Global value chains and the design of trade agreements

Abstract

We explore the role of global value chains (GVCs) in the design of preferential trade agreements (PTAs). We propose a theory that focuses on firms involved in backward and forward GVC activities to identify the main actors pushing for deep trade integration. To address the critical issue of endogeneity of trade flows for trade policy, our identification strategy exploits a transportation shock: The sharp increase in the maximum size of container ships, which more than quadrupled between 1995 and 2017. The key variation in our instrument hinges on the fact that only deepwater ports can accommodate these new larger ships. Our strategy is flexible enough to generate excludable instruments for different value-added components of exports, which allows us to disaggregate the causal effect of GVC participation into backward and forward GVC activities. We find that trade through GVCs increases the probability of forming deep PTAs that include provisions regulating both trade-related and non-trade-related policies. We find also evidence that GVC activities affect the flexibility of PTAs. Our results indicate that trade intermediation by producers is the main driver of the design of trade agreements.