The trade effects of product market regulation in global value chains: evidence from OECD and BRICS countries between 2000 and 2015

Abstract

Global Value Chains (GVC) have reshaped the landscape of international trade. The quality and intensity of regulation significantly impacts firms' competitiveness and their ability to engage in GVC. Economic literature suggests that regulation of product market competition has a detrimental effect on trade by decreasing productivity, innovation, and economic growth. This paper expands existing knowledge on this relationship by examining the influence of product market regulation (PMR) on value-added trade flows in an augmented gravity model. We constructed a data panel with trade data from 40 OECD and BRICS countries in the period from 2000 to 2015 and combined it with an extensive multi-level indicator set on PMR developed by the OECD. By disentangling the PMR indicators, we account for the heterogeneity of regulation and potential different trade effects. Overall, our evidence suggests that PMR has a negative impact on trade. Further, our results indicate that the negative impact stems largely from barriers to trade and investment. For the BRICS, our results suggest the contrary: We observed an overall positive trade effect of PMR, mainly driven by barriers to trade and investment. Our results support identifying policy areas in which regulatory reform can improve the integration in GVC and emphasize different approaches to economic policy, particularly in emerging economies such as the BRICS. Moreover, the results underline the detrimental effects of increasing protectionism and tariff hikes, a phenomenon that we increasingly observe in recent years from the world’s largest economies, such as the United States and China.