Trade Policy Impact on Global Value Chain Participation of the South Asian Countries

Abstract

This article provides an empirical analysis on the relationship between trade policy and global value chain (GVC) participation of the South Asian countries using Asian Development Bank’s country-sector Wang, Wei and Zhu decomposed exports data. We employ theoretically grounded three-way fixed effects gravity model with bias correction for incidental parameter problem to get unbiased and consistent coefficients for trade policy variables. This study finds strong evidence for the depressing effect of border tariffs on bilateral exports and forward and backward GVC participation. The negative effects are most prominent in the agriculture and food sectors. Moreover, we find that the regional trade agreements (RTAs) of South Asian countries have a negligible impact on trade and GVC participation in most sectors. However, we find evidence for the phasing-in effect of RTAs and a strong negative effect on bilateral food trade and GVC participation. Reformulating trade policy priorities and restructuring the RTAs to remove strict general regulatory measures like sensitive lists and rules of origin (ROO) should be South Asian policymakers’ priorities for robust trade lead growth. JEL Classification: F14, L23, O11, O55, Q17