CalBusiness

 

Summer 2005

Power of Ideas

 

Does It Pay to Join the Club?

Professor Andrew Rose finds that World Trade Organization membership does not increase trade.

 

By Marguerite Rigoglioso

 

Andrew Rose is the B.T. Rocca Jr. Professor of International Business at the Haas School of Business.


It is a commonly held belief among economists that joining the European Monetary Union (EMU) is a colossal waste of time and money, but that being part of the World Trade Organization (WTO) guarantees an improved economic outlook, according to Haas Professor Andrew Rose. Rose, however, has found just the opposite: membership in the WTO does not result in increased trade, while membership in the EMU does. His controversial findings have been at the heart of some major international policy debates of late, particularly in Great Britain, where the decision on whether to become part of the EMU is a hotly contested issue.


Extrapolating from data on the economic results of monetary unions in Latin America and Africa, Rose predicts that trade between any two countries in the EMU will eventually triple. "That's a big effect and would certainly swamp any costs associated with monetary unification," he observes. Although data are preliminary, the consensus estimate among economists is that trade inside the EMU has already increased by 15 percent.


As to why that is the case, Rose says, "unions make prices become more transparent." That is, wholesalers and consumers in France, for example, can now more easily understand and compare the price of goods and services coming from Germany. Moreover, wholesalers and distributors do not have to worry about exchange-rate risk. "All of this makes it easier for goods and services to pass across borders," he explains. As the UK prepares for its election, pro-EMU politicians are relying on Rose's research to make their arguments, while opposition leaders are busy denouncing him in the House of Commons.


Rose is also making waves among both globalization advocates and detractors with his study on the WTO, the first research to test whether increases in international trade over the past 50 years can be attributed to the presence of this institution. In examining whether countries inside the WTO trade more than countries outside, he came to the startling discovery that there is no difference. "Those on both sides of the globalization debate think a lot rests on whether the current round of trade liberalization succeeds or fails," he comments. "But my analysis reveals that such rounds really have no effect on trade, good or bad." As to what does account for trade increases, Rose suggests that steep reductions in transportation, communication, and shipping costs could in part be responsible.


Rose himself wondered how it could be that WTO status actually proves to have such little influence on members' trade relationships with each other. The answer, he says, was inspired by his five-year-old son Asher (whom he notes frequently serves as a source of ideas for his research). "We were in the Singapore airport for a stopover, and Asher wanted to go to the lounge," Rose recounts. "I said we could do so if he would refrain from running around and screaming, and he agreed. As soon as we got into the lounge, he went wild. I sat him down and said, hey, we had a deal that you wouldn't run around. And he said, yes Dad, but now I'm in!"


"That turns out to be exactly what happens with the WTO," Rose continues. "Countries make all sorts of promises to lower tariffs, reduce quotas, and so forth, in order to get into the organization, but once they're in they don't change their behavior. That affects the amount of trade that is possible between them."


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Henry Chesbrough, Ph.D. 97

Andrew Rose

 

"Those on both sides of the globalization debate think a lot rests on whether the current round of trade liberalization succeeds or fails...But my analysis reveals that such rounds really have no effect on trade, good or bad."