Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-24T11:03:19.642Z Has data issue: false hasContentIssue false
  • English
  • Français

International Institutions and the Volatility of International Trade

Published online by Cambridge University Press:  02 October 2008

Edward D. Mansfield  and
Eric Reinhardt
Edward D. Mansfield
Affiliation:
Christopher H. Browne Center for International Politics at the University of Pennsylvania, Philadelphia. E-mail: [email protected]
Eric Reinhardt
Affiliation:
Emory University, Atlanta, Ga. E-mail: [email protected]
Get access

Abstract

During the past half-century, states have established a large number of international trade institutions, both multilateral and regional in scope. The existing literature on this topic emphasizes that these agreements are chiefly designed to liberalize and increase the flow of overseas commerce. Yet such institutions have another function that has been largely ignored by researchers, namely, reducing volatility in trade policy and trade flows. Exposure to global markets increases the vulnerability of a country's output to terms of trade shocks. Governments seek to insulate their economies from such instability through membership in international trade institutions, particularly the World Trade Organization (WTO) and preferential trading arrangements (PTAs). We hypothesize that these institutions reduce the volatility of overseas commerce. We further hypothesize that, because market actors prefer price stability, trade institutions increase the volume of foreign commerce by reducing trade variability. This article conducts the first large-scale, multivariate statistical tests of these two hypotheses, using annual data on exports for all pairs of countries from 1951 through 2001. The tests provide strong support for our arguments. PTAs and the WTO regime significantly reduce export volatility. In so doing, these institutions also increase export levels.

Type
Research Article
Information
International Organization , Volume 62 , Issue 4 , October 2008 , pp. 621 - 652
Copyright
Copyright © The IO Foundation 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abbott, Frederick M. 2000. NAFTA and the Legalization of World Politics: A Case Study. International Organization 54 (3):519–47.CrossRefGoogle Scholar
Adserà, Alicia, and Boix, Carles. 2002. Trade, Democracy, and the Size of the Public Sector: The Political Underpinnings of Openness. International Organization 56 (3):229–62.CrossRefGoogle Scholar
Aizenman, Joshua. 2003. Volatility, Employment, and the Patterns of FDI in Emerging Markets. Journal of Development Economics 72 (2):585–601.CrossRefGoogle Scholar
Anderson, James E., and van Wincoop, Eric. 2003. Gravity with Gravitas: A Solution to the Border Puzzle. American Economic Review 93 (1):170–92.CrossRefGoogle Scholar
Bagwell, Kyle, and Staiger, Robert W.. 2002. The Economics of the World Trading System. Cambridge, Mass.: MIT Press.CrossRefGoogle Scholar
Baltagi, Badi H., Egger, Peter, and Pfaffermayr, Michael. 2003. A Generalized Design for Bilateral Trade Flow Models. Economics Letters 80 (3):391–97.CrossRefGoogle Scholar
Bernhard, William, and Leblang, David. 2006. Democratic Processes and Financial Markets: Pricing Politics. New York: Cambridge University Press.CrossRefGoogle Scholar
Blackhurst, Richard. 1998. The Capacity of the WTO to Fulfill Its Mandate. In The WTO as an International Organization, edited by Krueger, Anne O., 31–58. Chicago: University of Chicago Press.Google Scholar
Blonigen, Bruce A., and Bown, Chad P.. 2003. Antidumping and Retaliation Threats. Journal of International Economics 60 (2):249–73.CrossRefGoogle Scholar
Botcheva, Liliana, and Martin, Lisa L.. 2001. Institutional Effects on State Behavior: Convergence and Divergence. International Studies Quarterly 45 (1):1–26.CrossRefGoogle Scholar
Braumoeller, Bear F. 2006. Explaining Variance: Or, Stuck in a Moment We Can't Get Out of. Political Analysis 14:268–90.CrossRefGoogle Scholar
Broda, Christian. 2004. Terms of Trade and Exchange Rate Regimes in Developing Countries. Journal of International Economics 63 (1):31–58.CrossRefGoogle Scholar
