Absolute and size‐adjusted trade flows: An analysis of RTAs and GATT/WTO membership

Abstract

This paper contributes to the debate on whether membership of the General Agreement on Tariffs and Trade/World Trade Organisation (GATT/WTO) promotes greater levels of international trade. A size‐adjusted measure of trade flows vis‐á‐vis absolute trade flows (the traditional dependent variable) is used. The size‐adjusted trade flows dependent variable reduces the importance of bilateral trade with larger countries yielding a greater balance between large and small trade partners and provides an opportunity to test the importance of membership of the GATT/WTO relative to the numerous regional trade agreements (RTAs) which have grown exponentially over the years. In keeping with the recent literature, a structural gravity model of trade framework is used with a Poisson pseudo‐maximum‐likelihood estimator and high dimensional fixed effects. Furthermore, the data set consists of both international and intra‐national (domestic) trade flows. In the case of both approaches (size‐adjusted and absolute trade flows) the results are statistically significant and positive as regards the impact of GATT/WTO membership and RTAs on trade flows. Furthermore, the estimates resulting from size‐adjusted trade flows maintain the greater importance of GATT/WTO membership relative to RTAs.