In search of WTO trade effects: Preferential trade agreements promote trade strongly, but unevenly

a r t i c l e i n f o The literature measuring the effects of WTO membership on trade flows has produced remarkably diverse results. Rose (2004) reports a wide range of empirical specifications that produce no WTO effects. Tomz et al. (2007) use Rose's data but include de facto WTO membership, to find positive WTO trade effects. Rose (2005) also produced positive WTO trade effects after accounting for the diverse trade effects produced by individual preferential trade agreements (PTAs). When Subramanian and Wei (2007) emphasize general equilibrium trade effects by controlling for multilateral resistance, they find strong WTO trade effects only for industrialized countries. Subramanian and Wei (2007), however, account neither for unobserved heterogeneity among trading partners, nor for differences in trade effects across PTAs (which could inflate WTO estimates). We unify the Rose, Tomz et al., and Subramanian and Wei specifications in one comprehensive approach that minimizes omitted variable bias to show that all specifications produce one consistent result: WTO effects on trade flows are not statistically significant, while PTAs produce strong but uneven trade effects. Extending the gravity model to address specific avenues in which WTO may have affected trade flows, we find that WTO membership boosts trade prior to PTA formation and increases trade among proximate developing countries (at the expense of distant trade). An augmented gravity model that accounts for WTO terms-of-trade theory shows that countries with greater incentives to bargain for tariff reductions before WTO accession experience positive and significant subsequent WTO trade effects. Reductions in trade barriers have been the hallmark of the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariff and Trade (GATT). 1 While trade theory holds that tariff reductions should increase trade flows, the empirical literature on the effects of WTO membership has produced surprisingly ambiguous results. Rose (2004) initially documented the absence of WTO effects on bilateral trade flows. When Tomz et al. (2007, henceforth TGR) updated Rose's dataset to include both de jure and de facto WTO membership, they found positive WTO trade effects. Rose (2005) also produced a positive WTO impact on trade flows, after accounting for distinct effects of individual preferential trade agreements (PTAs). 2 Subramanian and Wei (2007, henceforth SW) then split the global sample to highlight that WTO trade effects exist for industrialized but not developing nations. This diversity of results in the empirical WTO literature seems to …