Posted June 8, 2006:
Are you confused about the various numbers being bandied about
that purport to quantify the 2015 gains to be had by World
Trade Organization (WTO) trade liberalization? Are the gains
for the world $832 billion, or $520 billion, or $287 billion,
or $96 billion? How about the developing countries who are
the focus and rationale for this round of trade negotiations?
Will they gain $539 billion, or $350 billion, or $128 billion
or a mere $32 billion?
We work with these numbers and the reports they come from
on a regular basis and we still struggle to keep them all
straight. If the stakes were not so high, we would be inclined
to shrug off the differences in the results of the various
models as inconsequential. But with this round of trade negotiations
being driven by an attempt to help the least developed countries
of the world, and with agriculture playing a big role in the
discussions, we can ill afford to ignore these differences.
The often made argument is that the rich U.S. and European
farmers are going to have to give up their subsidies so that
140 million people can be lifted out of poverty. In the U.S.,
we see organizations bringing poor developing country farmers
on tour as they argue against U.S. subsidies. As a result,
the stakes in understanding the various numbers have never
Let’s focus on two of the major reasons for this cascade
of changing results. The first is a change in the database
used to develop the trade models. The second is a matter of
which scenario is publicized. Let us look at these one at
a time, setting aside other methodological problems.
There has been a change in the GTAP (Global Trade Analysis
Project) database that is being used in most major models.
Sandra Polaski, in Winners and Losers: Impact of the Doha
Round on Developing Countries, writes, “The update
of the GTAP database is a major factor explaining some large
differences in results among different models that have been
used to simulate outcomes of the Doha Round since negotiations
were launched in 2001.”
The older databases are based on world conditions as of 1995
(GTAP 4) or 1997 (GTAP 5). “Models that use earlier
versions of GTAP (GTAP 5 or earlier) overstate the gains that
can be achieved from further trade liberalization in the Doha
Round. . . . They count as potential Doha Round gains many
changes that already were secured through the Uruguay Round
or through accession of new WTO member countries. These changes
include tariff reductions under the Uruguay Round, the end
of the global apparel quota system, and the accession of China
to the WTO,” Polaski explains.
Another lapse is the failure to recognize that some developing
countries are the beneficiaries of previously negotiated trade
preferences with specific countries or sets of countries.
These already enjoyed preferences are counted as gains in
the older models, thus inflating the benefits of trade liberalization.
Frank Ackerman in “The Shrinking Gains from Trade: A
Critical Assessment of Doha Round Projections” notes
that some earlier forecasts “did not completely anticipate
the rapid pace of recent reductions in trade barriers, the
rapid growth of East Asian economies, and other economic changes
that affect the models.” The consequence of these and
other problems is that the earlier models overstate the gains
that would result from trade liberalization.
In addition to including impacts that occurred prior to and
independent of the Doha Round, a second major cause of differences,
even in models using the same database, is the various scenarios
being studied and publicized. Most models begin with a full
trade liberalization scenario that includes the elimination
of all trade distorting subsidies and all tariffs. The full
trade liberalization scenarios, as would be expected, generate
the greatest gains from trade negotiations. The problem with
the projections based on these scenarios is that most analysts
consider the chances for full trade liberalization to be slim
To better cover the range of possibilities, modelers usually
make a number of runs that assume varying degrees of trade
liberalization. Not unexpectedly, the results are smaller
than for full liberalization. Study authors usually then designate
one scenario as the “likely result of the Doha Round.”
The “most likely” and “full” liberalization
scenarios are featured, often confusingly, in press releases
and press conferences.
Table 1 summarizes the numbers we have talked about and where
they fit in to our analysis:
It is common for print and online stories to not clearly
specify which study time-frame and scenarios are being referred
to. Often this results in a contradiction between the numbers
the writers are using and the policies that are being analyzed
in the story. If one is going to refer to trade liberalization
studies, it is misleading to quote numbers from an outdated
study or from a study that assumes full liberalization. In
terms of World Bank WTO studies, it is our opinion that the
last line of the table is the best set of numbers to quote.
There are two extremely important caveats that need to be
made when even these numbers are being reported. The first
is that the “most likely” designations are probably
now too optimistic. The second is that there are a host of
methodological issues that may cause continued overestimation
of trade liberalization benefits. These include the assumptions
that (1) there is no voluntary unemployment and (2) governments
are able to seamlessly transition from relying on tariffs
to other sources of revenue.