Re-Evaluation of Free Trade Agreement: Changes in Global Value Chain and Regional Value Contents

Abstract

Purpose – The purpose of this study is to evaluate the economic effects of FTAs using the concept of value-added exports. So far, the economic effects of FTAs have been dependent on decrease in import prices due to tariff cuts in importing countries, but the actual tariff reduction need to consider the value added of the exporting countries. Design/methodology – Value-added export refers to the added value created in the exporting country out of total exports. Among value-added exports, direct value-added export is interpreted as the Regional Value Contents (RVC), from which the economic effect of the FTA can be analyzed. A modified GTAP-VA model takes into account RVC in order to estimate accurate effects of FTAs. Findings – By the re-evaluation of the FTA based on the RVC, this paper makes it clear that the economic effects of the existing FTA methodology have the possibility of overestimation. In addition, as a new FTA with a strengthened Rules of Origin (ROO) is being initiated, a negative impact on international trade and GVC utilization may occur. Originality/value – This study introduces the concept of value-added export in analyzing the effects of FTAs. The new analysis methodology of this paper emphasizes the importance of value-added exports. Re-organization of GVCs would change regional trade agreements and empower ROO by weakening existing GVCs and transforming the value chain from global into regional scope.