The Group of Eight (G8) is an unofficial forum of the heads of state of the eight leading industrialized countries. In this paper, I examine the effect of the G8 (and its predecessor, the G7) on international trade. I use a gravity model of trade; the panel data set covers bilateral trade between 175 countries from 1948 through 1999. I find that membership in the G7/G8 is consistently associated with a strong positive effect on trade. --institution,organization,agreement,international,multilateral,summit

Nitsch, Volker

English

Research Papers in Economics

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Nitsch, Volker
Working Paper
Does the G7/G8 promote trade?
Diskussionsbeiträge des Fachbereichs Wirtschaftswissenschaft der Freien Universität
Berlin, No. 2006/16
Provided in cooperation with:
Freie Universität Berlin
Suggested citation: Nitsch, Volker (2006) : Does the G7/G8 promote trade?,
Diskussionsbeiträge des Fachbereichs Wirtschaftswissenschaft der Freien Universität Berlin,
No. 2006/16, http://hdl.handle.net/10419/28042 
 
 
 
 
 
Diskussionsbeiträge des Fachbereichs Wirtschaftswissenschaft  
der Freien Universität Berlin 
 
 
Volkswirtschaftliche Reihe 
 
 
2006/16 
 
 
 
 
 
 
 
 
Does the G7/G8 Promote Trade? 
 
 
 
Volker Nitsch 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3-938369-41-8 August 12, 2006 
 
 
Forthcoming: Economics Letters. 
 
 
 
Does the G7/G8 Promote Trade? 
 
 
 
Volker Nitsch 
Freie Universität Berlin 
 
 
 
 
 
 
 
Abstract
The Group of Eight (G8) is an unofficial forum of the heads of state of the eight leading 
industrialized countries. In this paper, I examine the effect of the G8 (and its predecessor, the 
G7) on international trade. I use a gravity model of trade; the panel data set covers bilateral 
trade between 175 countries from 1948 through 1999. I find that membership in the G7/G8 is 
consistently associated with a strong positive effect on trade. 
 
 
JEL Code: F13, F15 
 
Keywords: institution, organization, agreement, international, multilateral, summit 
 
 
Address: 
Volker Nitsch 
Free University Berlin 
Department of Economics 
Boltzmannstrasse 20 
14195 Berlin 
Germany 
Tel.: (030) 838-56280 
Fax: (030) 838-54142 
E-mail: vnitsch@wiwiss.fu-berlin.de 
Web: http://userpage.fu-berlin.de/~vnitsch 
  1I. Introduction 
Recent research has produced some surprising results on the trade (liberalization) 
effects of international organizations. Rose (2004) finds that membership in the General 
Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization 
(WTO), the multilateral organization most prominently associated with trade liberalization, 
has no measurable effect on patterns of trade. Rose (2005) examines the trade effect of other 
international institutions (that have trade liberalization as part of their mandate) and finds the 
strongest effect for membership in the Organisation for Economic Cooperation and 
Development (OECD) and its predecessor the Organisation for European Economic Co-
operation (OEEC), an organization with a wide range of objectives (other than trade), a 
limited set of policy instruments and weak enforcement mechanisms. In this short note, I 
examine the effect on trade of another international institution which is at the center of global 
governance, the Group of Eight (G8) and its predecessor the Group of Seven (G7). 
 
II. G7/G8 
The G7/G8 is of particular interest for at least two reasons. One the one hand, the 
group shares many characteristics with the OEEC/OECD. It is a small, exclusive club of 
industrial economies; it has broad interests, including trade liberalization; and it has no legal 
power or sanctions. On the other hand, the G7/G8 represents a radically different institutional 
approach towards international cooperation. It is a very informal forum (the G7/G8 has no 
permanent staff of its own; the chair rotates between members); it often deals with major, 
complex issues; topics addressed vary according to current relevance; and compliance is often 
achieved by reaching consensual agreement among state leaders and the leaders’ subsequent 
personal commitment to these collective decisions. Most notably, with its informal 
organizational structure, the G7/G8 has been a blueprint for other (groups of) countries 
seeking to coordinate policies, such as the G20 or the G77. 
  2Is it really reasonable to expect that the G7/G8 has liberalized trade among member 
countries? While the G7/G8 has no clear mandate or objective, the frequency of the coverage 
of trade issues at summit meetings and the credibility of summit commitments on trade may 
provide some useful insights. Indeed, trade liberalization has often featured prominently on 
the summit agenda. Summarizing traditional summit themes, Bayne and Putnam (1995) argue 
(emphasis added): “A prime task of the summits […] has been to restrain protectionist trends 
among the G-7 countries. […] In addition, the G-7 summits have always sought to encourage 
international trade negotiations and promote their successful conclusion.” Kirton and Kokotsis 
(2003) note that international trade is one of only three policy areas (along with 
macroeconomic policy and north-south development) that has been dealt with by every 
summit since the start in 1975. Also, compliance with summit commitments appears to be 
particularly high in regard to agreements in international trade. Von Furstenberg and Daniels 
(1992) apply a scoring technique to evaluate the credibility of the commitments announced in 
the economic summit declarations and report a high score for trade commitments. Finally, in 
addition to the annual summit meetings, a network of supporting ministerial meetings has 
evolved which allow ministers to meet on a regular (as well as on an ad hoc) basis. According 
to Ullrich (2001), meetings of the trade ministers are widely viewed as having played a key 
role in multilateral negotiations of trade liberalization.
1
 
