Abstract 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 are motivated by the model of Eaton and Kortum (2002) . The data show that the puzzle of no significant impact of WTO membership on trade documented by Rose (2004) manifests itself differently at the product margins of trade. We show that the impact of the WTO is 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 31%. At the same time, WTO membership has a negligible or even a negative impact on the intensive margin (the volume of already-traded goods). Incidentally, we also document that standard gravity variables provide good explanatory power for bilateral trade on both margins. Introduction The purpose of this paper is to decompose growth of trade into increased trade in products already traded by a country pair (the intensive product margin) and new trade in products not previously traded by a country pair (the extensive product margin), and then-in particular-to understand the effect of WTO membership on these two margins. Whereas previous work has found that trade growth has come E-mail: justinmiller@example.net (Dutt) ; justinmiller@example.net (Mihov); timothy. justinmiller@example.net (Van Zandt) primarly as increased trade among countries that already trade with each other (the intensive partner margin), we find the opposite when taking a product perspective. Introduction WTO membership has a significant effect on the extensive product margin but little effect on the intensive product margin. Introduction Since its inception in 1948, the General Agreement on Tariffs and Trade (GATT) has formulated and implemented the rules of world trade. The biggest overhaul of trading rules took place in the 1980s through the Uruguay Round of talks, and eventually led to the creation of the World Trade Organization in 1995. The agenda of GATT/WTO has been to promote trade, reduce trade barriers through rounds of trade talks, and provide a venue for settling trade disputes. Introduction However, its raison d'être as the promoter of world trade was cast in doubt by a seminal paper by Rose (2004) , who found a negligible impact of WTO membership on the volume of bilateral trade flows. That paper spawned multiple follow-up attempts to validate or overturn Rose's surprising result. For instance, Subramanian and Wei (2007) show that the impact of GATT/WTO depends on what the country does with its membership, with whom it negotiates, and which products the negotiation covers. Introduction Developing countries (e.g., India) enjoyed special exemptions in particular sectors (e.g., textiles) from the liberalization of trade; once these exceptions are accounted for, the WTO does promote trade. Tomz et al. (2007) argue that many countries are mistakenly classified as outside the GATT, even though they were de facto members with similar rights and obligations. They show that not counting such countries as GATT members systematically underestimates the effect of GATT on trade flows. Liu (2009) highlights the sample selection bias in the traditional gravity formulation: many country pairs exhibit zero trade, which the traditional formulation ignores by examining only strictly positive trade flows. Accounting for this, he finds a strong role for the WTO in initiating trade between non-trading countries-the so-called partnerlevel extensive margin of trade, as opposed to the partner-level intensive margin (increases in trade between partners that already trade with one another). Felbermayr and Kohler (2006) also emphasize the decomposition of the expansion of trade into partner-level extensive and intensive margins. 1 In recent years, theoretical models of trade have emphasized firm-level productivity differences in trade patterns (the so-called new-new trade theory). These models arose out of empirical work showing striking firm-level differences in trading behavior. The data show that only a few firms export; among exporters, only a few firms export to more than a few countries; and most exporters only sell a small fraction of their output abroad. Moreover, exporting behavior is positively associated with productivity and size. (See Bernard and Jensen 1995 , 1999 , 2004 Clerides et al. 1998; Aw et al. 2000; Eaton et al. 2004.) Incorporating such firm-level heterogeneity into trade models leads first of all to a decomposition of trade expansion into an increase in export volume by firms that are already exporters (the firm-level intensive margin) and the the entry of new firms into the export market (the firm-level extensive margin). When firms produce differentiated products, these firm-level margins translate into product-level margins. Introduction Multiple theoretical papers have then analyzed the consequences of trade liberalization on these margins (Eaton and Kortum 2002; Melitz 2003; Bernard et al. 2003; Chaney 2008) . At the same time, empirical research (e.g. Hummels and Klenow 2005; Evenett and Venables 2002) have shown that countries differ in the variety of goods that they trade. Introduction In our paper, we decompose the total volume of trade into the extensive and intensive product margin and examine how membership in the GATT/WTO influences these two margins of trade. We link our empirical findings to the new-new trade theories to show support or lack of support for models with varying predictions about how the two margins are affected by trade liberalization. We also spend some time analyzing how bilateral trade preferences, through the formation of preferential trading arrangements (PTAs), and unilateral trade preferences, influence each of the 1. Throughout this paper, the terms "extensive margin" and "intensive margin", when used without a qualifier, refer to the product-level margins. Introduction extensive and intensive product margin. We do this decomposition, while accounting for the zeros in the bilateral trade matrices (zero trade between partners) and allowing the GATT/WTO, PTAs and GSP to influence the extensive partner margin of trade as emphasized by Felbermayr and Kohler (2006) ; Liu (2009) Introduction We begin, in Section 2, by taking a first look at the data. We decompose the evolution of the volume of world trade (among 148 countries over the period who account for 98% of all trade) into changes in the extensive product margin (the rise