Deep Trade Agreements and Global Value Chains

Abstract

Preferential Trade Agreements (PTAs) have become deeper over time, often encompassing a set of disciplines that go beyond traditional trade policy such as investment, competition, and intellectual property rights protection. In the policy and theory literature, a prominent argument why countries sign "deep" PTAs is to promote and facilitate the operation of Global Value Chains (GVCs). This paper exploits a new dataset on the content of PTAs and data on trade in value added and in parts and components to quantify the impact of deep trade agreements on bilateral cross-border production linkages. Results show that the positive impact of deep trade agreements on GVC integration is driven by value added trade in intermediate rather than in final goods and services. Adding a policy area to a PTA increases domestic value added of intermediates (forward GVC linkages) and foreign value added of intermediates (backward GVC linkages) by 0.48 and 0.38 percent, respectively. At the sectoral level, the positive impact of deep PTAs is higher for higher value-added services suggesting that deep agreements help countries to integrate in industries with higher levels of value added. On a larger sample of countries and years, results confirm that adding a provision to a PTA increases bilateral trade in parts and components by 0.3 percent. The content of PTAs also matters for GVC integration, but the impact varies by income group. Provisions outside the current WTO mandate (e.g. investment, competition policy) drive the effect of deep PTAs on value added trade and on North-South trade in parts and components. Provisions under the current WTO mandate (e.g. tariff reduction, customs facilitation) drive the effect of deep PTAs on South-South trade in parts and components.

The African Continental Free Trade Area: Economic and Distributional Effects

“…A second phase of negotiations will focus on investment, competition, and intellectual property rights, with the potential of deepening AfCFTA. Research finds that deep trade agreements boost trade, foreign investment, and participation in global value chains (Laget et al 2018;Mattoo, Mulabdic, and Ruta 2017;Mulabdic, Osnago, and Ruta 2017). And yet these areas also involve complex negotiations.…”

The impact of preferential trade agreements on bilateral trade: A structural gravity model analysis

“…In addition to the effect of PTAs on bilateral trade and the design of PTAs, this study also investigates how PTAs affect intermediate goods trade. Existing literature referring to the GVCs tends to study how deep trade agreements affect different trade types [61][62][63]. Laget et al [62] use trade data in both value-added and gross forms to provide a complete picture of GVCs trade as possible and found that the positive impact of deep trade agreements on GVCs integration is driven by value-added trade in intermediate rather than final goods and services.…”

“…Existing literature referring to the GVCs tends to study how deep trade agreements affect different trade types [61][62][63]. Laget et al [62] use trade data in both value-added and gross forms to provide a complete picture of GVCs trade as possible and found that the positive impact of deep trade agreements on GVCs integration is driven by value-added trade in intermediate rather than final goods and services. In contrast to Laget et al [62], scholars [61,63] use the EORA multi-regional input-output (MRIO) data to derive variables for trade in value-added, as these offer greater country coverage.…”

“…Laget et al [62] use trade data in both value-added and gross forms to provide a complete picture of GVCs trade as possible and found that the positive impact of deep trade agreements on GVCs integration is driven by value-added trade in intermediate rather than final goods and services. In contrast to Laget et al [62], scholars [61,63] use the EORA multi-regional input-output (MRIO) data to derive variables for trade in value-added, as these offer greater country coverage. They found that broader PTAs have a larger impact on trade flows involving intermediates relative to flows involving all products, suggesting that GVCs trade is particularly sensitive to the scope of trade policy cooperation [61].…”

“…Following previous studies [61,62], we use the latest release of the EORA MRIO tables [71]. The rows in an MRIO table indicate a gross output from a particular industry in a particular country and comprise two main components.…”