Publication Type

Working Paper

Publication Date

2-2016

Abstract

This paper reformulates the Melitz (2003) model into the structural gravity equation (Andersonand van Wincoop, 2003) for both untruncated and truncated Pareto productivity distributions.The former setup is isomorphic to a large set of trade models and implies thesame structural gravity equation, not a surprising result given Arkolakis et al. (2012). Thesecond setup represents a drastic departure from the previous class of models, as emphasizedby Melitz and Redding (2015), and leads to a structurally distinct gravity equation. We usethe structural gravity equations implied by these two models to evaluate the welfare gains fromthe GATT/WTO for 190 countries during 1950-2005. The ex post effect of membership inGATT/WTO on trade flows, outward and inward multilateral resistance, nominal income, andwelfare (measured by real income, or equivalently terms of trade) are estimated for each countryin every 5 year interval. The estimates indicate significant welfare gains for GATT/WTO membersand the gains systematically increase over years (between 2-5% in 1950 and up to 6-8% in2005). On the other hand, nonmembers experience increasingly larger welfare loss over the years(around -0.5% in 1950 and 2-3% in 2005) due to general equilibrium effects on import prices andsupplier prices. The estimates also suggest a systematic larger benefit for smaller countries tojoin the GATT/WTO: the welfare gain is larger for smaller member countries and the welfareloss is larger for smaller nonmembers. We also conduct counterfactual exercises for the potentialwelfare gains if all countries have had joined GATT/WTO in each of the years studied, andthe change in the GATT/WTO effects with the observed preferential trade agreements (PTA)and without them. The latter counterfactual exercise serves to quantify the potential stumbling or complementary effects of PTA on GATT/WTO. Finally, we extend the analysis to allow forvarying trade elasticity with respect to GATT/WTO membership across years or across developmentstages of the country pair. The results are overall confirmative of the large welfare gainscreated by the GATT/WTO system at the global level and across more than five decades of itshistory.

Discipline

Economics | Economic Theory | Growth and Development

Research Areas

Econometrics

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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