International supply chains and trade agreements

ABSTRACT

There is a growing literature that examines the role of trade agreements on the formation of international supply chains. The evidence indicates that in general countries that share trade agreements are more likely to develope cross-border supply chains. In this analysis, we argue that in order to examine the effects of trade agreements on the formation of supply chains between two countries, it is not enough to analyse the impact of the trade agreements that the two countries share but it is also important to assess the impact of the trade agreements that they share with third countries. Using data on trade in value added for 129 countries, we show empirically that about 40% of the potential increase in trade in value added induced by a trade agreement between an importing country and a sourcing partner is wiped out by each additional trade agreement signed by the importing country with third nations in which the sourcing partner is not a member. The result has important implications for regions seeking to develop international supply chains but in which the process of integration is highly fragmented.

KEYWORDS:

• Global value chains
• trade agreements
• trade in value added
• rules of origin

JEL CLASSIFICATION:

• F10
• L23

Acknowledgment

We would like to thank Denisse Pierola, Mauricio Mesquita Moreira and Christian Volpe for their helpful comments and suggestions. The views and interpretations in this paper are strictly those of the author and should not be attributed to the Inter-American Development Bank, its Board of Directors, or any of its member countries

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ It should be noted that the value added used in country i from country j (our dependent variable) can arise from two sources: directly from country j when this country exports intermediate inputs to country i, and indirectly through third countries when they use value added from country j to produce goods that are subsequently exported to country i. It is reasonable to expect that the explanatory variables in Equation (1) affect only the direct portion of this value added. Therefore, to the extent that our dependent variable is ‘inflated’ by a portion of value added from country j that might not be affected by these variables, the regressions coefficients from Equation (1) might be taken as lower bounds of the effects of the covariates on the foreign value added that directly comes from country j.

² Note that a negative correlation between these two variables is expected because a trade agreement tends to incentivize exports which would cause to decrease.

³ Measured as the distance in Km between the two most populated cities of the countries (in logs).