in trade in new products) and changes in the intensive product margin (rise in trade volume of goods that were traded at the beginning of the sample period). A couple of features stand out. First, as in Helpman et al. (2008) , we show that the rapid growth of world trade from 1970 to 1999 was predominantly due to the growth of the volume of trade among countries that traded with each other in 1970 rather than due to the expansion of trade among new trade partners. Second, amongst countries that traded with one another in 1970, the extensive product margin accounts for a significant fraction of the rise in trade volumes (72% over the period . We also perform an event study around the time of WTO accession showing the changes in the extensive and intensive product margins change in response to WTO membership. Introduction In Section 3, we perform two decompositions of the traditional gravity equation into an extensive and intensive product margin. The first one simply decomposes the volume of bilateral exports into the number of products multiplied by average export per product. The second follows the methodology of Hummels and Klenow (2005) . Introduction The Hummels-Klenow extensive margin of exports for a country pair measures the fraction of goods sold by the exporter in the destination but it weights each product by its importance in world exports to this destination. The Hummels-Klenow intensive margin is the market share of the exporter in the importer's total spending on the products the exporter sells there. The volume of bilateral exports equals the product of the two margins multiplied by the total imports of the destination country. Section 4 details the data sources and describes the other independent variables commonly used in the gravity equation specification. Introduction In Section 5, across gravity-based specifications for these margins, we show that the effect of WTO membership is mainly along the extensive product margin. In the most demanding specification (with time-varying importer and exporter fixed effects) we find that the WTO raises the extensive margin by 42% for the count measure and 29% for the Hummels-Klenow measure. In contrast, depending on the specification, WTO has either a negative impact or no impact on the intensive margin of exports as measured by exports per product. For the Hummels-Klenow intensive margin measure, we find mixed results-it is positive and significant in a subset of specifications and for some years in the data, and insignificant in others. This allows us to reconcile the Rose (2004) result with respect to WTO membership-if the WTO has opposing effects on the two margins, raising the extensive and reducing the intensive, then their product may remain unaffected. Finally, we find that the gravity specification is a good fit for explaining variations in the two margins, accounting for at least 50% of the variation in our preferred specification. Introduction We also obtain interesting results on the effect of PTAs. Across specifications, membership in PTAs reduces the extensive margin of exports and raises only the intensive margin of exports. Moreover, the reduction in the extensive margin in absolute terms often outweighs the rise in the intensive margin. This explains the fragility of estimated PTA effects on trade flows previously noted in the literature (Bergstrand 1985; Frankel et al. 1995; Ghosh and Yamarik 2004) . Finally, unilateral access via GSP raises both margins, and is most effective in raising the volume of bilateral exports. Section 6 concludes with various implications of our findings. Introduction Our paper makes three contributions. First, it shows that the effect of WTO membership is mainly on the extensive margin rather than the intensive margin. Broda et al. (2006) show that the extensive margin and the rise in imports of new varieties is responsible for important increases in productivity growth. The WTO, by facilitating such trade, has potentially large welfare effects. Second, our empirical results allows us to understand how well the theoretical predictions of the various new-new trade models are borne out in the data. Finally, our decomposition allows us to evaluate how well the traditional gravity specification holds up in the data for the extensive and intensive margins. A First Look at the Data We use bilateral trade data from two sources to examine the evolution of world exports. A First Look at the Data We use UNCTAD's COMTRADE database at the Harmonized System 6-digit (HS6) level of disaggregation where there are data on 5017 product categories or lines. A First Look at the Data UNCTAD provides the HS6 data over the period 1988-2006 for 183 importers and 248 exporters. 2 The data are collected by the national statistical agencies of the importing countries and covers all exporting countries. For each year in our sample, our data span more than 99% of all world trade, based on the calculation of total world trade using the IMF's Direction of Trade Statistics Database. The latter provides data on aggregate trade between country pairs where trade is summed over all products. A First Look at the Data We supplement this with trade data from the World Trade Flows Database (Feenstra et al. 2005) , which contain information on bilateral exports for more than 150 countries over the period . The authors give primacy to the trade flows reported by the importing country, whenever they are available, assuming that these are more accurate than reports by the exporters. They use exporter reports only when the corresponding importer report is not available for a country pair. The data are based on the 4-digit Standard International Trade Classification, revision 2, with 790 4-digit categories and accounts for 98 percent of all world trade. A First Look at the Data 3 While these data are available only at a higher level of aggregation than that of the UNCTAD data, they are available over a longer time frame with a consistent definition of product categories over time and across space. We use these data mainly for graphical depictions of the evolution of the extensive and intensive margins, over time. A First Look at the Data 2. Adding all the other explanatory variables, results in a sample consisting of 189 exporters and 167 A First Look at the