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.