Thursday, August 22, 2013

The Effect of WTO on the Extensive and the Intensive Margins of Trade

DUTT Pushan, MIHOV Ilian, VAN ZANDT Timothy
Access the publisher's page
Journal of International Economics 91, 2 (2013) 204-219

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 where the specifications of these gravity equations aremotivated by a Melitz-Chaney model. 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. Our results suggest that WTO membership works as reducing the fixed rather than the variable costs of trade.