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WTO Trade Effects and Identification Problems: Why Knowing The Structural Properties of WTO Memberships Matters?

Since Rose’s (2004) striking finding of negligible WTO trade effects, numerous studies have at- tempted to solve the so-called WTO puzzle. These studies adopt novel model specifications to control for potential sources of bias, but often lead to conflicting results. Multilateral resistance terms (MRTs), unobserved country-pair heterogeneity (UCPH) and heteroskedastic errors in log- linear model are considered the most crucial controls. What has gone unnoticed, however, is that the first two controls lead to identification problems in the estimation of WTO trade effects. We show that controlling for MRTs leads to near-prefect multicollinearity because of a structural rela- tionship between the variables that measure the GATT/WTO membership statuses of any country- pairs. Also because of this structural relationship, accounting for UCPH using country-pair fixed effects (CPFEs) could reduce the number of observations that contribute to the identification of WTO trade effects by more than 98%. These identification problems make the estimates of WTO trade effects very imprecise and sensitive to model specifications, partly explaining the diverse re- sults in the literature. We propose a two-stage method that avoids these identification problems.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 491.

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Date of creation: 16 Oct 2013
Date of revision:
Handle: RePEc:qld:uq2004:491
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  1. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  2. Man-Keung Tang & Shang-Jin Wei, 2009. "The Value of Making Commitments Externally: Evidence from WTO Accessions," Working Papers 152009, Hong Kong Institute for Monetary Research.
  3. Dutt, Pushan & Mihov, Ilian & Van Zandt, Timothy, 2011. "Does WTO Matter for the Extensive and the Intensive Margins of Trade?," CEPR Discussion Papers 8293, C.E.P.R. Discussion Papers.
  4. Alla Lileeva & Daniel Trefler, 2010. "Improved Access to Foreign Markets Raises Plant-Level Productivity... for Some Plants," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1051-1099, August.
  5. Pao-li Chang & Myoung-jae Lee, 2007. "The WTO Trade Effect," Trade Working Papers 22063, East Asian Bureau of Economic Research.
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  7. Arvind Subramanian & Shang-Jin Wei, 2003. "The WTO Promotes Trade, Strongly But Unevenly," NBER Working Papers 10024, National Bureau of Economic Research, Inc.
  8. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  9. Andrew K. Rose, 2002. "Do We Really KNow that the WTO Increases Trade?," Working Papers 182002, Hong Kong Institute for Monetary Research.
  10. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  11. Portugal-Perez, Alberto & Wilson, John S., 2012. "Export Performance and Trade Facilitation Reform: Hard and Soft Infrastructure," World Development, Elsevier, vol. 40(7), pages 1295-1307.
  12. Theo S. Eicher & Christian Henn, 2008. "In Search of WTO Trade Effects: Preferential Trade Agreements Promote Trade Strongly, But Unevenly," Working Papers UWEC-2008-22-FC, University of Washington, Department of Economics.
  13. Michael Tomz & Judith L. Goldstein & Douglas Rivers, 2007. "Do We Really Know That the WTO Increases Trade? Comment," American Economic Review, American Economic Association, vol. 97(5), pages 2005-2018, December.
  14. Konya, Laszlo & Matyas, Laszlo & Harris, Mark, 2011. "GATT/WTO membership does promote international trade after all – Some new empirical evidence," MPRA Paper 34978, University Library of Munich, Germany, revised 20 Nov 2011.
  15. William D. Dupont & W. Dale Plummer Jr., . "Density Distribution Sunflower Plots," Journal of Statistical Software, American Statistical Association, vol. 8(i03).
  16. Roy, Jayjit, 2011. "Is the WTO mystery really solved?," Economics Letters, Elsevier, vol. 113(2), pages 127-130.
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