Busch, Marc L., Raciborski, Rafal, and Reinhardt, Eric. 2007. Does the WTO Matter? US Antidumping Investigations and the Rule of Law. Unpublished manuscript, Department of Political Science, Emory University, Atlanta, Ga.Google Scholar
Busch, Marc L., and Reinhardt, Eric. 2003. Developing Countries and GATT/WTO Dispute Settlement. Journal of World Trade 37 (4):719–35.Google Scholar
Correlates of War Project. 2003. State System Membership List Version 2002.1. Available at ⟨http://correlatesofwar.org⟩. Accessed 26 February 2008.Google Scholar
Davis, Christina L. 2004. International Institutions and Issue Linkage: Building Support for Agricultural Trade Liberalization. American Political Science Review 98 (1):153–69.CrossRefGoogle Scholar
Desai, Mihir A., and Hines, James R. Jr. 2004. Market Reactions to Export Subsidies. NBER Working Paper 10233. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Devereux, Michael B., and Lane, Philip R.. 2003. Understanding Bilateral Exchange Rate Volatility. Journal of International Economics 60 (1):109–32.CrossRefGoogle Scholar
Downs, George W., Rocke, David M., and Barsoom, Peter N.. 1996. Is the Good News About Compliance Good News About Cooperation? International Organization 50 (3):379–406.CrossRefGoogle Scholar
Drabek, Zdenek, and Bacchetta, Marc. 2004. Tracing the Effects of WTO Accession on Policy-Making in Sovereign States: Preliminary Lessons from the Recent Experience of Transition Countries. World Economy 27 (7):1083–125.CrossRefGoogle Scholar
Easterly, William, and Kraay, Aart. 2000. Small States, Small Problems? Income, Growth, and Volatility in Small States. World Development 28 (11):2013–27.CrossRefGoogle Scholar
Edwards, Sebastian, and Levy-Yeyati, Eduardo. 2003. Flexible Exchange Rates as Shock Absorbers. NBER Working Paper 9867. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Edwards, Sebastian, and Magendzo, I. Igal. 2003. A Currency of One's Own? An Empirical Investigation on Dollarization and Independent Currency Unions. NBER Working Paper 9514. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Eichengreen, Barry, and Irwin, Douglas A.. 1995. Trade Blocs, Currency Blocs, and the Reorientation of World Trade in the 1930s. Journal of International Economics 38 (1–2):1–24.CrossRefGoogle Scholar
Engle, Robert F. 2001. GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics. Journal of Economic Perspectives 15 (4):157–68.CrossRefGoogle Scholar
Engle, Robert F., Lilien, David M., and Robins, Russell P.. 1987. Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model. Econometrica 55 (2):391–407.CrossRefGoogle Scholar
Fernández, Raquel, and Portes, Jonathan. 1998. Returns to Regionalism: An Analysis of Nontraditional Gains from Regional Trade Agreements. World Bank Economic Review 12 (2):197–220.CrossRefGoogle Scholar
Finger, J. Michael, Ingco, Merlinda D., and Reincke, Ulrich. 1996. The Uruguay Round: Statistics on Tariff Concessions Given and Received. Washington, D.C.: World Bank.CrossRefGoogle Scholar
Finlayson, Jock A., and Zacher, Mark W.. 1981. The GATT and the Regulation of Trade Barriers: Regime Dynamics and Functions. International Organization 35 (4):561–602.CrossRefGoogle Scholar
Finnemore, Martha. 1993. International Organizations as Teachers of Norms: The United Nations Educational, Scientific, and Cultural Organization and Science Policy. International Organization 47 (4):565–97.CrossRefGoogle Scholar
Foroutan, Faezeh. 1998. Does Membership in a Regional Preferential Trade Arrangement Make a Country More or Less Protectionist? World Economy 21 (3):305–35.CrossRefGoogle Scholar
Francois, Joseph, and Niels, Gunnar. 2004. Political Influence in a New Anti-Dumping Regime: Evidence from Mexico. CEPER Discussion Paper 4297. London: Centre for Economic Policy Research.CrossRefGoogle Scholar
Frankel, Jeffrey A. 1997. Regional Trading Blocs in the World Economic System. Washington, D.C.: Institute for International Economics.Google Scholar
Frieden, Jeffrey A. 2002. Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration. International Organization 56 (4):831–60.CrossRefGoogle Scholar
General Agreement on Tariffs and Trade (GATT). 1984. Panel on Newsprint—Report of the Panel. L/5680. Geneva: GATT.Google Scholar
General Agreement on Tariffs and Trade (GATT). 1994. Report by Ambassador H. Ukawa (Japan), Chairman of the Group on Environmental Measures and International Trade, to the 49th Session of the Contracting Parties. L/7402. Geneva: GATT.Google Scholar
