The WTO Is Not Passé

The empirical literature on the effect of trade agreements has reached a consensus that WTO effects are insignificant or modest at best especially compared to the robust and strong positive effect of preferential trade agreements (PTAs) on bilateral trade (Rose, 2004; Eicher and Henn, 2011; Baier and Bergstrand, 2007, 2009). In this paper, the author shows that previous work that reports “average treatment effects” on trade flows fails to account for the heterogeneity in the effects of trade arrangements over time, leading to an underestimation of the WTO effect on bilateral trade. The author presents semi-parametric estimates of the impact of WTO membership, allowing for heterogeneity of WTO effects over time. The author finds evidence for strong WTO effects over time, with the WTO effects increasing almost monotonically with years of membership. In fact, in the long-term, the magnitude of the WTO effect exceeds those of the PTA effects. The author also finds that the strongest WTO effect over time is for destinations that are developing countries that underwent rigorous accession procedures to join the WTO. Disaggregating PTAs into bilateral, multilateral, and deep integration (customs union, common markets, and economic union), the author finds that the long-term effects of WTO membership dominate bilateral and multilateral PTAs but fall short of deep integration arrangements. Finally, the author shows that WTO membership increases both the extensive and intensive margins of trade over time, with a stronger impact on the former. The author's results are consistent with gradual trade liberalization and declining trade policy uncertainty over time, following WTO membership.