Data importers, for a total of 24,261 country pairs. A First Look at the Data 3. Some trade gets classified at the 3-digit level but cannot be classified at the 4-digit level. We drop such trade. However, assigning it to fictitious sub-categories does not qualitatively affect our results. Evolution of Trade Figures 1 and 2 provide a graphical depiction of the evolution of the extensive margin of trade. We perform a decomposition of world trade similar to that of Helpman et al. (2008) , who derive and estimate a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes. We use the World Trade Flows Database and for the sake of comparison restrict the timeperiod from 1970-1999, the same one as in Helpman et al. (2008) . Figure 1 shows the evolution of the aggregate real volume of exports of all 158 countries in our sample, and of the aggregate real volume of exports of the subset of country pairs that had positive exports in 1970. The difference between the two curves (plotted as line 3 in Figure 1 ) shows the volume of exports due to the emergence of trade between country pairs who did not export in 1970. As in Helpman et al. (2008) , the graph suggests that the increase in the volume of trade over time can be mainly attributed to the expansion of trade between partners who were already trading in 1970. Event Study To finish our description of the data, we present the evolution of the intensive and extensive margins of trade around WTO accession dates. product margin. Average volumes per category increase one year before accession. Event Study Then there is a decline in the average value per category and then there is acceleration again. It seems that from this data we cannot establish any particular trend or pattern. Event Study But again, the dynamics of the intensive margin might be affected by other factors. To establish the role of WTO fro the product margins of trade we turn now to statistical analysis. Extensive and Intensive Margins of Exports We next create two measures of the intensive and extensive margins of exports. There are multiple ways to define the extensive margin of exports. These range from counting categories exported, to counting categories over a certain size, to weighting categories in various ways, etc. We construct measures that are close, albeit not identical, to the specification in Eaton and Kortum (2002) . Indeed, their model, which we briefly outline in the Appendix, is used to construct the gravity equation for the extensive margin of trade. Trade volume reflects an extensive margin (number of sectors/goods traded) and an intensive one (volume of trade per product/sector). Therefore, our first measure of the bilateral extensive margin is simply a count of the number of products exported from country i to country j at time t: The bilateral intensive margin is defined as the exports per product. This permits a natural and easily interpretable decomposition of the overall volume of bilateral exports X ni .t/ to destination n from exporter i at time t as Extensive and Intensive Margins of Exports the product of the extensive .N ni .t// and the intensive margins .x ni .t//. Since the gravity specification is always implemented in terms of the natural log of trade volumes, the sum of the logged margins will equal the log of the aggregate bilateral exports. Moreover, the sum of the estimated coefficients for the two margins of any independent variable will equal the coefficient on that variable in a standard gravity specification, with total bilateral exports as the dependent variable. In our dataset, the extensive margin in terms of number of products, is the highest between US and Canada, with the US exporting 4930 products to Canada in the year 1994. For this country-pair-year, we observe positive exports in 98% of all 5017 HS-6 product categories. We also observe that 70% of all bilateral exports is in less than 100 Extensive and Intensive Margins of Exports categories amongst all country pairs that exhibit strictly positive exports. However, once we take into account that 40% of all country pairs exhibit zero exports, we find that 90% of all bilateral exports is in less than 100 categories amongst all country pairs in the world. In terms of the intensive margin, we observe the highest intensive margins for oil exporters such as Angola, Iran, Iraq, Libya and Saudi Arabia. Extensive and Intensive Margins of Exports Following Hummels and Klenow (2005) , we construct an alternate measure of extensive and intensive margin of exports. Hummels and Klenow (2005) build on the methodology of Feenstra (1994) to investigate the extent to a country with a higher volume of exports does so because it exports a wider variety of goods (extensive margin) or because it exports larger quantities of each variety (intensive margin). 5. Feenstra (1994) and Feenstra and Kee (2004) provide microfoundations for the construction of these indices. These papers develop a methodology for measuring the impact of new varieties on productivity. Extensive and Intensive Margins of Exports It uses a constant elasticity of substitution (CES) specification that identifies the gains from variety by keeping track of only two factors: the elasticity of substitution among different varieties of a good and shifts in expenditure shares among new, remaining, and disappearing goods. The main intuition is that increasing the number of varieties does not increase productivity much if new varieties are close substitutes to existing varieties or if the share of new varieties is small relative to existing ones. Broda and Weinstein We construct the extensive margin of exports from county i to county n (dropping the time subscript t/ as Extensive and Intensive Margins of Exports where W denotes World, X j nW is the value of world exports of good j to country n; J ni is the set of products where country i has strictly positive exports to country n and J nW is the set of products exported by the World as a whole to n. Thus, this is a measure of the fraction of products in which country i exports to n, but it weights each product by its importance in world exports to n. Alternatively, it measures an individual exporter's market share in the importing country, had it sold the total amount imported of each good that it does sells there. Extensive