Abstract
<div>The number of preferential trade agreements (PTAs) has increased tremendously since 1990. The natural question to ask is why. PTAs are not only about lowering down tariffs further than the most favoured nation (MFN) tariff levels. There are many economic and non-economic policies other than border policies that are addressed in PTAs. Trade agreements dealing with border policies (tariffs) are referred to as “shallow”; and those that are dealing with a broader set of policies are referred to as “deep”. Therefore, PTAs are about something deeper. Parallel to the increase in the PTAs, trade in intermediate inputs has grown exponentially over past decades. Therefore, the first question that arises is whether trade in intermediate inputs generates the need for deep integration. In this dissertation, we show that the nature of trade in intermediate goods requires deep integration. The second question to be addressed is whether the deep trade agreements need to be preferential. With a three-country model, we show that the deep bilateral agreements are rarely chosen over the shallow agreements. Finally, by introducing the deep integration in the multilateral trading system, we conclude that although trade in intermediate inputs calls for deep integration, they do not call for deep PTAs. However, deep integration is better implied under multilateral agreements. Therefore, the deep integration in economic policies does not contribute to the increase in the number of PTAs.</div>
Highlights
The number of preferential trade agreements has increased rapidly over the past couple of decades
We analyzed the need for deeper trade agreements when trades are in intermediate goods and whether trade in intermediate inputs can explain the reasons behind the proliferation of the Preferential trade agreements (PTAs) in recent decades
Our results show that when trade is in intermediate inputs, the inter-dependency between the trading parties requires agreements to be deeper than the conventional ones
Summary
Trade in intermediate inputs has been increasing in recent decades. Using OECD inputoutput table, Miroudot and Lanz [2011] have shown that trade in intermediate inputs has been growing at an average of 6.2% for goods and 7% for services between 1995 and 2006. The incomplete contract between buyers and sellers of intermediate inputs can impact the volume of trade in the intermediate goods and negotiation of trade measures other than the border policies or what is known as deep integration, which can induce the optimal level of inputs (Staiger [2012]). We show that trade between intermediate input suppliers and buyers involves opportunistic behavior that can lead to an inefficient trade volume of the intermediate inputs To eliminate this inefficiency trade agreement should go beyond the expected GATT/WTO final-good international trade policies. As a result of that, there is no under-investment on the level of intermediate inputs, and international terms of trade between two parties satisfy the market-clearing conditions As a result, this has an impact on the requirements for deep integration.
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