Alliances, market power, and postwar trade: explaining the GATT/WTO

This paper argues that testing the empirical implications of existing theories about institutions yields rich insights into the postwar trade regime. Market-failure theory predicts that the GATT/WTO will exert its strongest impact on trade between its largest member states. A theory based on security externalities implies that a sizeable expansion of trade will also occur between a subset of the contracting parties that alliance ties link. An analysis of the data shows that the evidence is consistent with both theories, making clear the value added of taking explicitly into account the economics and politics that motivated the establishment of the postwar regime and that governed its subsequent operation.