Do deep regional trade agreements facilitate regional production networks in Latin American and Caribbean countries?

Abstract

Using a structural gravity model, this study analyzes the causal effects of the depth of regional trade agreements (RTAs) measured by the coverage and legal enforceability of WTO-plus and WTO-extra policy areas on the production networks trade in all 33 Latin American and Caribbean (LAC) countries from 1990 to 2016. The study constructs a unique dataset on the indexes of the depth, breadth, and core depth of all RTAs in force that include at least two LAC countries, based on a World Bank database on RTAs’ contents. Results indicate that both the depth and breadth of RTAs have positive effects on the intra-regional parts and components exports in the LAC region. However, the effects are substantially heterogeneous by the type of agreements and the characteristics of country-pairs. The depth of custom unions among Latin American countries, mainly the Southern Common Market (MERCOSUR), has positive effects, whereas the depth and breadth of plurilateral free trade agreements with developed countries outside the region (e.g., the United States or European countries) have negative effects. These findings are robust to the use of the mirror import data, the use of three-year interval data, and the inclusion of future values that control for reverse causality.