and Intensive Margins of Exports The intensive margin of exports for county i to n (once again dropping the time subscript t) is Extensive and Intensive Margins of Exports where X j ni is the value of exports from country i to country n of good j . The intensive margin equals i 's nominal exports relative to W 's nominal exports in those categories in which i exports to n (J ni ). Thus, it measures the overall market share country i has within the set of categories in which it exports to n. 6 Note that the product of the two Hummels-Klenow margins is Extensive and Intensive Margins of Exports (2003) use this methodology as well and apply it to all U.S. imports. They find that increased import variety contributes to a 1.2% per year fall in the "true" import price index. Extensive and Intensive Margins of Exports 6. Hummels and Klenow (2005) calculate the two margins between country pairs relative to the rest of the world rather than to the world as a whole, as we do. We feel that the the two margins are more easily interpreted in terms of market shares if we use the world as a whole. Second, for a small subset of country pairs, the intensive margin may be negative. This would happen, for example, if a single country accounts for all exports to a destination country of the only product that is exported to it. Extensive and Intensive Margins of Exports where X n is simply the total imports by country n. Therefore, the decomposition of bilateral trade between county pair i and n is given by Extensive and Intensive Margins of Exports This implies that adding the coefficients on the extensive and intensive margins will not yield the traditional gravity coefficients. This will be the case only when we include time-varying import country fixed effects which would then exactly capture the term X n .t/. The Eaton and Kortum model assumes that each country n buys a good from exactly one source country i . This in turn implies that Extensive and Intensive Margins of Exports so that IM ni D 1 in the model and the extensive margin is EM ni D X ni =X n . There are two ways to reconcile this. Perhaps we simply lack data at extremely fine levels of disaggregation and if we have such data the assumption that each country buys a good from exactly one source country may well be true. An alternate explanation is that this assumption is not borne out in the data. Extensive and Intensive Margins of Exports The correlation between the count measure and the Hummels-Klenow extensive margin measure equals 0.86 and correlation between exports per product measure and the Hummels-Klenow intensive margin measure equals 0.88. Both measures of extensive margins are highly skewed. For instance, in the year 2006 (the last year for which data are available), we have data on 27,900 country pairs that had strictly positive bilateral trade flows. In 31% of these country pairs, we observe exactly one product being exported, whereas in only 7% of the sample, the exporting country exported more than 1000 products to at least one trading partner. Similarly EM ni < 0:05; for 54% of the country pairs whereas only 10% of country pairs exhibit EM ni > 0:5. Independent variables Market access. To capture market access and the ability to circumvent artificial trade barriers, we use three measures of preferential market access: multilateral, bilateral, and unilateral. Trade liberalization under GATT/WTO is on a Most Favored Nation basis, whereby trade concessions granted to one member should be available to all members. Therefore, multilateral market access, the main focus of our paper, is Since the early days of GATT, there have been two major ways in which the nondiscriminatory aspect has been violated. First, GATT permits exemptions to the MFN principle for regional or bilateral preferential trade arrangements that reduce local barriers to trade. Members in free trade areas and customs unions obtain privileged access to each others markets that do not have to be granted to non-members. Independent variables Such bilateral preferential trade arrangements are captured by a dummy variable which takes the value 1 if both trading partners are members in a preferential trade arrangements (PTA). Data on PTAs are also from the WTO website. PTAs account for 3% of our sample and 1634 of the 24,261 country pairs were part of a PTA for at least one year of the sample. The second major exemption to the multilateral principle is the Generalized System of Preferences (GSP). This is a scheme of trade preferences granted on a non-reciprocal basis by developed countries to developing countries. It is a unilateral tariff preference which facilitate developing country access to markets of rich countries. We code a dummy variable as 1 if the importing county j grants a GSP to exporter j at time t. 7 GSP data are from Andrew Rose's website. Independent variables 71 importing countries granted unilateral preferential access to at least one exporting country, whereas 124 exporters were beneficiaries under the GSP exception. Independent variables Gravity variables. We use traditional gravity variables-such as exporter and importer size, geographic distance, contiguity, colonial links, and linguistic similarities-to capture factors that facilitate or impede trade. Exporter and importer size are measured as nominal GDP, data for which are from the World Development Indicators. As suggested by the gravity model, GDP is measured as the logarithm of GDP in current US dollars (Baldwin and Taglioni 2006) . Geographic distance is measured as the logarithm of the distance (in kilometers) between the two most populous cities. Contiguity is a dummy variable that takes the value 1 if the country pair shares a common border. Linguistic similarity is captured using two variables: Independent variables one is a dummy that equals one if the country pair shares a common official language; the other takes the value one if a common language is spoken by at least 9% of the population. Colonial links are measured using two variables, one that measures whether a country pair were ever in a colonial relationship (one country was the colonizer and the other colonized or vice versa) and one that captures the fact if a country pair had a common colonizer (for instance, Singapore and Malaysia). Our final measure of links between countries is a dummy that takes the value one if a country pair in the past had been part of the same country (example, Georgia and Russia). Data on these variables are obtained from the CEPII bilateral distance database (www.cepii.fr). 