The Effect of WTO on the Extensive and the Intensive Margins of Trade
INSEAD - Economics and Political Sciences
INSEAD; Centre for Economic Policy Research (CEPR)
Timothy Van Zandt
INSEAD - Economics and Political Sciences; Centre for Economic Policy Research (CEPR)
February 28, 2013
INSEAD Working Paper No. 2013/38/EPS
We use 6-digit bilateral trade data to document the effect of WTO/GATT membership on the extensive and intensive product margins of trade.We construct gravity equations for the two product margins motivated by Chaney (2008). The empirical results show that standard gravity variables provide good explanatory power for bilateral trade on both margins. Importantly, we show that the impact of the WTO is concentrated almost exclusively on the extensive product margin of trade, i.e. trade in goods that were not previously traded. In our preferred specification, WTO membership increases the extensive margin of exports by 25%. At the same time, WTO membership has a negative impact on the intensive margin. Based on novel comparative statics results about how fixed and variable trade costs impact the product margins of trade, our results suggest that WTO membership works by reducing primarily the fixed rather than the variable costs of trade.
Number of Pages in PDF File: 45
Keywords: WTO, Gravity, Extensive Margin of Trade, Intensive Margin of Trade, Trade Costs
Date posted: April 4, 2011 ; Last revised: March 9, 2013
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