Deep Agreements and Global Value Chains

Abstract:
Preferential Trade Agreements (PTAs) are becoming a prominent feature of the world trading system. These agreements have increased in number and in depth -PTAs often encompass a set of disciplines that go beyond traditional trade policy such as tariffs to include investment, competition, intellectual property protection and other border and behind the border measures. 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). We exploit 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 PTAs on bilateral cross-border production linkages. We show that adding a provision to a PTA increases re-exported value added (forward GVC linkages) and foreign value added (backward GVC linkages) by 0.4 and 0.26 percent, respectively. On a larger sample of countries and years, our results confirm that adding a provision to the PTA increases trade in parts and components by 1.5 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) drive the effect of deep PTAs on South-South trade in parts and components.