7. GSP resulted in a substantial increase in developing country exports. For empirical evidence, see Baldwin and Murray (1977) , Romalis (2003) , and Rose (2004) . Empirical specification We estimate gravity models for the extensive and intensive margins using OLS in all specifications save one. All our specifications include time dummies to capture global shifts in the patterns of world trade. We also add various combinations of countryfixed effects. In one specification we use separate set of dummies for exporters and importers while in another we employ pair-specific dummies. Using fixed effects in this manner also dramatically reduces the scope for omitted variables and mismeasurement that may plague our estimates: with country-specific dummies, the intercepts take out all variation that is time-invariant and country specific, while the country-pair dummies account for all variation that is time-invariant but specific to bilateral pairs. Empirical specification In gravity model estimations, particular care has to be exercised in capturing the impact of the price indices, often addressed as multilateral trade resistance terms Baldwin and Taglioni (2006) argue that time-invariant country-specific fixed effects may not suffice, since omitted terms reflect factors that vary every year, so the country dummies need to be time varying. 8 To account for this, we employ two additional specifications. In one, we use time-varying, import country and export-countryspecific fixed effects, and in the second, we estimate each of the margins year by year with exporter and importer specific country dummies. These are very demanding specifications with the country-dummies capturing the multilateral trade resistance terms. When we estimate the model year-by-year, rather than report each gravity estimate, we only show the coefficient and the standard error on the GATT/WTO and 8. Feenstra (2002) argues that the fixed effects method provides consistent estimates of the average border effect across countries and recommends this as the preferred empirical method given the simplicity in its implementation. However, Frankel (2006) argues, that the trade diversionary role of the multilateral trade resistance indices may be overemphasized in the literature, and that adding a plethora of dummies (for time-and country-specific fixed-effects) entails eliminating a lot of variation in the data, with a consequent, unwarranted loss in statistical significance. Empirical specification PTA variables (Table 5 ). This also allows us to compare the coefficients for the WTO and PTA dummy over time. This, in turn, allows us to infer whether the GATT/WTO and PTA effects are increasing, decreasing, or roughly constant over time. Empirical specification Recent papers by Evenett and Venables (2002) Results The results from estimating gravity-specifications for the extensive and intensive margins of exports are reported in Tables 2 and 3 , respectively. columns (1)- Table 2 use the product count as the measure of the extensive margin, while columns (4)-(6) use the Hummels-Klenow measure of the extensive margin. Results Similarly, columns (1)- (3) in Table 3 use the export per product as the measure of the intensive margin, whereas columns (4)-(6) use the Hummels-Klenow measure of the intensive margin. All specifications include time-dummies, which accounts for all common global trends. All standard errors are adjusted for clustering on country pairs. Results In Table 2 , for both the pooled and the estimates with country fixed effects, the signs are as expected-entering GATT/WTO leads to a statistically significant 9. We use the IMF's Direction of Trade Statistics Database to confirm that the total volume of exports between a pair of countries is indeed zero. Standard errors, adjusted for clustering on country-pairs, are in parentheses. *significant at 10%; **significant at 5%; ***significant at 1%. Columns (1)-(3) use the number of products exported as measure of extensive margin; Columns (4)-(6) use the Hummels-Klenow measure of extensive margin. In all columns, we log the dependent variable. All columns include a constant (not shown). Results increase in the extensive margin. Moreover, the results are remarkably consistent regardless of the methodology used to construct the various margins of exports, count or Hummels-Klenow. To understand the magnitude of the effect consider the estimated coefficient on the GATT/WTO dummy in column (1). If both countries in a country pair are members of the WTO, then the coefficient of 0.363 implies that the WTO boosts the extensive margin of exports by 43%. Adding country-specific fixed effects in column (2), which accounts to some degree for the multilateral trade resistance terms, as well as time-invariant unmeasured country characteristics, reduces the magnitude of the effect to 31%. The corresponding magnitude of the effects, when we use the Hummels-Klenow measure of the extensive margin are 38% and 12.5% respectively in columns 4 and 5. In either case, the WTO exerts a significant influence on the extensive margin of trade. Columns 3 and 6 replaces the importer and exporter Standard errors, adjusted for clustering on country-pairs, are in parentheses. *significant at 10%; **significant at 5%; ***significant at 1%. Columns (1)-(3) use the export per product as the measure of intensive margin; Columns (4)-(6) use the Hummels-Klenow measure of intensive margin. In all columns, we log the dependent variable All columns include a constant (not shown). Results dummies with country-pair dummies (distinct dummies are used for exports from i to n and for exports from n to i ) so that the coefficient estimates are within-estimates. Results The country-pair dummies also eliminate the time-invariant cross-section correlation between any omitted terms (including multilateral trade resistance terms) and the included variables. This reduces the estimated impact of the WTO (comparing column (3) to column (1) and column (6) to column (4)) suggesting that this cross-correlation is