III. Data and Methodology 
To identify the effect of membership in the G7/G8 on international trade, I use a 
gravity model of trade; this model essentially links the bilateral value of trade between two 
countries to their economic size and the distance between them. It has been used extensively 
                                                 
1 The meetings of trade ministers are labeled Quadrilateral ministerials because in this forum 
the European Commission represents all member states of the European Union. 
  3in the literature. Most importantly, Rose (2004, 2005) applies this framework to analyze the 
effect of other international institutions on trade. 
In particular, I estimate an equation of the form: 
 
ln(Tijt) = α + β1 ln (Dij) + β2 ln(YitYjt) + Σk=3 βk Xijkt + γ1 G8_2ijt + γ2 G8_1ijt + εijt
 
where Tijt denotes real bilateral trade between countries i to j at time t; D and Y denote 
the standard gravity variables: the great-circle distance between the geographic centers of i 
and j and the real gross domestic product, respectively; X is a set of other control variables 
that are typically found to affect the bilateral pattern of trade, including per capita incomes, 
sharing a common land border, sharing a common language, membership in the same free 
trade arrangement, current and former colonial links, and sharing a common currency; G8_2ijt 
is a binary dummy variable that takes the value of one if both i and j are a member of the 
G7/G8 at time t; G8_1ijt is a binary dummy variable that takes the value of one if either i or j 
is a member of the G7/G8 at time t; and εijt is a stochastic error. 
To allow a direct comparison of the estimation results with Rose’s (2005) findings, I 
use exactly the same data; the data set has been graciously made available by Andrew Rose at 
http://faculty.haas.berkeley.edu/arose.
2
 
IV. Results 
Table 1 presents the results. The first column reports coefficient estimates derived 
from a simple pooled OLS regression (with year controls). Similar to Rose (2004, 2005) and 
others, I find that the gravity framework has a good empirical fit; (most of) the variables take 
on the expected sign and are statistically highly significant. I am mainly interested, however, 
in the effect of membership in international institutions on trade. For the GATT/WTO, the 
                                                 
2 See Rose (2005) for a more detailed description of variable definitions and data sources. 
  4IMF and the OEEC/OECD, I essentially reproduce Rose’s (2005) results. Membership in the 
OEEC/OECD is strongly positively associated with trade, while the point estimates are much 
lower (and even negative) for the other institutions. The most noticeable result, however, 
concerns membership in the G7/G8. The γ coefficients are positive, economically large and 
statistically highly significant. The point estimate of γ1 of 0.44 implies that trade between two 
G7/G8 members is 55% (=exp[0.44]-1) higher than trade between otherwise identical 
nonmembers. Analogously, the γ2 estimate of 0.41 implies that trade between a G7/G8 
member and a nonmember is greater by 51% (=exp[0.41]-1), possibly reflecting the support 
of the G7/G8 system for an open trading regime. Interestingly, Rose (2005) reports point 
estimates of about exactly the same magnitude for membership in the OEEC/OECD for which 
I find slightly reduced (but still large and significant) effects if I control for G7/G8 
membership. 
The other two columns of table 1 present the results of robustness checks, as does 
table 2. I have experimented with alternative estimation techniques (adding country-pair 
effects), entering the G7/G8 individually (without other institutional dummies), 
disaggregating the effect of regional trade agreements on trade, and splitting the sample 
across various (country and time) dimensions. The estimates of the G7/G8 effect on trade 
were generally robust to those perturbations. 
 
V. Summary 
The G7/G8 is a highly non-legalized institution. Still, it has situated itself at the center 
of global governance. In this paper, I examine the effect of the G7/G8 on international trade. 
Using a gravity model to examine trade between 175 countries over the period from 1948 
through 1999, I find that membership in the G7/G8 is consistently associated with a strong 
positive effect on trade. Even informal institutions may be successful in liberalizing trade. 
 
  5References: 
 
Bayne, Nicholas and Robert D. Putnam. 1995. “The G-7 Summit Comes of Age,” in Sylvia 
Ostry and Gilbert R. Winham (eds.) The Halifax G-7 Summit: Issues on the Table. Halifax: 
Centre for Foreign Policy Studies, Dalhousie University. 
 
Kirton, John and Ella Kokotsis. 2003. “Producing International Commitments and 
Compliance without Legalization: G7/8 Performance from 1975 to 2002,” University of 
Toronto. 
 
