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Does the GATT/WTO promote trade? After all, Rose was right

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Abstract

This paper re-examines the effect of the GATT/WTO on trade using recent econometric developments that allow us estimating structural gravity equations with the Poisson pseudo-maximum likelihood (PPML) estimator on a large dataset that requires computing high-dimensional fixed effects. By doing so, we overcome computational limitations that are present in previous studies. In line with Rose’s (Am Econ Rev 94:98–114, 2004) seminal work, we find that, unlike regional trade agreements and currency unions, the GATT/WTO accession has not generated positive trade effects. This result is robust to the use of alternative measures of trade flows, across periods and country groups, to changes in the periodicity of the data, when taking into account the GATT/WTO accession dynamics, to controlling for the participation of only one country of the dyad in GATT/WTO, to the consideration of non-member participants, and to the use of alternative datasets. Notwithstanding, we also find that PPML results are sensitive to the definition of the dependent variable.

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Notes

  1. See Gil-Pareja et al. (2016) for a comprehensive review of the empirical literature on the effect of GATT/WTO on trade.

  2. Subramanian and Wei (2007) conclude that the GATT/WTO promotes trade strongly, but unevenly. In particular, they find that the GATT/WTO boosts trade in industrialized countries, but not in developing countries; in less protected sectors, but not in agriculture and textile sectors; and for new WTO members, but not for old GATT members. Moreover, Felbermayr and Kohler (2010) document a positive effect on trade for developing country importers in the post-Uruguay Round era. Finally, Bista (2015) finds a positive impact but only on the extensive margin in trade between industrial and developing members.

  3. Since Baier and Bergstrand (2007) pointed out that trade agreements are not exogenous, the endogeneity issue has received a great deal of attention in the empirical gravity-equation literature. These authors proposed the inclusion of country-pair fixed effects to deal with this problem. However, it is worth noting that country-pair dummies do not completely eliminate the extent of endogeneity. Therefore, this paper will test for strict exogeneity in Sect. 4.

  4. Some recent papers (see, for example, Dai et al. 2014; Bergstrand et al. 2015; Anderson and Yotov 2016; Baier et al. 2016; Mattoo et al. 2017) show the importance of including the internal trade flows in the estimation of the gravity equation of international trade. In this paper, we do not include within-country trade flows due to the lack of the required data (in terms of both countries and years of analysis).

  5. In this literature, five papers account for both heteroskedastic residuals and zeros using Poisson estimators (Liu 2009; Felbermayr and Kohler 2010; Herz and Wagner 2011; Bista 2015; Gil-Pareja et al. 2016) but none of them simultaneously controls for unobserved bilateral heterogeneity and multilateral resistance terms.

  6. In a previous version of this paper, we used the Zylkin’s ppml_panel_sg Stata command. Larch et al. (2019) apply this command on the Glick and Rose (2016) dataset (as we do here) to re-assess the currency union effect on trade concluding that whereas the effect of non-euro currency unions is large and significant, the euro effect is economically small and statistically insignificant.

  7. The argument is that there may be unobserved country-pair characteristics that affect trade, and which are at the same time correlated with the economic integration agreements. Baier and Bergstrand (2007) address this issue with respect to free trade agreements suggesting the use of dyadic fixed effects to avoid this omitted variable bias.

  8. Anderson (1979) and Bergstrand (1985) offer early theoretical justification for the gravity model.

  9. Obviously, the gravity equation in its log-linear specification is not defined for zero trade flows. This problem results in a sample selection bias that can be particularly important in datasets with a large number of trade observations that are zero in levels.

  10. Tobit and Heckman-type procedures can deal with zero trade relationships but they are not robust to misspecification of the error term (Felbermayr and Kohler 2010).

  11. Santos Silva and Tenreyro (2006) show that this approach leads to inconsistent parameter estimates.

  12. It is worth noting that these authors provide an interesting contribution to the literature by accounting for countries’ participation in the GATT/WTO (as in Tomz et al. 2007) with matching techniques.

  13. Larch et al. (2019) provides a list of papers on other areas of research that are unable to obtain estimates with a full set of fixed effects with PPML.

  14. It is worth noting that the reference category for the economic integration agreements dummy variables (RTA, CU and GATT/WTO) includes both pairs of non-member countries and member-non-member pairs avoiding the concern about multicollinearity raised by Cheong et al. (2014). Section 5 confirms the robustness of the results to changes in the reference category.

