Juyoung Cheong

The WTO puzzle, multilateral resistance terms and multicollinearity

Since Rose’s (2004) striking finding of negligible WTO trade effects, numerous studies have attempted to solve the so-called WTO puzzle. These studies have progressively improved model specifications to control for potential sources of bias, but they often lead to conflicting results. Multilateral resistance terms (MRTs) are considered to be one of the most crucial factors to be accounted for to avoid the omitted variable bias in the gravity model. What has gone unnoticed, however, is that the control for MRTs leads to near-prefect multicollinearity because of the structural relationship between the variables that measure the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) membership status of any country pairs. This multicollinearity contributes to the fragility of the WTO effect estimates, as it dramatically increases SEs. In this article, we explain how this multicollinearity arises and provide evidence of it.

It Is Much Bigger Than What We Thought: New Estimate of Trade Diversion

Conventional estimate of the trade diversion (TD) effect of preferential trade agreements (PTAs) tends to be much smaller than that of the trade creation (TC) effect. This paper ex- amines two sources of estimation bias of the TD effect. The first bias of TD arises from the difficulty in controlling for multilateral resistance and other unobserved time-varying country heterogeneity when estimating both TC and TD effects simultaneously due to perfect mul- ticollinearity. The second one is the underestimation of TD and arises from the failure to recognize that the concept of TD is inapplicable for a substantial proportion of PTAs and, thus, that the conventional method wrongly counts cases where trade cannot be diverted as cases where trade is not diverted. This paper corrects these two biases by using fixed effects and introducing a new measure of TD which provides a better mapping between the theoretical concept and data characteristics. Removing the two sources of bias leads to a twelve-fold in- crease in the estimate of the TD effect. It is found that the total TD effect is comparable to the TC effect in dollar terms.

The Trade Effects of Tariffs and Non-Tariff Changes of Preferential Trade Agreements

The recent literature on preferential trade agreements (PTAs) emphasizes the distinction between the extensive and intensive margins. What has been missing is the distinction between tariff and non-tariff changes under PTAs. Tariff reduction is a quintessential feature of PTAs. But member countries of a PTA often pursue deeper integration through agreements on nontariff matters as well. Some member countries, however, may want to use non-tariff barriers to compensate for tariff cuts. The current study isolates the effects of tariff and non-tariff changes under PTAs. It involves the construction of a new dataset of bilateral tariff rates for 90 importing and 149 exporting countries over 1996-2010, covering the Harmonized System 2-digit level of product varieties. Given the complexity of non-tariff arrangements, we allow for heterogeneity across three different types of PTAs, namely custom unions (CUs), free trade agreements (FTAs), and partial scope agreements (PSAs). We further consider heterogeneity within each of these three PTAs regarding responding time, partner type, and product type. The key findings are: (i) nontariff changes under PTAs on average increase both the intensive and extensive margins of trade; (ii) PSAs do not have discernible trade impacts unlike FTAs and CUs (iii) CUs have a stronger trade impact than FTAs; (iv) the impact of CUs comes mostly from non-tariff changes, while that of FTAs comes from both tariff and non-tariff changes; (v) non-tariff changes associated with CUs have a stronger trade effect than those associated with FTAs, which in turn are stronger than those associated with PSAs (vi) non-tariff changes take a longer time than tariff changes to impact on the intensive margin; (vii) non-tariff changes under FTAs and CUs between industrial and developing countries increase the exports from the former to the latter more than the other way around; and (viii) there is substantial heterogeneity across sectors in their response to trade liberalization.

A Trade and Welfare Analysis of Tariff Changes Within the TPP

Abstract This paper examines the effects of the Trans-Pacific Partnership (TPP) tariff reductions on trade flows and welfare of the TPP members and nonmembers following the Caliendo and Parro (2015) method. We use comprehensive sectoral data on 39 countries and the rest of the world, including those in the Association of Southeast Asian Nations (ASEAN) and the Organization for Economic Co-operation and Development (OECD). Our results show that many TPP nonmembers along with the TPP members gain from the TPP tariff reductions, suggesting the existence of a positive externality, with the welfare gains mainly arising from the changes in the terms of trade. Our analysis also shows that the TPP members increase their imports from other TPP members and decrease from non-TPP members, but the trade creation effects exceed the trade diversion effects. Our calibration results under various assumptions of the model emphasize the role of multiple sectors and sectoral linkages in the welfare analysis of the TPP tariff reductions.