Non-trade issues in preferential trade agreements and global value chains

Abstract

How do labor and environmental provisions (also known as non-trade issues) that are increasingly part of preferential trade agreements (PTAs) affect investment patterns within global value chains (GVCs)? In this article, we explore how the design of these provisions and the local regulatory environments of trading partners influence the geography of production. By employing a difference-in-difference analysis of quantitative data on the design of non-trade issues in 478 PTAs and mergers and acquisitions between 1948 and 2018, we assess the influence of labor and environmental provisions in PTAs on GVCs. Building on the legal and business studies literatures, we expect and empirically find that when countries join PTAs, enforceable non-trade clauses interact with domestic regulatory environments and induce changes in GVCs, especially in Global North hosts. Our findings provide nuance to our current understanding of the interconnections across trade agreement design, domestic regulations, and vertically integrated multinational production.