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 promote free trade between member states. Nonetheless, an exhaustive study of bilateral merchandise trade based on a large panel data set led Rose (2004) to conclude that there is no compelling empirical evidence to show that GATT/WTO membership does actually encourage 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 set up a new international trade data set which, unlike Rose’s, allows us to model exports and imports separately and to study the extensive margin of trade, i.e., the number of bilateral trade relationships. Using this data set and a gravity framework, first we demonstrate how to obtain puzzling negative results and so explain the previous unintuitive findings. Then we show that GATT/WTO membership does indeed encourage international trade, so the most obvious reason for Rose’s negative outcome is the lack of zero bilateral trade observations in his data set.