The Economics of the World Trading System.

• Author: Conway, Patrick
• Position: Book Review

By Kyle Bagwell and Robert Staiger. Cambridge, MA: MIT Press, 2003. Pp. xiii, 224. $29.95.

The World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), have been the source of much controversy in recent years. There is controversy in the general public, with a spirited debate over whether the WTO is assisting or exploiting developing countries in their efforts to grow. This debate was joined in most graphic terms at the WTO Ministerial meeting in Seattle in 1999: protests in the streets joined with discontent among the delegates to bring about an abandonment of the reform package proposed at that meeting.

While the economics profession is more united on the benefits from free trade, there is controversy within the profession about whether the trade structure negotiated within the WTO (or earlier, the GATT) embodies the rational principles underlying economic theory. Paul Krugman, for one, thought not:

If our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interests. (Krugman 1997, p. 113) Bagwell and Staiger (henceforth, "the authors") address their analysis exclusively to the intraprofession debate. (1,2) Their thesis is a simple one: The design and implementation features of the WTO have been developed as a rational response to strategic inefficiencies in the setting of national commercial policy. (3)

The authors' logic is straightforward. First, they define a static model in which there is a unique noncooperative equilibrium in commercial policy. They demonstrate that this equilibrium has the characteristics of a prisoners' dilemma: individually, rational choice of commercial policy by trade authorities in each country generates a noncooperative trading equilibrium characterized by positive protection in the trading countries. They then describe a set of cooperative equilibria with reduced protection that is weakly preferred by all trading partners and strongly preferred by at least one. They also specify a trigger strategy mechanism that will ensure the existence of the cooperative equilibrium in each period if the static game is repeated over an infinite time horizon. Second, they examine the principles of the WTO agreements for evidence that the components necessary to replicate the posited cooperative equilibrium are observed in the trading system. They are successful to a remarkable extent in matching features of the WTO system to the essential features of the theoretical model. The authors do not demonstrate that this is the only explanation for the WTO to take the form it does, but they do construct a plausible story.

This book will appeal to a wide variety of readers. Graduate students and professors of international trade theory will find it a valuable bonding of general-equilibrium trade theory to international trade negotiations. Those who have read the authors' previous journal articles (especially Bagwell and Staiger 1999) will not find the theory to be novel but may appreciate the institutional detail on WTO. Commercial-policy analysts, both inside and...