  15. We gratefully acknowledge Andrew Rose for making his data publicly available.

  16. It is noteworthy that not all areas covered are countries in the conventional sense of the word. The dataset also includes some colonies (e.g. Gibraltar), territories (e.g. Guam) and overseas departments (e.g. Guadeloupe).

  17. Similarly to us, Chen and Wall (2005), Baier and Bergstrand (2007), Subramanian and Wei (2007), Vicard (2009), Eicher and Henn (2011), Behar and Cirera-i-Crivillé (2013), Kohl (2014) and Limão (2016) use of data at five-year intervals. Alternatively, Trefler (2004) uses three-year intervals, whereas Dai et al. (2014), Bergstrand et al. (2015), Anderson and Yotov (2016), and Gil-Pareja et al. (2016) use intervals of four years. We have also considered these alternative frequencies for the data (three-year and four-year intervals) and that hardly affects the estimates. These results are available from the authors upon request.

  18. Rose’s dataset includes only positive trade flows. However, as a robustness check, we have also estimated the gravity equations treating all missing observations as zero trade flows (in line with Felbermayr and Kohler 2006; Helpman et al. 2008; or, more recently, Larch et al. 2019). The results of these estimations are qualitatively and quantitatively very similar to those reported in columns (1)–(3) of Table 2. For brevity, the results with zeros are not reported, but are available from the authors upon request. Furthermore, in the sensitivity analysis section, we have estimated model (1) using other datasets that include zero trade flows, such as those in Limão (2016), Head and Mayer (2013), and Gil-Pareja et al. (2016) and the results confirm the absence of the GATT/WTO effect on trade.

  19. It is worth noting that, since trade data is available from 1948, the GATT trade effects between the 23 countries that joined the GATT in that year cannot be estimated because they are absorbed by the country-pair fixed effects.

  20. Several papers have addressed the GATT/WTO effect on trade distinguishing between industrial and developing countries with remarkably mixed results (Subramanian and Wei 2007; Felbermayr and Kohler 2010; Eicher and Henn 2011; Dutt et al. 2013; Kohl 2015; Bista 2015; Gil-Pareja et al. 2016). However, only do the last two papers take into account the group that each country in the pair belongs to (as we do here).

  21. This result is in line with Felbermayr and Kohler (2010), who show negative effects for the three time-spans considered over the GATT period (1948–1994).

  22. This classification criterion follows Rose (2004) and Eicher and Henn (2011) that split their sample periods by decades. We have further split the sample period using different classification criteria and the results remain quantitatively and qualitatively unchanged. The results are available upon request.

  23. Novy (2013) and Bas et al. (2017) provide two different theoretical models featuring this type of heterogeneous elasticities. They argue that the effect of trade costs on trade flows varies depending on how intensely two countries trade with each other.

  24. The authors gratefully acknowledge one of the referees for this discussion and the suggestion to include the imwto indicator in the list of controls.

  25. These results are available from the authors upon request.

  26. We have also applied the ppmlhdfe Stata command to the datasets used by Head and Mayer (2013) and Gil-Pareja et al. (2016). In both datasets, the positive effect of the GATT/WTO obtained with OLS disappears when we use the PPML estimator (both excluding and including zeros).

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Acknowledgements

The authors are grateful to Andrew Rose, the Associate Editor (Thierry Mayer) and two anonymous referees for their valuable comments and suggestions. We also thank Thomas Zylkin for help with the implementation of the ppml estimator including exporter-time and importer-time fixed effect constant at intervals. The authors acknowledge financial support from Ministerio de Ciencia, Innovacion y Universidades (project RTI2018-100899-B-I00, in part-financed by the European Regional Development Fund) and Generalitat Valenciana (PROMETEO/2018/102). The usual disclaimer applies.

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Authors and Affiliations

  1. University of Valencia and Inteco Research Unit, Valencia, Spain

    Silviano Esteve-Pérez, Salvador Gil-Pareja & Rafael Llorca-Vivero

  2. Facultad de Economía, Departamento de Estructura Económica, Av. de los Naranjos s/n, 46022, Valencia, Spain

    Salvador Gil-Pareja

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  1. Silviano Esteve-Pérez
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Esteve-Pérez, S., Gil-Pareja, S. & Llorca-Vivero, R. Does the GATT/WTO promote trade? After all, Rose was right. Rev World Econ 156, 377–405 (2020). https://doi.org/10.1007/s10290-019-00367-w

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