Preferential trade agreements and multinational production

Abstract

This paper investigates the impact of deep integration in preferential trade agreements (PTAs) on multinational production (MP), i.e. the production carried out by firms outside of their country of origin. Using a structural gravity model, we find that tariff reductions have a positive impact on MP of goods. This effect is stronger for foreign affiliates trading intermediate inputs or serving the final demand. However, while deep provisions have no significant impact on foreign affiliates that produce goods, we find that deep integration provisions positively affects foreign affiliates operating in the service sector. These results suggest that the proliferation of PTAs with deep integration provisions has contributed to the growth of multinational production and facilitated the participation of foreign affiliates in global value chains.