positive. We find that for both measures of the extensive margin, the coefficient on WTO membership is significant so that if both the exporting and importing country join the WTO, their extensive margin rises significantly. The magnitude of this effect is 22% for the count measure and 10.3% for the Hummels-Klenow measure. That is, starting from a scenario where neither or exactly one of a country pair are in the WTO, as both become members, the exporting country experiences a rise in its extensive margin of exports. Results The estimated coefficients for bilateral PTAs in Table 2 suggest that country pairs who are members of a bilateral PTA also tend to be exhibit higher extensive margins. Results However, when we add country fixed effects, either importer and exporter specific as in column (2) or pair-specific as in column (3) then the sign on PTA becomes negative and significant. With the Hummels-Klenow measure of the extensive margin, we observe a similar effect -membership in PTAs reduces the extensive margin of trade significantly, once we add fixed effects, pairwise or country-specific. Similar to Rose (2004), who shows that the Generalized System of Preferences plays a strong role in trade flows, we find that across specifications GSP raises the extensive margin of trade. Results Therefore, market access granted by rich countries to poor countries is instrumental in raising their extensive margin of export, both over time and when compared to countries that lack such market access. 10 Next, the traditional gravity variables have significant explanatory power for the extensive margin. Country size, whether that of the exporter or the importer, increases the extensive margin of exports in line with Melitz (2003) . If we think of distance as capturing trading costs, then greater the distance between partners, greater is the threshold for exporting and lower are the extensive margin of exports. Countries that border each other exhibit higher extensive margin, as are countries with linguistic and colonial links. Finally, if a country pair were part of the same country, then these past ties tend to increase the extensive margin of exports. Overall, the traditional gravity variables affect the extensive margin of exports in much the same as it has been shown to affect bilateral trade flows. In terms of PTAs we find that unlike the extensive margin, bilateral trading arrangements are very effective in raising the intensive margin of exports across specifications, once the specifications include either county fixed effects or countrypair fixed effects. This is true regardless of the measure of the intensive margins used (see columns (2), (3), (5), and (6) in Table 3 ). For GSP, we do find that in three out of the six specifications in Table 3 , it increases the intensive margin of exports. In addition, the traditional gravity variables such as country-size, distance, linguistic and colonial links are all instrumental in influencing the intensive margin of exports. Results Next, to assure us of the validity of our results, we compare our estimates of the traditional gravity variables with those in the literature. While these coefficients are not shown separately, they can be easily calculated by adding the corresponding coefficients for extensive and intensive margins, where we measure the margins in terms of the number of products exported and the export per product. For instance, Standard errors, adjusted for clustering on country-pairs, are in parentheses. *significant at 10%; **significant at 5%; ***significant at 1%. In all columns, we log the dependent variable. All columns include a constant (not shown). Results if we add the coefficients on GDP of the exporter and importer from column (1) in Tables 2 and 3 , then the coefficients equal 1.150 for exporter GDP and 0.969 for importer GDP. Both and importer are close to unity in line with the traditional gravity estimates of the total volume of trade, which does not use any country or country-pair fixed effects. The coefficient on distance, 1:15, is also close to unity in line with earlier estimates. Next, sum of the extensive and intensive margin coefficients on contiguity (common border) and common language in column (2) are indistinguishable from those in Eaton and Kortum (2002) . We use column (2) since the Eaton and Kortum (2002) specification uses importer and exporter country fixed-effects. The coefficients on colonial ties are similar to the ones in Helpman et al. (2008) . Finally, the decline in the coefficient in GDP once country dummies or country-pair dummies are added reflect a similar pattern reported by Rose (2004) , Baier and Bergstrand (2007) , and Dutt and Traça (2010) . Table 4 presents results with the most demanding specification for the extensive and intensive margins. Here each specification includes a full set of time-varying exporter and importer specific fixed effects which should capture the multilateral traderesistance terms. As before, columns 1 and 2 show that GATT/WTO membership increases the extensive margin, as measured by the number of products exported, while it has no effect on the intensive margin. In fact, once we add time-varying country fixed effects, the coefficient on GATT/WTO is very close to the one in the most basic specification-the pooled gravity estimates of column (1) which includes only time dummies. The coefficient implies that the extensive margin of exports for country pairs that are GATT/WTO members is 42% larger than that of country pairs where either one or both is a non-member. Columns 3 and 4 show that the results for the Hummels-Klenow measure of the extensive and intensive margins. As before, we find that the extensive margin is higher for country pairs who are WTO members, and their bilateral extensive margin of exports is 29% larger. In column (4), where we find that the WTO membership is also instrumental in increasing the HummelsKlenow intensive margin of exports. This supports Melitz (2003) in whose model, a decline in variable trade costs, raises both the extensive margin (more firms export products) and the intensive margin (the market share of exporters). In terms of the other preferential trading arrangements, for PTAs, as before we see that PTAs reduce the extensive margin while positively influencing only the intensive margin of exports. Multilateral Trade Resistance GSP, meanwhile, helps raise both export margins. 