Rose, Andrew K. 2004. “Do We Really Know That the WTO Increases Trade?” American 
Economic Review. 94 (March): 98-114. 
 
Rose, Andrew K. 2005. “Which International Institutions Promote International Trade?” 
Review of International Economics. 13 (September): 682-698. 
 
Ullrich, Heidi. 2001. “Stimulating Trade Liberalization after Seattle: G7/8 Leadership in 
Global Governance” in John Kirton and George von Furstenberg (eds.) New Directions in 
Global Economic Governance. Aldershot: Ashgate. 
 
Von Furstenberg, George M. and Joseph P. Daniels. 1992. “Economic summit declarations, 
1975-1989: Examining the Written Record of International Cooperation,” Princeton Studies in 
International Finance #72 (Princeton: International Finance Section, Princeton University). 
 
  6Table 1: Benchmark results 
 Default  OLS  Fixed 
country-pair 
effects 
Random 
country-pair 
effects 
Both in G7/G8   0.44* 
(0.21) 
 0.53** 
(0.08) 
 0.68** 
(0.08) 
One in G7/G8   0.41** 
(0.04) 
 0.13** 
(0.02) 
 0.20** 
(0.02) 
Both in GATT/WTO  -0.09# 
(0.05) 
 0.29** 
(0.02) 
 0.25** 
(0.02) 
One in GATT/WTO  -0.10* 
(0.05) 
 0.17** 
(0.02) 
 0.12** 
(0.02) 
Both in IMF  -0.52** 
(0.10) 
-0.52** 
(0.04) 
-0.44** 
(0.04) 
One in IMF  -0.29** 
(0.10) 
-0.29** 
(0.04) 
-0.23** 
(0.04) 
Both in OECD   0.35** 
(0.04) 
 0.87** 
(0.04) 
 1.14** 
(0.04) 
One in OECD   0.36** 
(0.04) 
 0.29** 
(0.02) 
 0.47** 
(0.02) 
Regional FTA   1.15** 
(0.11) 
 0.76** 
(0.04) 
 0.87** 
(0.04) 
GSP   0.59** 
(0.03) 
 0.16** 
(0.01) 
 0.24** 
(0.01) 
Currency union   1.06** 
(0.12) 
 0.59** 
(0.05) 
 0.54** 
(0.05) 
Log distance  -1.10** 
(0.02) 
 -1.28** 
(0.03) 
Log product real GDP   0.90** 
(0.01) 
 0.47** 
(0.02) 
 0.87** 
(0.01) 
Log product real GDP per capita   0.27** 
(0.02) 
 0.19** 
(0.02) 
-0.04** 
(0.01) 
Common language   0.34** 
(0.04) 
   0.27** 
(0.05) 
Land border   0.58** 
(0.11) 
   0.74** 
(0.13) 
Number landlocked  -0.33** 
(0.03) 
 -0.57** 
(0.03) 
Number islands   0.03 
(0.04) 
   0.12** 
(0.04) 
Log product land area  -0.10** 
(0.01) 
 -0.07** 
(0.01) 
Common colonizer   0.65** 
(0.07) 
   0.32** 
(0.06) 
Currently colonized   0.94** 
(0.23) 
 0.10 
(0.09) 
 0.10 
(0.09) 
Ever colony   0.99** 
(0.11) 
   1.83** 
(0.17) 
Common country   0.01 
(1.05) 
   1.38 
(1.33) 
G7/G8=0  0.00 0.00 0.00 
GATT/WTO=0  0.13 0.00 0.00 
IMF=0  0.00 0.00 0.00 
OECD=0  0.00 0.00 0.00 
R
2 0.65 0.54 0.62 
  7Notes: Dependent variable is the log of real trade. Robust standard errors are in parentheses. 
Number of observations = 234,597. Time effects are included in all regressions (but not 
reported). ** denotes significant at the 0.01 level. 
 
 
Table 2: Robustness checks 
 
 Both  in 
G7/G8 
One in  
G7/G8 
Only G7/G8   0.55** 
(0.21) 
 0.48** 
(0.04) 
Separate regional FTAs   0.86** 
(0.13) 
 0.51** 
(0.04) 
Only 1970s   0.15 
(0.21) 
 0.46** 
(0.04) 
Pre-1985  -0.13 
(0.24) 
 0.18** 
(0.04) 
Post-1985   0.78** 
(0.20) 
 0.61** 
(0.04) 
No low-income countries   0.26 
(0.18) 
 0.34** 
(0.05) 
No middle-income countries   0.38** 
(0.15) 
 0.36** 
(0.06) 
 
Notes: Dependent variable is the log of real trade. Robust standard errors are in parentheses. 
Same set of regressors as in table 1. Time effects are included in all regressions (but not 
reported). ** denotes significant at the 0.01 level. 
 
 
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  10

Does the G7/G8 promote trade?

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