GATT/WTO Membership Does Promote International Trade After All – Some New Empirical Evidence

The declared objective of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) is to encourage free trade between member states. Nonetheless, an exhaustive study of bilateral merchandise trade based on a gravity model and on a large panel data set led Rose (2004) to conclude that there is no compelling empirical evidence to show that GATT/WTO membership actually encourages international trade. This unanticipated finding generated a great deal of attention in the literature and several scholars put forward various explanations for it. In this paper we go back to the basics and set up a new international trade data set which, unlike Rose’s, allows us to study the extensive margin of trade and to model exports and imports separately. First we systematically uncover the nature of this new data set and show that bilateral trade, despite being often unbalanced, tends to be reciprocal and persistent, and that the extensive margin is indeed vital in modeling it. We then, using a gravity framework, show how to obtain puzzling negative results and so explain the previous negative findings. Finally, using the new data set properly and appropriate procedures we show that GATT/WTO membership does unambiguously encourage international trade. Hence, the most obvious reason for Rose’s negative finding is the lack of zero bilateral trade observations in his data set