The Effect of Deep PTAs on Trade in Global Value Chains

• In Event: The Politics and Consequences of Trade Agreement Design

Abstract

Do deep PTAs increase trade in GVCs? From the extensive literature on the design of trade institutions, we know that deep preferential trade agreements (PTAs) with many provisions can significantly increase bilateral trade in goods and services and, by implication, contribute to economic development. What we know considerably less about, however, is whether the design elements of these agreements also matter for bilateral value-added (VA) trade, which is essentially the building block of global value chains (GVCs). This paper takes a gravity equation approach and estimates the average effect of PTAs on bilateral VA trade between 188 countries in 1990-2018. It finds that this effect greatly varies by the design features of PTAs and national income: deep PTAs have indeed a positive effect on bilateral VA trade but only when a) at least one partner is a developing country; and b) PTAs include investment-related provisions. These results imply that, moving forward, trade and development policy may need to recalibrate its tools towards supporting an open trade as well as investment regimes if its goal is to make the globalization of production work for development.

Author

• Zarlasht Razeq, McGill University