The World Trading System and Implications of External Opening 1

The chapter begins by pointing out that external opening, which here means reductions in barriers to international trade, still has a long way to go. It reviews the evidence on the economic benefits from integration. It reports an econometric attempt to address a major concern regarding simultaneous causality between growth and trade: does openness lead to growth, or does growth lead to openness? We remove the complication of simultaneous causality by isolating variation in trade patterns that could be clearly attributed to geographical influences. The result indicates that the observed effect of trade on growth—an estimated 0.3 percent increase in income over 20 years for each .01 increase in the ratio of trade to GDP—is not attributable to simultaneity. Next the chapter considers non-economic effects, taking the case of the environment. The evidence suggests that for some pollutants (such as SO2) trade can be on net beneficial, while for other environmental criteria (such as CO2) the reverse is true. A ready explanation is that when externalities arise primarily at the national level as with local air and water pollution, an adequate level of income and effective national governance are sufficient to enact regulation to protect the environment, but that in the increasingly important case of global externalities such as emissions of greenhouse gases, the free-rider problem prevents individual countries from acting on their own, in the absence of an effective international agreement.