In Search of WTO Trade Effects: Preferential Trade Agreements Promote Trade Strongly, But Unevenly

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.The literature measuring the impact of Preferential Trade Agreements (PTA) and WTO membership on trade flows has produced remarkably diverse results. Rose's (2004) seminal paper reports a range of specifications that show no WTO effects, but Subramanian and Wei (2007) contend that he does not fully control for multilateral resistance (which could bias WTO estimates). Subramanian and Wei (2007) address multilateral resistance comprehensively to report strong WTO trade effects for industrialized countries but do not account for unobserved bilateral heterogeneity (which could inflate WTO estimates). We unify these two approaches by accounting for both multilateral resistance and unobserved bilateral heterogeneity, while also allowing for individual trade effects of PTAs. WTO effects vanish and remain insignificant throughout once multilateral resistance, unobserved bilateral heterogeneity, and individual PTA effects are introduced. The result is robust to the use of alternative definitions and coding conventions for WTO membership that have been employed by Rose (2004), Tomz et al. (2007, or by Subramanian and Wei's (2007).

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

“…This is a severe blow to the "revisionist" conclusions suggested by recent literature. Importantly for our purpose, however, Eicher & Henn (2008) This leads to what thus seems to be the ultimate line of defense for the WTO, which is at the core of this paper. Rose (2004a) This paper is thus not the first to explore WTO membership effects at the extensive margin of world trade.…”

“…Rose (2007) points out certain puzzles that cast doubt on the trade-promoting role of non-formal membership. Eicher & Henn (2008) question the findings of Subramanian & Wei (2007) on the grounds of a more comprehensive treatment of preferential trade agreements alongside WTO membership, as well as on econometric grounds. 5 This paper revisits the issue by looking at a place of potential evidence that has so far received relatively scant attention.…”

“…First, we go back to theory in developing the simplest possible gravity model of bilateral trade that allows for zero trade as an equilibrium outcome. Although we call our model a "corner solutions" version of the gravity model, it goes well beyond Felbermayr & Kohler (2006), while at the same time being much simpler 10 The empirical implementation of this approach in Felbermayr & Kohler (2006) has revealed that the increasing force of distance as a trade barrier, transpiring from recent gravity estimates of the distance coefficient ("distance puzzle"), can partly be explained as reflecting an omitted variables bias from ignoring the extensive margin.…”

“…Alternatively, PTA and WTO membership could be coded independently, as in the original studies by Rose (2004aRose ( ,2005. As Subramanian & Wei (2007) Eicher & Henn (2008) do this for the hierarchy assumption employed by Subramanian & Wei (2007), similarly distinguishing between industrial and developing country PTA effects.…”

“…Their composition exercise adds a further insight: Industrial countries find almost no additional PTA effect, while developing countries see an average PTA effect equal to 214 percent, which is even more than the WTO effect for developing countries. Eicher & Henn (2008) also distinguish between different types of PTAs, and they add bilateral fixed effects. This gives full control over all unobserved country-pair heterogeneity, in addition to controlling for the time-invariant component of multilateral resistance.…”