Third-country effects of regional trade agreements: A firm-level analysis

Abstract

How do regional trade agreements impact exporters in non-member countries? We revisit this long-standing trade policy question using firm-level data from Costa Rica and detailed information on the content of trade agreements. Differently from the conventional view on trade diversion, the analysis shows that “deep” regional trade agreements can have a positive spillover effect: they increase the probability of export and entry of third-country firms that previously exported to one of the member countries. This spillover effect is driven by provisions that are nondiscriminatory and address regulatory issues, as they make member countries more “similar”, thus allowing to reduce entry costs. Indeed, firms exporting regulation-intensive products benefit disproportionately more from deep trade agreements in destination markets.