Trading up for development: the effect of deep trade liberalization on participation in global value chains (GVCs)

Zarlasht M. Razeq, International Relations (International Political Economy), McGill University
Economic Development, Economic Policy, Economics, International Economics, International Relations/Trade, Political Economy, Political Science
Keywords - GVCs, PTAs, trade integration, trade institutions , firms, investment, globalization, supply chains

Preferential trade agreements (PTAs) are powerful institutional tools for trade integration. In recent years, PTAs have increased in number and become more comprehensive to include beyond-tariff policy areas. It is well evidenced in the political economy of trade that PTAs increase members’ participation in international trade and, by implication, have a welfare-enhancing effect. However, what has received little attention is whether these agreements and their “deepening” have the same effect on members’ participation in new international trade patterns that have evolved in the past few years under the globalization of production and the formation of global value chains (GVCs). This doctoral thesis contributes to the study of PTAs and GVCs and asks whether and when the deepening of the preferential trade regime helps members and their producers to integrate and trade more with GVCs, and if they do, what are the implications for development and trade policy, especially for developing countries?

The project empirically examines these questions in three papers. The guiding argument is that deep PTAs are more effective in facilitating the participation of countries and firms in GVC because deep PTAs provide a unified institutional framework conducive to long-term stability in trade, investment, and production relations among countries and firms. The thesis takes a comprehensive conceptual, analytical, and empirical approach. Conceptually, it embeds itself in the new regionalism, trade theory, development, and GVC studies literature. Analytically, it divides the analysis process into macro (country) and micro (firm) levels and examines the expected effect at the country and firm levels. Empirically, it builds three separate datasets, combining macro (country-level) and micro (firm-level) on PTAs, GVCs, firms, and institutional quality and examines the expected effect using causal inference techniques. Chapter two (paper 1) examines if the proliferation of deep bilateral integration increases states’ participation in global value chains (GVCs). It provides robust evidence that deep trade integration increases states’ participation in GVCs, but the size of this effect varies across the design features of PTAs. Chapter three (paper 2) offers a unique measure of firms’ participation in GVCs and brings the question of local institutions into the discussion of firms’ participation in GVCs. It finds that when the regulatory quality of domestic institutions is high, the deepening of trade integration increases productive firms’ participation in GVCs. Finally, Chapter four (paper 3) examines if deep PTAs enhance the resilience of firms’ trade in GVC against unexpected supply chain disruptions, such as pandemics. It shows that deep PTAs mitigate the negative impact of supply chain disruptions on firms’ GVC relations.

Results suggest deep trade agreements are a powerful and enduring policy tool that can effectively organize trade in GVCs for development. However, the context matters. Participation in GVCs is conditioned not only on deep trade integration and the heterogeneous characteristics of firms but also on the design features of trade agreements and the quality of local institutions. This project contributes to the study of the new generation of trade agreements and their development impact on members in the context of the evolving patterns of international production and GVCs. Additionally, it draws implications for an evidence-based trade and development policy discussion on the PTAs-GVCs nexus.