March 16, 2006
Ute S. Frey
UC Berkeley Haas School of Business
UC Berkeley Haas School of Business
Economists generally agree that joining the European Monetary Union (EMU) is a colossal waste of time and money but World Trade Organization (WTO) membership guarantees an improved economic outlook. However, UC Berkeley Haas School of Business Professor Andrew Rose 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 debates.
Rose’s research is based on detailed models of trade that factor in such variables as the distance between countries, common language, and history. In his common currency research, Rose also relied on United Nations trade data for 186 countries between 1970 and 1990. He detailed his findings in his article, “One Money, One Market: The Effect of Common Currencies on Trade” (Economic Policy, April 2000).
Extrapolating from data on the economic results of monetary unions primarily 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.
Rose does add a caveat, however. “We can’t be sure the same effects we have estimated for a collection of countries that are small, poor, or both can be extended to large, rich countries such as those in the EMU,” Rose acknowledges in his research. But he has no choice but to heavily rely on data from such countries because they were the only ones in currency unions prior to the launch of the EMU.
Although data are preliminary, the consensus estimate among economists is that trade inside the EMU has already increased by 15 percent.
"Unions make prices become more transparent," says Rose, explaining one reason behind the increase in trade. 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," explains Rose, director of the Clausen Center for International Business and Policy and the Bernard T. Rocca Jr. Professor of International Business at the Haas School.
Rose is also making waves among both globalization advocates and detractors with his study on the WTO, the first research to test whether the international trade body is responsible for the increases in trade over the last 50 years. The latest round of trade talks among the WTO’s 149 member countries, called the Doha round, is currently hung up on cutting rich countries’ farm subsidies and tariffs, a vital issue to poorer nations that rely heavily on farm trade.
But in examining whether countries inside the WTO trade more than countries outside, Rose came to the startling discovery that there is no difference. He outlined his WTO findings in his article, “Do We Really Know that the WTO Increases Trade?” (American Economic Review, March 2004).
"Those on both sides of the globalization debate think a lot rests on whether the current round of trade liberalization succeeds or fails," Rose comments. "But my analysis reveals that such rounds really have no effect on trade, good or bad."
Instead, Rose suggests steep reductions in transportation, communication, and shipping costs could be partly responsible for trade increases.
Rose himself wondered how 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, a frequent source of research ideas. On this occasion, the inspiration came when Asher wanted to visit the lounge during a stopover in the Singapore airport.
"I said we could do so if he would refrain from running around and screaming, and he agreed,” Rose recounts. “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."