THE IMPACT OF REGIONALISM

AND MULTILATERALISM FOR

DEVELOPING COUNTRIES: THE

GRAVITY APPROACH

By

Blasetti Eugenia, De Marinis Marta, Urzi Alessandra

THE DEBATE ON MULTILATERAL AGREEMENT

Why is that important in relation to developing countries?

The answer lies in different assumptions which drive economicpolicies:

The neoliberal paradigm that sees international trade as animportant factor for the development of poor countries and theirintegration into the global economy.

On the other hand, the ‘unfairness’ nature of international trademay actually seem to be useless and irrelevant for poor countries.Side effects could also affect rather than develop their weakindustrial sectors and internal markets.

INTERNATIONAL BILATERAL AND MULTILATERAL AGREEMENTS

To increase international trade, bilateral and multilateralagreements have been established.

� FTA: Is an agreement between two or more countries toestablish a free trade area where commerce in goods andservices can be conducted across their common borders,without tariffs or hindrances.

� GSP: is a preferential tariff system which provides non-reciprocal concessions under which countries allow duty-freeor low-duty entry to imports from selected countries.

GATT/WTO

GATT/WTO is a multilateral organization which had been established topromote international free trade, spelling out the principles ofliberalization.

The agreements cover goods, services and intellectual property.

By taking part in it, the individual countries’ commitments is to lower customstariffs and other trade barriers, and to open services markets.

These agreements are not static: they are renegotiated from time to timeand new agreements can be added to the package.

It is also provided with independent body to conduce procedures to settledisputes.

THE GATT/WTO’s PRINCIPLES

� MFN: is the non-discrimination requirement.

It is a method of establishing equality of tradingopportunity among states by guaranteeing equal tradeopportunity to that accorded to the Most-favoured Nation.

� RECIPROCITY: is the mutually agreed reductions oftrade barriers.

It refers to the idea of mutual changes in trade policy whichbring about changes in the volume of each countries’ importsthat are of equal value to changes in the volume of itsexports

GATT/WTO ROUNDS

2313

38

26 26

62

102

123

1947 -GENEVA

1949 -ANNECY

1951 -TORQUAY

1956 -GENEVA

1961 -DILLION

1967 -KENNEDY

1979 -TOKYO

1994 URUGUAY -

WTO

NUMBER OF COUNTRIES IN GATT/WTO

WTO’s MEMBERSHIP STATUS 2014

THE GRAVITY EQUATION

Basi

c ass

um

ptions

� OMITTED VARIABLE – use of different framework ofspecification

� BIAS OF MISPECIFICATION: Include more proxy variablescorrelated with the omitted variable

� BIAS OF HETEROGENEITY: include panel data to accountfor time dimension (Fixed Effects)

� FIT IN with the model:

� R-squared

� Mean Squared error

A MATTER OF DUMMIES…

WTO

FTA

GSP

Adopting a dummy strategy focuses on aggregate effects,uses aggregated data:

� The trade effect of the preferential trade policy is themarginal effect of a dummy variable that takes thevalue of one if the preferential trade policy affects theimports (or/and export) of country i from country j

� Disadvantages - all countries included in a treatedgroup are assumed to be subject to the same dose oftreatment which:� may be correct in the case of non discriminatory policy,

e.g. the Most Favored Nation (MFN) clause of theGATT/WTO agreement

� but false in the case of non reciprocal preferentialagreements (GSP)

� the treatment gets confounded with any other event that isspecific to the country-pair and contemporaneous to thetreatment.

Published on «The American Economic Review» in 2004

By Andrew Rose

DO WE REALLY KNOW THAT

WTO INCREASES TRADE?

OBJECTIVE OF ROSE’s THE ANALYSIS…

…Is to understand wether the WTO and predecessorGATT have actually boosted trade.

� The author, through the analysis conducted using GM,concludes that GATT/WTO's impact is not assystematically significant as portrayed and describedin the main literature.

� Furthermore, he finds that GSP extended from theNorth to developing countries approximately doubles

trade.

A PRELIMINARY LOOK: GRAPHICAL “EVENT STUDIES”

A PRELIMINARY LOOK: GRAPHICAL “EVENT STUDIES”

THE SEXY PART

� The event studies seen above provides little evidencethat membership in the GATT/WTO stimulates trade.However those results may not be completelypersuasive

� To is isolate the effects of the multilateral tradingsystem Rose runs a Standard Regression Analysis, andsensitive analysis, using:• OLS

• Country Fixed Effects

• Year specific Fixed Effects

THE GRAVITY EQUATION

With:• culture, geography and history as dummies to take into account extra conditions

variables

• as the parameters of Rose’s interest.

…see Table 1*

…SHIFT IN THE DATA SET

CROSS-SECTIONAL DATA:

• The parameters are observed in individual years

at 5 year intervals.

• It does not take into account, as in panel data, the time

series dimension.

… RETURNING TO PANEL DATA: GATT ROUNDS

Country-pair

fixed effects

capture the “within”relation:

What does joining the GATT do to the trade

flow pattern over time for a given

country pair?

NEW CATEGORIES…

ANALYSIS ON MORE RECENT YEARS…

DYNAMIC ANALYSIS:

Is to take into account the development of trade

flows over time.

ROSE’S CONCLUSIONS

� Rose has called into question the effectiveness and hence the usefulness of the GATT/WTO as a multilateral institution.

� According to him, his results are robust: while the GSP

encourages trade, the membership in the GATT/WTO

seems not to have an economically or statistically

significant effects on trade. However he holds such results to be a mystery…

…see table 8*

Published on «The American Economic Review» in 2007

By Tomz, Goldstein & Douglas

DO WE REALLY KNOW

THAT WTO INCREASES

TRADE?

