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WTO Membership and the Extensive Margin of World Trade: New Evidence

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  • Wilhelm Kohler
  • Gabriel Felbermayr

Abstract

Recent literature has argued that, contrary to the results of a seminal paper by Rose (2004), WTO membership does promote bilateral trade, at least for developed economies and if membership includes non-formal compliance. We review the literature in order to identify open issues. We then develop the simplest possible “corner-solutions" version of the gravity model which serves as a framework to readdress these issues. We focus on the extensive margin of trade that separates positive-trade from zero-trade country pairs. We argue that the model can be consistently estimated using Poisson pseudo-maximum-likelihood methods with exporter and importer fixed effects. We account for coding issues and the potential heterogeneity of the WTO membership which recent contributions have stressed. While we find that WTO membership increases the likelihood that a given country pair trades, we do not find that the extensive margin has a strong and systematic effect on the average trade-creating potential of the WTO.

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Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 09/06.

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Handle: RePEc:not:notgep:09/06

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Keywords: gravity approach; WTO; monopolistic competition; real trade costs;

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References

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  1. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers, Centre for Economic Performance, LSE dp0701, Centre for Economic Performance, LSE.
  2. Anne-Celia Disdier & Keith Head, 2008. "The puzzling persistence of the distance effect on bilateral trade," Working Papers, Institut National de la Recherche Agronomique, France 21709, Institut National de la Recherche Agronomique, France.
  3. Andrew K. Rose, 2007. "Do We Really Know That the WTO Increases Trade? Reply," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 2019-2025, December.
  4. Chang, Pao-Li & Lee, Myoung-Jae, 2011. "The WTO trade effect," Journal of International Economics, Elsevier, Elsevier, vol. 85(1), pages 53-71, September.
  5. Xuepeng Liu, 2009. "GATT/WTO Promotes Trade Strongly: Sample Selection and Model Specification," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 17(3), pages 428-446, 08.
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  7. Rose, Andrew K, 2002. "Do We Really Know that the WTO Increases Trade?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3538, C.E.P.R. Discussion Papers.
  8. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics, Boston College Department of Economics 485, Boston College Department of Economics.
  9. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  10. Felbermayr, Gabriel, 2006. "Exploring the Intensive and Extensive Margins of World Trade," Munich Reprints in Economics, University of Munich, Department of Economics 20646, University of Munich, Department of Economics.
  11. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2003. "A generalized design for bilateral trade flow models," Economics Letters, Elsevier, Elsevier, vol. 80(3), pages 391-397, September.
  12. Andrew K. Rose, 2002. "Do WTO Members have More Liberal Trade Policy?," NBER Working Papers 9347, National Bureau of Economic Research, Inc.
  13. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
  14. Shang-Jin Wei & Arvind Subramanian, 2003. "The WTO Promotes Trade, Strongly But Unevenly," IMF Working Papers, International Monetary Fund 03/185, International Monetary Fund.
  15. Theo S. Eicher & Christian Henn, 2008. "In Search of WTO Trade Effects: Preferential Trade Agreements Promote Trade Strongly, But Unevenly," Working Papers, University of Washington, Department of Economics UWEC-2008-22-FC, University of Washington, Department of Economics.
  16. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
  17. Bogdan Lissovolik & Yaroslav Lissovolik, 2006. "Russia and the WTO: The "Gravity" of Outsider Status," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 53(1), pages 1.
  18. Andrew Rose, 2005. "Which International Institutions Promote International Trade?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 13(4), pages 682-698, 09.
  19. Michael Tomz & Judith L. Goldstein & Douglas Rivers, 2007. "Do We Really Know That the WTO Increases Trade? Comment," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 2005-2018, December.
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  21. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  22. Ghosh, Sucharita & Yamarik, Steven, 2004. "Are regional trading arrangements trade creating?: An application of extreme bounds analysis," Journal of International Economics, Elsevier, Elsevier, vol. 63(2), pages 369-395, July.
  23. Theo S. Eicher & Christian Henn, 2009. "In Search of WTO Trade Effects," IMF Working Papers, International Monetary Fund 09/31, International Monetary Fund.
  24. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper, Federal Reserve Bank of Atlanta 2005-03, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Jayjit Roy, 2010. "On the Robustness of the Trade-Inducing Effects of Trade Agreements and Currency Unions," Working Papers, Department of Economics, Appalachian State University 10-09, Department of Economics, Appalachian State University.
  2. Prehn, Sören & Brümmer, Bernhard & Thompson, Stanley R., 2010. "Payment decoupling and the intra-European calf trade," DARE Discussion Papers, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE) 1008, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).

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