Market-Protecting Institutions and the World Trade Organization's Ability to Promote Trade†

Recent research has shown that the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO), contrary to common perceptions, does not increase trade. We argue that the effect of the GATT/WTO on dyadic trade flows is conditioned by the strength of market-protecting institutions (MPIs), which are the fundamental determinant of transaction costs. Dyads with weak MPIs do not see an increase in trade from GATT/WTO membership while dyads that have strong MPIs do see an increase in trade from GATT/WTO membership. In the former case, the benefits of GATT/WTO membership are outweighed by the high risk of doing business under weak market protection, but when property rights are well protected, GATT/WTO membership contributes positively to international trade. Empirical analysis of bilateral trade flows from 1948 to 1999 supports this hypothesis.