Deep Trade Research Articles

Gravity for cross‐border licensing and the impact of deep trade agreements: Theory and evidence

AbstractWe examine whether deep regional trade agreements facilitate cross‐border licensing. A micro‐founded gravity equation for each supply mode is derived from a model in which heterogeneous firms choose to supply their goods to foreign markets through export, foreign direct investment or licensing. We present several comparative statics results regarding the effects of changes in the fixed costs of serving the destination country, the freeness of trade, and the strength of intellectual property rights protection on bilateral flows of licensing revenues. We then empirically test our theoretical predictions using data on the cross‐border flows of royalties and licence fees for 49 countries in the period 1995–2012. In addition to variables that capture the impact of shallow and deep regional trade agreements, we construct dummy variables that represent subcategories of IP rights‐related provisions. Consistent with our theoretical predictions, we find that improved access to the destination market through a deep regional trade agreement and stronger IP rights protection through a regional trade agreement with legally enforceable IP rights and technology‐related provisions increase bilateral flows of licensing revenues. Among IP rights‐related provisions, the accession to or ratification of existing international IP agreements and the protection of trademarks, patents, or industrial designs are important for facilitating cross‐border licensing.

Trade-driven model of “Hydropower for Rice” cooperation in the Lancang-Mekong River basin

There have been intense conflicts over water resources between upstream and downstream countries in the Lancang-Mekong River Basin (LMRB) over the past years, primarily due to the trade-off relationship between hydropower and rice production. Great potential for transboundary cooperation has been shown, such as China’s emergency water release in 2016 to alleviate downstream severe drought. However, there is still a lack of systematic cooperation pattern. To address this issue, the study proposes a trade-driven model of “Hydropower for Rice” cooperation, and then derives three key political factors including price weight, export rate, and terminal water level of reservoirs. Our results show that (1) The hydropower and rice production under the trade-driven model can approximate the centralized model, and the “Hydropower for Rice” cooperation is feasible. (2) For downstream countries, rice is the main product, and the rice production and economic benefit can be increased with a higher price weight or export rate. Compared to Thailand and Cambodia, Vietnam needs to engage in deeper trade with China. (3) For upstream China, hydropower is the main product, and the economic benefit of riparian countries can be increased with higher export rates. The discharge in the dry season is increased, which is driven by the trade of rice. Additionally, China’s initiative to reduce the terminal water level of reservoir Nuozhadu has the potential to further increase rice production in downstream countries. This study indicates that the transboundary cooperation in LMRB requires joint efforts of upstream and downstream countries.

Indirect channel of trade agreements in deepening global value chains

AbstractPreferential trade agreements (PTAs) between trading partners are known to have positive impact on the expanding and deepening of global value chain integration due to lower trade and investment barriers. Less is known, however, is if other PTAs of PTA partners have any impact on the value‐added trade linkages of the direct PTA partners concerned. Based on compositive indicators measuring the breadth and depth of PTAs from 2007 to 2018 and using Multiregional Input–Output Table database covering 62 countries and 35 sectors and the Content of Deep Trade Agreements database, this paper estimates the multiplicative form of the constant‐elasticity augmented gravity equation model by a Poisson Pseudo Maximum Likelihood (PPML) estimator. This study shows that indirect impact of the deepening of trade agreements of a country's PTA partner exerts positive, significant impact on value‐added exports of a country. Both backward and forward linkages of a country measured by various decomposition of valued added exports indicate this indirect channel of value chain deepening effect even outweighs the direct impact from the deepening of PTAs between direct trading partners with significant policy implications in formulating PTA strategies.

Deep trade agreements and international migration: the role of visa provisions

Abstract An increasing number of regional trade agreements contains provisions that ease access to visas among member countries, which reduces the administrative cost of crossing the border. Combining United Nations data on bilateral stocks of immigrants in the period 1990–2020 with World Bank data on the content of 279 regional trade agreements, this article presents robust evidence of a positive effect of visa provisions in regional trade agreements on bilateral migration: the presence of visa provisions in regional trade agreements increases the bilateral stock of immigrants by 5.8 per cent. This result is robust to an instrumental variable strategy addressing the endogeneity problem. The effect of the inclusion of visa provisions in regional trade agreements is particularly effective among country pairs with different income levels (such as North-South). For this type of country pairs, the presence of visa provisions in regional trade agreements increases the bilateral stock of immigrants by 12.7 per cent. Finally, the article shows that the effectiveness of visa provisions in regional trade agreements reduces with the anti-immigration sentiment of voters in the destination.