COMMENTS

THE ROLE OF MEMBERSHIP

� Formal Members

� Non-member Participants:

� Colonies

� Newly independent states

� Provisional members (de facto participants)

����Treating this category as outsiders leads to systematic downward bias inestimating the effect of the GATT/WTO

TOMZ et al. GRAVITY REGRESSION

While Rose finds that membership in GATT/WTOdoesn’t have a positive impact on trade flows…

Tomz et al., by re-adjusting membership variables, findpositive economically and statistically consistent results.

� Use of fixed effects for years and country-pair

….see table 2*

GATT ROUNDS

NEW CATEGORIES

SHIFT IN DATA SET…

TOMZ et al.’s CONCLUSIONS

Rose’s mystery is solved:

The negative effect of the multilateral trade systemstudied, is here explained as a consequence ofoverlooking the role of non-member participants.

Indeed the GATT created rights and obligations notonly for formal contracting parties but also forcolonies, newly independent states and provisionalmembers, thus enhancing trade.

Published on «The Journal of Inernational Economics» in 2007

By ARVIND SUBRAMANIAN & SHANG-JIN WEI

THE WTO PROMOTES TRADE,

STRONGLY BUT UNEVENLY

THE OBJECTIVE OF THE ANASYSIS IS TO…

…criticize Rose’s work by giving robust evidence thatWTO has strong positive impact on trade, howeverunequally since it depends on:

� What the country does with its membership

� With whom the country negotiates

� Which products the negotiation covers.

THE 4 ASYMMETRIES GENERATED BY THE GATT/WTO

1) Developed vs developing members

2) Imports of members from other members vsimports from non-members

3) Liberalized vs exempted sectors

4) New vs old developing countries

DIFFERENCES BETWEEN THE TWO GRAVITY MODELS

� Use the average of trade flow from country j to country k

� Year and Country pair fixed effects

� Considers GSP, FTA and WTO as additive dummies

� Only focus on import flows from country k to country j.

� Time varying importer and exporter fixed effects (Multilateral Resistance)

� Decompose GSP, FTA and WTO dummies to isolate their specific impact

ROSE SUBRAMANIAN & WEI

1° ASYMMENTRY: DEVELOPED vsDEVELOPING COUNTRES

The FTA, GSP and WTO dummies are separated in order to capture their own effect. Those are also related to the categories of developed and developing countries.

2° ASYMMETRY:IMPORTS FROM MEMBERS

vs IMPORTS FROM NON-MEMBERS

Each dummy is further disaggregated into two dummies to underline the role of the membership of the importer and exporter country. This specification give informations not just on who liberalized, but also who this liberalization was done with.

…see table 4*

3° ASYMMETRY: ASYMMETRY BETWEEN SECTORS

Where S is an index representing the five sectors for which this equation isestimated:

• Liberalized manufacturing• Clothing• Footwear• Agriculture• Other highly protected manufacturing

4° ASIMMETRY: NEW VS OLD DEVELOPING COUNTRIES MEMBERS

Is to check if there had been any change in the tradingpatterns of GATT/WTO members in recent past:

� Developing countries have always benefitted from aSpecial and Differential Treatment, under the GATT(before 1995)

� With the Uruguay Round and the establishment of WTO,developing countries have been required to take on moreobligations to liberalize their trade regimes (after 1995)

…see table 7*

SUBRAMANIAM & WEI’S CONCLUSIONS

� Rose’s analysis implies that the GATT/WTO, whose raison d'être is to promotetrade, has failed to do so. While Subramanian & Wei’s paper shows that theGATT/ WTO has done a splendid job of promoting trade.

� The unevenness emerged is related to four asymmetries in the system, analizedabove. The results suggest that:

� There has been little impact of WTO membership on developing countries'imports;

� However, the positive impact of WTO membership on industrial country importsmeant that developing countries exports also increased significantly

� Indeed, despite not liberalizing themselves sufficiently, developing countriesenjoyed at least some of the benefits of industrial country liberalization,notwithstanding the exclusion of the 5 sectors

����These unreciprocated benefits pose a challenge to the theory of the GATT/WTO,which merits further research.

FINAL CONCLUSIONS….

METHODOLOGICAL ISSUES

In recent studies, the linear prediction of trade flows has been recognizedas limited.

Indeed, questions related to the effect of a gradual liberalization in tradepolicies cannot be answered using dummies, and the trade elasticity totrade policy changes cannot be estimated. Since this is the most commonevent the use of a dummy for preferential trade policy can be a relevantshortcoming.

���� Alternatives exist:

� Switching from a dummies strategy to a continuous variables strategy,quantifying the preferential margin that the preferential agreementguarantees.

� Using the matching econometrics strategy.

THEORETICAL ISSUES

The different theories here presented have shown how controversial the debateover the impact of expanded multilateral trade system, is.

In relation to developing countries, the most convincing and most precise theory,to us, seems to be that of Subramanian and Wei. By underlining the inequalitiesexperienced by less developed countries, as a consequence of relations inmultilateral trade agreements, they, in fact, deliver the most comprehensive andexhaustive analysis.

Indeed, beyond the gravity analysis, and despite the WTO eagerness to improvemarket access, fears remain that trade liberalization with large industrializednations will:

� Erode infant industrial sectors, hindering the process of economic development

� Increase inequalities amongst global economic areas

� Not take into account the social and environmental sustainability in boosting thegrowth of specific sectors.