Gleditsch, Nils Petter, Wallensteen, Peter, Eriksson, Mikael, Sollenberg, Margareta, and Strand, Håvard. 2002. Armed Conflict 1946–2001: A New Dataset. Journal of Peace Research 39 (5):615–37.CrossRefGoogle Scholar
Glick, Reuven, and Rose, Andrew K.. 2002. Does a Currency Union Affect Trade? The Time-Series Evidence. European Economic Review 46 (6):1125–51.CrossRefGoogle Scholar
Goldstein, Judith L., Rivers, Douglas, and Tomz, Michael. 2007. Institutions in International Relations: Understanding the Effects of the GATT and the WTO on World Trade. International Organization 61 (1):37–67.CrossRefGoogle Scholar
Gowa, Joanne, and Kim, Soo Yeon. 2005. An Exclusive Country Club: The Effects of the GATT on Trade, 1950–94. World Politics 57 (4):453–78.CrossRefGoogle Scholar
Gowa, Joanne, and Mansfield, Edward D.. 2004. Alliances, Imperfect Markets, and Major-Power Trade. International Organization 58 (4):775–805.CrossRefGoogle Scholar
Hanson, Gordon H., Mataloni, Raymond J. Jr., and Slaughter, Matthew J.. 2001. Expansion Strategies of U.S. Multinational Firms.” In Brookings Trade Forum: 2001, edited by Rodrik, Dani and Collins, Susan, 245–82. Washington, D.C.: Brookings Institution Press.Google Scholar
Hausmann, Ricardo, Panizza, Ugo, and Rigobon, Roberto. 2004. The Long-Run Volatility Puzzle of the Real Exchange Rate. NBER Working Paper 10751. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Hudec, Robert E. 1993. Enforcing International Trade Law: The Evolution of the Modern GATT Legal System. Salem, N.H.: Butterworth Legal Publishers.Google Scholar
International Monetary Fund (IMF). 2004. Exchange Rate Volatility and Trade Flows—Some New Evidence. Washington, D.C.: IMF.Google Scholar
Jackson, John H. 2001. The Role and Effectiveness of the WTO Dispute Settlement Mechanism. In Brookings Trade Forum: 2000, edited by Collins, Susan M. and Rodrik, Dani, 179–236. Washington, D.C.: Brookings Institution Press.Google Scholar
Jaggers, Keith, and Gurr, Ted Robert. 1995. Tracking Democracy's Third Wave with the Polity III Data. Journal of Peace Research 32 (4):469–82.CrossRefGoogle Scholar
Keefer, Philip, and Stasavage, David. 2002. Checks and Balances, Private Information, and the Credibility of Monetary Commitments. International Organization 56 (4):751–74.CrossRefGoogle Scholar
Keohane, Robert O. 1983. The Demand for International Regimes. In International Regimes, edited by Krasner, Stephen D., 141–71. Ithaca, N.Y.: Cornell University Press.Google Scholar
Kim, So Young. 2007. Openness, External Risk, and Volatility: Implications for the Compensation Hypothesis. International Organization 61 (1):181–216.CrossRefGoogle Scholar
Klein, Michael W., and Shambaugh, Jay C.. 2004. Fixed Exchange Rates and Trade. NBER Working Paper 10696. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Koremenos, Barbara, Lipson, Charles, and Snidal, Duncan. 2001. The Rational Design of International Institutions. International Organization 55 (4):761–99.CrossRefGoogle Scholar
Krueger, Anne O. 1999. Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives 13 (4):105–24.CrossRefGoogle Scholar
Kucik, Jeffrey, and Reinhardt, Eric. 2008. Does Flexibility Promote Cooperation? An Application to the Global Trade Regime. International Organization 62 (3):477–505.CrossRefGoogle Scholar
Leblang, David, and Mukherjee, Bumba. 2004. Presidential Elections and the Stock Market: Comparing Markov-Switching and Fractionally Integrated GARCH Models of Volatility. Political Analysis 12 (3):296–322.CrossRefGoogle Scholar
Levy-Yeyati, Eduardo, and Sturzenegger, Federico. 2003. To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth. American Economic Review 93 (4):1173–93.CrossRefGoogle Scholar
Maddala, G. S., and Wu, Shaowen. 1999. A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test. Oxford Bulletin of Economics and Statistics 61 (S1):631–52.CrossRefGoogle Scholar
Mansfield, Edward D., Milner, Helen V., and Rosendorff, B. Peter. 2000. Free to Trade: Democracies, Autocracies, and International Trade. American Political Science Review 94 (2):305–21.CrossRefGoogle Scholar