Impacts of deep trade agreements on trade and welfare – An application to China joining the RCEP and CPTPP

Using a quantitative trade model, this paper evaluates the trade and welfare effects of deep trade agreements in an application to China joining the RCEP and CPTPP. By feeding trade cost shocks from the changes in RTA deepness into the model, we find substantial gains from incorporating legal enforceability and dispute settlement provisions in both agreements. With the CPTPP being deeper than the RCEP, our counterfactual exercise of China joining the CPTPP shows that 69% of its welfare gains come from deepening RCEP provisions to the CPTPP level. For the RCEP members, the gains from deepening non-tariff-related core provisions are quantitatively important.

Heterogeneous trade effects of technical non‐tariff measures: Vietnamese agricultural imports

This study investigates the impact of technical non‐tariff measures (NTMs), specifically technical barriers to trade (TBT) and sanitary and phytosanitary (SPS), of Vietnam on agricultural imports and the role of deep trade agreements. This issue has been primarily focused on advanced countries but rarely studied for developing countries. The estimates indicate that the impacts of technical NTMs on imports from least developed countries (LDCs) and non‐LDCs are heterogeneous in terms of the measures' sophistication level. Simple technical NTMs, namely labelling, marking, and packaging requirements, increase agricultural imports from LDCs, while there is no significant impact on those from non‐LDCs. Other categories of TBT and SPS NTMs impede imports from LDCs, while benefiting imports from non‐LDCs. In addition, we found that deep trade agreements can ease the burdens of technical NTMs, but this is limited to imports from non‐LDCs. The findings of this study can help policymakers in better regulating agricultural imports to prevent harmful imports with minimal impacts on the benefits from trade.

Deep trade agreements and services trade: An analysis based on service trade provisions

AbstractOur paper builds a novel panel data sourced from the Regional Trade Agreements Database and Database on International Trade in Services Statistics (ITSS) to explore the heterogeneous effects of service trade agreements on services trade. Then we employ a gravity model with the Poisson pseudo‐maximum likelihood (PPML) estimation and obtain the following findings: First, both general service trade agreements and deep service trade agreements promote services trade. Yet, deep trade agreements have a higher trade‐expansion effect (roughly 21.53%) on services trade compared to general ones (16.9%). Next, based on the content of trade‐related provisions, we find provisions of rights of non‐establishment and natural person movement largely increase the services trade, while review provisions do not have a significant impact on services trade. Surprisingly, provisions with MFN status even exhibit a negative relationship with services trade. Third, with whom you sign the agreements matters. Deep trade agreements exert a positive and significant impact on services trade between high‐income countries (NN), low‐income countries (SS) and high‐ to low‐income countries (NS), but are insignificant between low‐ to high‐income countries (SN). Four, emerging regions, including China, may benefit more from deep trade agreements. As indicated by propensity score matching, deep trade agreements reduce service trade costs and improve the business environment more effectively than GTAs. Our empirical results are robust after controlling for the endogeneity of DTAs and GTAs. Our findings provide direct evidence for the role of deep service trade agreements in fostering international economic integration.

Deep Trade Agreements and Firm Ownership in GVCs

Abstract This paper focuses on the effect of preferential trade agreements and their depth on firm-to-firm ownership, in particular, along global value chains. It measures shareholder–affiliate ownership links at the country-sector-pair level to distinguish between vertical and horizontal links. The findings show that preferential trade agreements boost vertical international investment links (both backward and forward) while reducing horizontal investment. Deep preferential trade agreements stimulate investment particularly for sector pairs, where a high input specificity prevails.

Deep trade agreements, production position distance and bilateral global value chain participation

AbstractOwing to globalisation‐induced fragmentation of production across regions and reorganisation of global value chains (GVCs), more attention is being paid to the impact of deep preferential trade agreements (PTAs) on GVC participation. We examine how the promotional effect of deep trade agreements on GVC participation changes with GVC production position distance between member countries. We argue that production position distance has an inverted U‐shaped effect on the relationship between deep trade agreements and bilateral GVC participation. Specifically, starting with a short production position distance, an increase in production position distance can strengthen the promotional effect of deep trade agreements on bilateral GVC participation. However, when the production position distance reaches a certain threshold, an increase in production position distance weakens the promotional effect of deep trade agreements on bilateral GVC participation. Analysis of panel data, which covers 43 countries over the 2000–2014 period, supports our predictions. Further analysis shows that the inverted U‐shaped effect of production position distance on the relationship between deep trade agreements and bilateral GVC participation is more likely to take place in the manufacturing sector rather than in the services sector.

Does the depth of trade agreements matter for trade in services?

