Abstract

Do regional trade agreements negatively impact non-members? This paper revisits this long-standing trade policy question using firm-level data and detailed information on the content of trade agreements. Differently from the conventional view on trade diversion, the analysis identifies a positive spillover effect of regional trade agreements: 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 deeper trade agreements, as they make member countries moresimilarin terms of the regulatory environment. Indeed, firms exporting regulation-intensive products benefit disproportionately more from deep trade agreements in destination markets, especially if the agreement includes nondiscriminatory provisions and addresses regulatory issues.

Highlights

  • Entering foreign markets is costly for firms in terms of information and adaptation costs (Roberts and Tybout, 1997)

  • The conventional view is that regional trade agreements (RTAs), by lowering tariffs between members, increase trade policy discrimination faced by firms in third countries leading to a contraction in their exports at the expense of less efficient producers in member countries

  • How do regional trade agreements affect non-members’ exports? The conventional view is that RTAs, by lowering tariffs between members, increase trade policy discrimination faced by firms in third countries, leading to trade diversion

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Summary

Introduction

Entering foreign markets is costly for firms in terms of information and adaptation costs (Roberts and Tybout, 1997). Stringency of the harmonized standards and the restrictiveness of the rules of origin We contribute to this literature by identifying through a firm-level analysis regulatory convergence in deep trade agreements (and, the presence of SPS and TBT provisions in RTAs) as a source of spillover effect. This expanded panel data set allows us to include a rich set of fixed effects and exploit firms’ previous export experience to estimate the effect of RTAs on non-member country firms Using this data set, we construct two dependent variables: firm export participation and entry dummies. While the likelihood of previous exports to a country that has a shallow agreement with the new destination is equivalent for the two types of products, the likelihood is higher for regulation-intensive goods in the case of deep trade agreements This suggests that firms exporting regulation-intensive products benefit disproportionately more from deeper RTAs. In the rest of the paper, we investigate this relationship econometrically. To test if third-country effects are driven by the harmonization of standards, we check if the effects are stronger for RTAs that include SPS or TBT provisions

Results
Continuous measure of regulation intensity
Alternative measure of regulation intensity
Alternative measure of depth
Full set of fixed effects
Conclusion
Provisions in deep RTAs
Costa Rican exports
Regulation-intensive products
Additional robustness tables
Full Text
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