Mansfield, Edward D., Milner, Helen V., and Rosendorff, B. Peter. 2002. Why Democracies Cooperate More: Electoral Control and International Trade Agreements. International Organization 56 (3):477–513.CrossRefGoogle Scholar
Mansfield, Edward D., and Reinhardt, Eric. 2003. Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements. International Organization 57 (4):829–62.CrossRefGoogle Scholar
Markusen, James R., and Maskus, Keith E.. 2001. General Equilibrium Approaches to the Multinational Firm: A Review of Theory and Evidence. NBER Working Paper 8334. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Marshall, Monty G., and Jaggers, Keith. 2005. Polity IV: Political Regime Characteristics and Transitions, 1800–2004. Center for International Development and Conflict Management, University of Maryland.Google Scholar
Martin, Lisa L., and Simmons, Beth A.. 1998. Theories and Empirical Studies of International Institutions. International Organization 52 (4):729–57.CrossRefGoogle Scholar
Milner, Helen V., and Kubota, Keiko. 2005. Why the Move to Free Trade? Democracy and Trade Liberalization in the Developing Countries. International Organization 59 (1):107–43.CrossRefGoogle Scholar
Morrissey, Oliver, and Nelson, Douglas. 2001. The Role of the WTO in the Transfer of Policy Knowledge on Trade and Competition. Paper presented at the Conference on Innovation, Competition and Regulation in the Global Economy, September, Margaret River, Australia.Google Scholar
Özden, Caglar, and Reinhardt, Eric. 2005a. First Do No Harm: The Effect of Trade Preferences on Developing Country Exports. Unpublished manuscript, Department of Political Science, Emory University, Atlanta, Ga.Google Scholar
Özden, Caglar, and Reinhardt, Eric. 2005b. The Perversity of Preferences: GSP and Developing Country Trade Policies, 1976–2000. Journal of Development Economics 78 (1):1–21.CrossRefGoogle Scholar
Perroni, Carlo, and Whalley, John. 2000. The New Regionalism: Trade Liberalization or Insurance? Canadian Journal of Economics 33 (1):1–24.CrossRefGoogle Scholar
Quinn, Dennis P., and Woolley, John T.. 2001. Democracy and National Economic Performance: The Preference for Stability. American Journal of Political Science 45 (3):634–57.CrossRefGoogle Scholar
Razin, Assaf, Sadka, Efraim, and Coury, Tarek. 2003. Trade Openness, Investment Instability, and Terms-of-Trade Volatility. Journal of International Economics 61 (2):285–306.CrossRefGoogle Scholar
Reinhardt, Eric. 2001. Adjudication without Enforcement in GATT Disputes. The Journal of Conflict Resolution 45 (2):174–95.CrossRefGoogle Scholar
Rodrik, Dani. 1998. Why Do More Open Economies Have Bigger Governments? Journal of Political Economy 106 (5):997–1032.CrossRefGoogle Scholar
Rose, Andrew K. 2003. Do We Really Know That the WTO Increases Trade? American Economic Review 94 (1):98–114.CrossRefGoogle Scholar
Rose, Andrew K. 2004. Do WTO Members Have More Liberal Trade Policy? Journal of International Economics 63 (2):209–35.CrossRefGoogle Scholar
Rose, Andrew K. 2005. Does the WTO Make Trade More Stable? Open Economies Review 16 (1):7–22.CrossRefGoogle Scholar
Scheve, Kenneth, and Slaughter, Matthew J.. 2004. Economic Insecurity and the Globalization of Production. American Journal of Political Science 48 (4):662–74.CrossRefGoogle Scholar
Simmons, Beth A., and Elkins, Zachary. 2004. The Globalization of Liberalization: Policy Diffusion in the International Political Economy. American Political Science Review 98 (1):171–89.CrossRefGoogle Scholar
Smith, James McCall. 2000. The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts. International Organization 54 (1):137–80.CrossRefGoogle Scholar
Subramanian, Arvind, and Wei, Shang-Jin. 2007. The WTO Promotes Trade, Strongly but Unevenly. Journal of International Economics 72 (1):151–75.CrossRefGoogle Scholar
World Trade Organization (WTO). 1998. European Communities—Customs Classification of Certain Computer Equipment—Report of the Appellate Body. WT/DS68/AB/R. Geneva: WTO.Google Scholar
World Trade Organization (WTO). 2000. Trade Policy Review—Brazil—Minutes of Meeting. WT/TPR/M/75. Geneva: WTO.Google Scholar
Yarbrough, Beth V., and Yarbrough, Robert M.. 1992. Cooperation and Governance in International Trade: The Strategic Organizational Approach. Princeton, N.J.: Princeton University Press.CrossRefGoogle Scholar