AbstractIn recent years, deep trade agreements have spread around the world and gone beyond tariff reductions. We aim to test whether the depth of agreements fosters trade in services. To do so, we use a structural gravity‐type model and build new indicators of the depth of agreements based on the number of articles that are legally enforceable and that are related to trade in services. We show that, while only the deepest trade agreements raise trade in services, the quality of institution determines how deep agreements affect both the intensive (measured by the quantity of trade) and extensive margins of trade (measured by the number of service products exported and the share of the most exported service product in total services exports). This result is more pronounced for some service provisions and is robust after we control for the endogeneity of deep trade agreements. Finally, our results also hold for the Middle East and North Africa countries that we examine as an example of an emerging region that has a comparative advantage in services but whose most of the trade agreements are rather shallow.

Unrealized opportunities: Exploring Russia’s untapped OFDI potentials amidst economic sanctions

The economic sanctions imposed by the United States, Europe, and other countries since 2014 have heightened the unpredictability and turbulence in the business environment for Russian firms, necessitating exploration of new international partners and transformation of economic relationships. This paper aims to examine the redirection of Russian outward foreign­ direct investment (OFDI) in the context of these economic sanctions, particularly those intensified since 2022. The analysis employs an estimated econometric model to compare actual and potential levels of OFDI, utilizing a comprehensive database covering 74 origin and 102 destination countries from 2010 to 2019. The estimation technique employs Poisson pseudo-maximum likelihood approaches. The findings indicate that Russian firms demonstrated underinvestment in most regions, except for Northern and Western Europe, during the examined period. The 2014 sanctions resulted in a significant decline in Russian OFDI to the countries imposing sanctions, while there was an increase in OFDI to Asia, the Middle East, and the CIS countries. As anticipated, the 2022 sanctions exerted additional pressure on Russian OFDI, leading to a further shift of their outflows towards Asia and the Middle East, which, however, could not compensate for the sharp decline in OFDI to the EU countries and North America. The results highlight the existence of untapped OFDI potential for Russia in African and Latin American countries as well as in the Middle East. These regions emerge as desirable partners for bilateral economic liberalization. From a policy perspective, the findings emphasize the importance for the Russian Federation to pursue deep trade agreements that encompass investment preferences, public procurement, and the protection of intellectual property rights with regions harboring untapped potential for OFDI. Additionally, expanding government support for domestic firms venturing abroad is crucial to sustain and enhance integration into the global economy, especially in the face of sanctions.

Deep trade agreements and trade costs

AbstractDeep trade agreements (DTAs) have boomed in recent years and extended their reach well beyond tariff liberalisation. This paper investigates the impact of deep trade agreements on trade costs from a global perspective. The results show that trade costs between partners that sign an agreement with the highest depth decrease by 10.3%. The results are shown to be robust to the consideration of interval data, different measures of the trade agreement depth, different datasets, and alternative estimation strategy. Furthermore, we provide supportive evidence of the spillover effect of DTAs. We find that non‐discriminatory provisions in DTAs significantly lower non‐tariff costs for non‐member countries, especially for agricultural goods.

Which Combination of Trade Provisions Promotes Trade in Value‐Added? An Application of Machine Learning to Cross‐Country Data

Over time, the trade agreements are witnessing a substantial change in their provisions by encompassing provisions beyond their conventional trade domain, such as labour market regulations, environmental regulations and competition policies. Theoretically, studies argued the role of signing an agreement with deep provisions to promote trade in value‐added, but empirical verification in favour of a few is rarely available. The present study attempts to identify this set of provisions included in deep trade agreements (DTAs) that positively impact the bilateral trade in value added. Using the traditional gravity model framework and its estimation through modern econometric and machine learning tools, the study shows that incorporating provisions relating to establishing and preserving economic rights in trade agreements promotes trade in value‐added among member countries. Notably, the study found the combination of three main policy areas: technical barriers to trade, competition policy and labour market regulations. Both econometric and machine learning methods confirm the significant impact of these three provisions. Understanding the significance of specific provisions holds relevance in the current scenario where major trading economies are calibrating trade agreements. From the policy perspective, disentangling a set of provisions might be relevant for designing and negotiating trade agreements.

Deep Trade Agreements and Heterogeneous Firms Exports

Deep Trade Agreements and Heterogeneous Firms Exports

Articles: Deep trade integration and North-South participation in global value chains

Do comprehensive trade agreements increase the participation of States in global value chains (GVCs) and contribute to their development? Although there is extensive evidence in the trade literature that deep preferential trade agreements (PTAs) can increase States’ bilateral export of final goods and, by implication, contribute to local development, much less is known about the characteristics of this effect on GVC relations. This paper answers the question in the framework of a gravity model and uses a comprehensive dyadic data set on trade in GVCs, PTAs, export and other characteristics for 188 countries and economies between 1990 and 2018. Results provide robust evidence that deep PTAs increase members’ bilateral trade in GVCs over the long term, especially when these agreements involve at least one developing country or economy and include provisions that support investment. These results underscore that GVC-facilitating deep PTAs are a powerful policy tool that can mobilize the potential of production and trade in GVCs for development.

