What Has the WTO Ever Done for Us?

On January 1^st, the WTO will celebrate its 25^th birthday. Whether it is looking forward to a rosy future is however uncertain. Their largest members, the US and China escalate their tariff disputes outside the organization. At the same time, the US’s blocking of the Appellate Body risks damaging the whole institution. The US and China should think twice though: together with Germany, they are among the largest beneficiaries of the rules-based trading system.

Gütersloh, 30 December 2019

A membership that pays off: The USA, China and Germany are the countries that benefit the most worldwide from their accession to the WTO. They achieve by far the largest income gains, which are directly attributable to their membership in the trade organization.

For the United States, income gains amount to about 87 billion US dollars (measured in gross domestic product, GDP). The Chinese generate income gains of about 86 billion US dollars and the Germans about 66 billion US dollars. These are the results of a recent study commissioned by the Bertelsmann Stiftung, for which the authors Felbermayr, Larch, Yotov and Yalcin calculated the wealth effects of WTO membership for 180 countries worldwide, including all 164 member states.

The whole of the WTO membership achieved a total increase in prosperity of around 855 billion US dollars. This corresponds to about average gain of 4.51 percent of GDP per member country. But membership in the world trade club is also good business for most countries, in addition to the top winners. For example, EU members benefit together with 232 billion and OECD countries with a total of 480 billion US dollars. But the success story also has its downsides: Countries that are not members of the WTO are losing out – on average -0.96 percent per country – due to the greater economic integration of WTO members.

WTO benefits: Nations with strong exports benefit the most

“The WTO is the operating system of the world economy that ensures that goods and services can be traded in a stable and rule-based environment on a daily basis. Even if no organization is perfect, anyone who believes they can rely on a system of bilateral trade agreements instead of the WTO risks enormous losses of prosperity in international trade,” says Christian Bluth, trade expert at the Bertelsmann Stiftung.

According to the analysis, nations with strong exports and production are the main beneficiaries of membership. This is true for Germany and South Korea (around USD 31 billion in GDP growth) as industrial and innovation locations, but also for Mexico (around USD 58 billion in GDP growth) and China.

The WTO works: internally and externally

The WTO brings together several treaties under one roof which create an environment of low tariffs for its member states and maintains them stable over a long period of time. Such a predictable environment is good for exporters and leads to the emergence of complex international value chains.

But this system is coming under increasing pressure. Since 11 December, the Appellate Body of the WTO Dispute Settlement Mechanism is no longer quorate, so trade disputes can no longer be conclusively judged. “A rule-based system cannot exist for long without the enforcement of rules,” said Bluth, adding that “the WTO urgently needs an update in order to continue to generate prosperity.

Additional information

The study uses state-of-the-art econometric techniques to estimate the causal effect of WTO membership. It is based on long-term panel data sets (1980-2016). Taking into account economies of scale through international market integration, trade and wealth effects are calculated based on estimates of a Pseudo-Poisson Maximum Likelihood (PPML) method.