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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
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Handle: RePEc:qld:uq2004:491
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  1. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper 2005-03, Federal Reserve Bank of Atlanta.
  2. Pao-Li Chang & Myoung-Jae Lee, 2007. "The WTO Trade Effect," Working Papers 06-2007, Singapore Management University, School of Economics.
  3. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
  4. Portugal-Perez, Alberto & Wilson, John S., 2010. "Export performance and trade facilitation reform : hard and soft infrastructure," Policy Research Working Paper Series 5261, The World Bank.
  5. Arvind Subramanian & Shang-Jin Wei, 2003. "The WTO Promotes Trade, Strongly But Unevenly," NBER Working Papers 10024, National Bureau of Economic Research, Inc.
  6. Alla Lileeva & Daniel Trefler, 2007. "Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants," NBER Working Papers 13297, National Bureau of Economic Research, Inc.
  7. Roy, Jayjit, 2011. "Is the WTO mystery really solved?," Economics Letters, Elsevier, vol. 113(2), pages 127-130.
  8. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
  9. Theo S. Eicher & Christian Henn, 2009. "In Search of WTO Trade Effects; Preferential Trade Agreements Promote Trade Strongly, But Unevenly," IMF Working Papers 09/31, International Monetary Fund.
  10. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  11. William D. Dupont & W. Dale Plummer Jr., . "Density Distribution Sunflower Plots," Journal of Statistical Software, American Statistical Association, vol. 8(i03).
  12. Tang, Man-Keung & Wei, Shang-Jin, 2009. "The value of making commitments externally: Evidence from WTO accessions," Journal of International Economics, Elsevier, vol. 78(2), pages 216-229, July.
  13. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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.
  16. 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.
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