Deep Trade Agreements and Global Value Chains

Abstract

Preferential trade agreements have become deeper over time, often encompassing policy areas that go beyond traditional trade policy, such as investment, competition, and intellectual property rights protection. In the literature, a prominent argument why countries sign "deep" agreements is to promote and facilitate the operation of global value chains. This paper exploits a new data set on the content of trade agreements and data on trade in value added and in parts and components, to quantify the impact of the depth of trade agreements on bilateral cross-border production linkages. The results show that adding a policy area to a trade agreement increases the domestic value added of intermediates (forward global value chain linkages) and the foreign value added of intermediates (backward global value chain linkages) by 0.48 and 0.38 percent, respectively. At the sectoral level, the positive impact of deep trade agreements is higher for higher value-added industries, suggesting that deep agreements help countries to integrate in industries with higher levels of value added. For a larger sample of countries and years, the results confirm that an additional provision in a trade agreement increases bilateral trade in parts and components by 0.3 percent. The content of trade agreements also matters for global value chain integration, but the impact varies by income group. Provisions outside the current mandate of the World Trade Organization (investment and competition policy) drive the effect of trade agreements on North-South trade in parts and components. Provisions under the current World Trade Organization mandate (tariff reduction and customs facilitation) drive the effect of trade agreements on South-South trade in parts and components.

Keywords: International Trade and Trade Rules, Industrial and Consumer Services and Products, Transport and Trade Logistics, Competition Policy, Competitiveness and Competition Policy, Trade Finance and Investment