Article 3 - The Evolution of Deep Trade Agreements

This paper takes a first look at new data on the content of Preferential Trade Agreements (PTAs). The data contain detailed information on the eighteen policy areas most frequently covered in PTAs, focusing on the stated objectives, substantive commitments, and other aspects such as transparency, procedures and enforcement. A number of new stylized facts emerge: (i) PTAs have reduced trade-weighted average tariff rates to less than 5 percent for more than two-thirds of countries; (ii) the number of commitments in PTAs has increased over time, particularly since the 2000s and in areas aiming at facilitating flows of services, goods and capital; (iii) deepening commitments have been accompanied by an increase in regulatory requirements, namely on enforcement; (iv) developing countries tend to have fewer commitments in PTAs, with larger gaps in areas such as labor and environment; (v) PTAs are more similar within blocs, but similarity can be significant even across blocs. The paper also discusses the challenges of quantification of PTA “depth” and its effects and proposes a research agenda for future work on trade agreements.

EU trade dynamics and the European model in the context of new globalization patterns and global governance

This article argues that European Union (EU) trade dynamics and (old and new) globalization challenges cannot be seen in isolation from their implications for the European (economic, social, environmental) model. The EU, a staunch defender of free trade and multilateralism, faces an increasingly messy international trading system and new realities that affect its external trade (environmental and geopolitical considerations, industrial policy). Its quest to promote external trade may however sit uneasily with European values, to which EU trade policy reviews pay tribute by letter, most recently enshrining the objectives of the European Green Deal. This article questions the EU’s unfettered defence of the European model in practice through its new generation trade agreements, which are a chief embodiment of its trade policy. Those increasingly stretch into non-traditional areas, which implies that they feed back into the European model in a way that traditional trade agreements have not, via multiple channels, including regulation (standards, also environmental and labour) or investor protection clauses. The issue whether the EU privileges trade over the European model is reflected in the difficulty to find a necessary consensus among member states to ensure the ratification of recent deep trade agreements.

What have we learned and how is EU trade policy to cope with new challenges?

The EU is in a prime position in trade but faces an onslaught of challenges where a weakened open trading order, recent shocks with impacts on the international economic system (the Covid-19 pandemic, the Ukraine war, climate change), geopolitics and changing globalization patterns combine. This article (and special issue) takes stock of what we have learned and summarizes how EU trade policy copes with new challenges. It brings together the different perspectives on global cooperation and trade, deep trade agreements, EU deep trade agreements and the lessons from CETA, the EU’s Trade and Sustainability Chapters, and the European (economic, social, environmental) model.

Credit constraints and spillover effects of financial market liberalization: Case of Colombia

We identify an effect of deep trade agreements that is previously not studied in the literature. The 2012 US-Colombia Trade Promotion Agreement caused Colombia to liberalize its financial markets, providing greater access to foreign financial services. We show that this financial market liberalization effectively reduced credit constraints faced by Colombian firms. We merge balance sheet data with export transaction data, allowing us to analyze changes in export decisions of more than 7000 firms over the span of 10 years. As a result of the reforms, in sectors that rely more on external financing, exports have increased to the rest of the world. That is, the trade-diversion effects of the agreement were reduced due to improved access to external financing by foreign capital. Thus, we demonstrate a new channel for potential welfare gains from trade agreements.

The Impact of Non‐tariff Barriers on Trade and Welfare

Deep trade agreements (DTAs) are widespread and have taken the world beyond tariff liberalization in goods trade. As the importance of global supply chains and the services sector has increased across the world, shallow tariff reductions have given way to deeper commitments that address non‐tariff barriers and behind‐the‐border barriers to trade. This paper shows that DTA commitments undertaken since the Uruguay Round have increased trade in goods and trade in services by over half in the long term. Taking reduced‐form trade elasticity estimates to a general equilibrium quantitative model, DTAs contributed over 40% to the welfare gains from trade globally and even more for advanced economies. China, India and the Eastern European bloc benefited the most from trade agreements. While most of the gains in China and India came from tariff reductions, the gains to Eastern Europe came largely from deep commitments during its accession to the EU. Applying the DTA estimates to ex ante analysis of Brexit, the losses to the UK from its departure from the deepest trade agreement in the world would not be offset by new deep trade deals with key non‐EU trade partners.