11 Multilateral Trade Resistance In Table 5 , we estimate the extensive and intensive margins year-by-year, where every specification included a set of dummies for exporters and another for importers, as well as all pair-specific gravity variables shown in the earlier tables. This specification should also account fully for the multilateral trade resistance terms. Multilateral Trade Resistance Additionally, it gives us some insights into how the effects of WTO and PTAs have 11. As mentioned earlier, in Table 4 , the sum of the coefficients for any variable in columns (1) and (2) are exactly equal to the sum of the coefficients for the same variables in columns (3) and (4). The next four columns in Table 5 show the effect of PTAs on the extensive and intensive margins for each of the years in our data. Here the results for the HummelsKlenow measure are very striking. We see that country pairs who are part of a PTA have a significantly lower extensive margin but a significantly higher intensive margin. Multilateral Trade Resistance In many cases, the magnitude of the coefficient on PTA for the extensive margin is larger in absolute terms than the magnitude of the coefficient on PTA for the intensive margin. This reflects the fragility of estimated PTA effects previously noted in the literature (see Ghosh and Yamarik 2004; Frankel 1997; Frankel et al. 1995; Bergstrand 1985) . 12. This shift from GATT to WTO saw many countries acceding to the newly formed WTO. However, the WTO website notes their accession dates as 1994. Therefore, we find a string effect for 1994 as well. Multilateral Trade Resistance 13. Baier and Bergstrand (2009) argue that once we recognize the potential endogeneity of PTAs, the effect of PTAs on trade flows quintuples. However, finding good instruments is a non-trivial task. Selection-Bias A recent paper by Helpman et al. (2008) criticizes the traditional gravity model on the grounds that it includes only those observations where we see strictly positive bilateral trade flows. Helpman et al. (2008) argue that excluding these zeroes, when we take the log of the dependent variable, creates a sample selection bias which biases OLS estimates. In a recent paper, Silva and Tenreyro (2006) where k is an index for a particular religion. Selection-Bias 14 Before performing the Heckman correction, column (1) in Table 6 Standard errors adjusted for clustering on country-pairs in parentheses; * significant at 10%; ** significant at 5%; *** significant at 1%.; Column 1 presents Tobit estimates; Column 2 presents estimates of the selection equation and uses the common religion variable as the exclusion restriction; Columns 3 and 4 present Heckman corrected estimates for the extensive and intensive margins. All columns include a constant (not shown). Selection-Bias the WTO on the extensive margin is robust to accounting for the zero-trade flows phenomenon within the Tobit specification. The number of observations here rises to 364,923 which covers 189 exporters and 184 importers. The censored Tobit estimates imply that the marginal effect of WTO membership is to raise the extensive margin by 35.5% which is close to the estimates in Table 2 . In other words, the Tobit censored specification yields magnitudes which are very similar to the uncorrected specification in Table 2 . Selection-Bias The rest of the columns in Table 6 presents the results for both the probability of trade (selection equation) and the Heckman-corrected extensive and intensive margins. Column (2) shows the estimates for the selection equation, while columns (3)- (6) show the estimates for the extensive and intensive margins. All columns include exporter and importer dummies. The common religion index is the sole exclusion restriction and we see that the common religion index significantly affects the probability of trade in column (2). Not surprisingly, column (2) also shows that, the probability of trade is positively affected by all forms of trading preferences, unilateral (GSP), bilateral (PTAs) and multilateral (WTO). Next, columns 3 and 4 show that the coefficients on our variables of interest (WTO, PTA and GSP) are similar, in terms of sign, significance and magnitude, to our previous estimates, from using the traditional gravity model (column (2) in Tables 2 and 3 ). The inverse Mills ratio (not reported) is significant at the 1%, so that the hypothesis of independence of the selection and regression equations is easily rejected. Selection-Bias In sum, our results show that the impact of the WTO is mainly along the extensive margin, that PTAs increase the intensive margin of exports while reducing the extensive margin, and GSP has a positive impact on both margins. Moreover, the results obtained in the previous sub-sections are robust to controlling for selection bias. Robustness One of the drawbacks of the decomposition of bilateral exports into the number of products exported and exports per product is that the latter, the intensive margin measure, may decline in a mechanical fashion. This would happen, for example, whenever a country exports a new product, but the export value of the new product is small compared to the value of the previously exported products. This may bias the estimate of the WTO for the intensive margin to be negative. To account for this, we calculate the export per product while holding the set of goods constant, both before and after WTO accession. In Table 7 , we present results with the adjusted intensive margin, where the export per product is calculated on the basis of only those products exported over a three-year window before and after the accession date. Each column, except the last, corresponds to one particular year of accession, while the last column pools the data. All columns include exporter and importer fixed-effects. With these adjusted measure of intensive margins, we again see that WTO membership does not exercise a positive and significant influence. Further, as with the non-adjusted intensive margins, PTAs and GSP positively affect the adjusted intensive margins. Robustness Second, we evaluated whether the effect of the WTO was mainly due to multiple countries joining