Free trade agreements partnership and value chain linkages: Evidence from China

Abstract

AbstractAs multilateral trade negotiations have lapsed into stalemate, regional economic integration arrangements like free trade agreements (FTAs) are gaining growing prominence. We propose a theory on how a developing country's GVC linkages with partners are affected by partners’ position on the GVCs and the characteristics of the FTAs, and use a large matched data of China's trading partners to validate our hypothesis. We find that there are stronger value chain linkages between China and higher‐income economies, and the degree of mutual value chain dependence rises in line with the partner's development level. The GVC promoting effect of FTA partnership is more pronounced for China's value chain linkages with its higher‐income partners. The results survive various robustness checks and are likely to be informative for other developing countries.