GEP Research Papers 09/06
WTO Membership and the Extensive Margin of World Trade: New Evidence
Wilhelm Kohler and Gabriel Felbermayr
Summary
The paper estimates a gravity model allowing for the possibility of zero trade. Including the extensive margin does not generate robust additional evidence of a trade-promoting effect of GATT/WTO membership.
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.
JEL classification: F12, F13
Keywords: gravity approach, WTO, monopolistic competition, real trade costs
Issued in January 2009
The paper is available in PDF format