The Role of Multilateralism of the WTO in International Trade Stability

Department

Economics, Finance and Quantitative Analysis

Document Type

Article

Publication Date

12-6-2021

Abstract

We look at the effect of the WTO on stabilizing international trade using both a fixed-effects and an event study approach. Our results show that WTO members experience lower trade volatilties in a predictable and integrated system. In addition, we focus on the trade volatility comovement among countries in a multilateral framework. Previous research has mainly focused on WTO membership in a bilateral trade framework, which only allows interactions between two trade partners without considering any possible influence from other countries. A bilateral trade framework does not fully capture the effect of WTO membership, nor does it investigate why the multilateral platform of the WTO should exist. With a unique setup estimating interactions among multiple trading dyads, we find strong evidence supporting positive correlation or comovement of trade volatilities across trading pairs. Such a comovement appears much stronger among WTO members than between WTO and non-WTO members. Due to the feedback mechanism among dyads in a multilateral framework, such as the WTO, bilateral trade stability may further stabilize the global trade. Our results remain robust to a battery of sensitivity checks.

Journal Title

World Trade Review

Journal ISSN

14747456

Volume

20

Issue

5

First Page

668

Last Page

689

Digital Object Identifier (DOI)

10.1017/S1474745621000057

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