around the year of the switch from GATT to WTO. We did this by Standard errors adjusted for clustering on country-pair; * significant at 10%; ** significant at 5%; *** significant at 1% Robustness Each columns use the adjusted export per product as the measure of adjusted intensive margin as the dependent variable (in logs); The export per product is calculated over a three-year window before and after the accession date; Each column except the last corresponds to one particular year of accession; The last column pools the data All columns include a constant, all other gravity variables from Table 2 , country-specific fixed effects and time fixed-effects (not shown). Robustness confining our sample to exporters who joined prior to 1993 or after 1996. Again, we find that the extensive margin is positively influenced by WTO membership. Robustness Similarly, when we confine our sample to importers who joined prior to 1994 or after 1996, the extensive margin of exports continues to be positively influenced by WTO membership. We also allowed the sample to vary across various GATT/WTO rounds. Robustness If we split the sample into pre-Uruguay round vs. post-Uruguay round, none of our results are qualitatively affected. As a final sub-sample check, we dropped all the original members of GATT who signed the original GATT agreement in 1948. Again, this does not alter our conclusions regarding the importance of WTO membership for the extensive margin. Third, we reran all specifications with a second dummy variable that takes the value 1, if exactly one country in a country pair is a member of the WTO. Similar to Rose (2004) , in a majority of the specifications this coefficient on this variable is not statistically significant. In a small subset of the specifications, it negatively affects the extensive and intensive margin of exports. Fourth, we followed Tomz et al. (2007) and reclassified de facto members outside the WTO also as WTO members. This does not alter our conclusions either. Finally, we think that reverse causality is less likely to be an issue. While countries may join the WTO in order to participate in world markets and perhaps, increase exports, this is likely to be an overall policy goal. Bilateral exports and margins of exports are less likely to be impacted. Conclusion Rose ( (2003) . In that model, as trade barriers go down, exporters reduce prices, capturing a larger market share and increase exports (the intensive margin). At the same time, more firms now find it profitable to export and enter the export market (the extensive margin). Therefore, trade liberalization via the WTO, should raise trade volumes by increasing both margins of trade, a conclusion which is not supported by our results. Conclusion By contrast, in the Eaton and Kortum (2002) model, the entire adjustment is along the extensive margin, which is more in line with our findings. A third, and perhaps intriguing possibility is that the WTO is not at all about reducing trade barriers, variable or fixed. Rather it serves to resolve uncertainty in the mind of potential exporters regarding the evolution of international trade rules and they respond by exporting newer products into newer markets. As far as we know, none of the standard models in the new-new trade literature explicitly model uncertainty, and this has the potential to be a promising area of future research. Appendix: A Brief Exposition of Eaton-Kortum To understand the driving forces behind the movements in the extensive and intensive Appendix: A Brief Exposition of Eaton-Kortum margins of trade, we analyze the model of Eaton and Kortum (2002) , who derive an aggregate gravity equation across heterogeneous Ricardian sectors. The model is a multi-country multi-product model with differences in technologies across countries and differences in trade costs across possible bilateral trade relationships. The model is based on perfect competition and no differentiation of products according to country of origin. In its representation of the gravity relationship, the model resembles the standard gravity model based on monopolistic competition and on the Armington (1969) assumption that products are differentiated by country of origin. However, the underlying forces of gravity in the two models differ. In the Armington model, the set of goods in which each country specializes remains constant and hence a decrease in trade costs increases trade flows only at the intensive margin. In Eaton and Kortum (2002) , a fall in trade costs would also lead to an increase in the range of goods that each country exports, that is, to an increase in trade at the extensive margin. Appendix: A Brief Exposition of Eaton-Kortum The model is analyzed extensively in Eaton and Kortum (2002); we replicate only key features here to provide the theoretical background for our empirical analysis. Appendix: A Brief Exposition of Eaton-Kortum There is a continuum OE0; 1 of differentiated goods, indexed by j , and N countries, indexed by i and n. Production uses a single input and has constant returns to scale. Appendix: A Brief Exposition of Eaton-Kortum The cost of the input in country i is c i and country i requires 1=´i .j / units of the input to produce one unit of good j . Thus, country i 's cost of production of good j is c i =´i .j /. Appendix: A Brief Exposition of Eaton-Kortum Geographic barriers are modeled as "iceberg" costs: to deliver a unit from country i to country n requires producing d ni > 1 units of the good in country i . Under perfect competition, the price of good j produced in country i and delivered to country j is therefore its total cost Appendix: A Brief Exposition of Eaton-Kortum The importer, country n, selects to import from the country that offers good j .) The parameter Â is the same for all countries and it governs the dispersion of efficiencies with which each good is produced. A large value of Â implies low variability. Appendix: A Brief Exposition of Eaton-Kortum Given the distributional assumptions about efficiencies and the price definitions, we can derive the distribution of prices in country
{'paper_id': '58935691', 'title': 'Does WTO Matter for the Extensive and the Intensive Margins of Trade', 's2_url': 'https://api.semanticscholar.org/CorpusID:58935691', 'source': 'S2ORC'}