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

40 Pages Posted: 19 Dec 2010

See all articles by Gabriel J. Felbermayr

Gabriel J. Felbermayr

University of Stuttgart-Hohenheim

Wilhelm Kohler

University of Tuebingen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

Recent literature has argued that, contrary to the results of a seminal paper by Rose (2004), General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) membership does promote bilateral trade, at least for developed economies and if membership includes non-formal compliance. We review the literature to identify open issues. We then develop a simple extension of the gravity model that gives rise to an extensive country margin of trade separating positive trade from zero trade country pairs. The model is used to identify WTO membership effects at both the intensive and the extensive margins. Empirical estimation of this model, based on Poisson pseudo-maximum likelihood methods with exporter and importer fixed effects, allows us to readdress the empirical issue of whether GATT/WTO membership does or does not promote trade. We find that GATT membership was successful on the extensive margin of world trade but not on the intensive margin. For the recent WTO episode (1995-2008), we find consistent and robust evidence for a substantial trade-creating role of membership which is driven primarily by the intensive margin. WTO membership results in higher bilateral trade of about 40 per cent.

Suggested Citation

Felbermayr, Gabriel J. and Kohler, Wilhelm K., Modelling the Extensive Margin of World Trade: New Evidence on GATT and WTO Membership. The World Economy, Vol. 33, No. 11, pp. 1430-1469, 2010, Available at SSRN: https://ssrn.com/abstract=1727908 or http://dx.doi.org/10.1111/j.1467-9701.2010.01292.x

Gabriel J. Felbermayr (Contact Author)

University of Stuttgart-Hohenheim ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany

Wilhelm K. Kohler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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