Indirect channel of trade agreements in deepening global value chains

Abstract

Preferential trade agreements (PTAs) between trading partners are known to have positive impact on the expanding and deepening of global value chain integration due to lower trade and investment barriers. Less is known, however, is if other PTAs of PTA partners have any impact on the value‐added trade linkages of the direct PTA partners concerned. Based on compositive indicators measuring the breadth and depth of PTAs from 2007 to 2018 and using Multiregional Input–Output Table database covering 62 countries and 35 sectors and the Content of Deep Trade Agreements database, this paper estimates the multiplicative form of the constant‐elasticity augmented gravity equation model by a Poisson Pseudo Maximum Likelihood (PPML) estimator. This study shows that indirect impact of the deepening of trade agreements of a country's PTA partner exerts positive, significant impact on value‐added exports of a country. Both backward and forward linkages of a country measured by various decomposition of valued added exports indicate this indirect channel of value chain deepening effect even outweighs the direct impact from the deepening of PTAs between direct trading partners with significant policy implications in formulating PTA strategies.