries’ varying trade goals will increase the chance of success.”


Shang-Jin Wei is the N. T. Wang Professor of Chinese Business and Economy in the Finance and Economics Division at Columbia Business School.

Read the Research

Arvind Subramanian, Shang-Jin Wei

"The WTO Promotes Trade, Strongly but Unevenly"

View abstract/citation  Download PDF   View Research  

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