On deep trade agreements, institutions, and global value chains: evidence from Egypt

Abstract

This paper investigates the nexus between deep trade agreements, institutional quality, and global value chains (GVCs) in Egypt. Indeed, the enforcement of deep trade agreements requires good institutions to boost GVCs. Applying a Poisson Pseudo-Maximum Likelihood (PPML) estimator to control for heteroscedasticity and zero trade flows, we use bilateral and sectoral data on Egypt’s exported Foreign Value-Added (FVA) from the Eora dataset and merge it with the Deep Trade Agreement Dataset (World Bank). The findings of the paper support the positive relationship between the depth of trade agreements and GVCs at the aggregate level. In addition, differences in the quality of institutions reduce this positive effect. However, the sectoral analysis revealed a lot of heterogeneity across different sectors. Comparing the coefficients of trade agreements for different periods, one can conclude that GVC linkages in human-capital and technology intensive products have started to respond to deep trade agreements, pointing out the agreement depth matters for exports upgrading. The results remain robust after we control for the endogeneity between GVC and the depth of trade agreements and after we use alternative measures for institutions and for the agreement depth. From a policy perspective, this paper highlights the importance of deepening agreements and improving the quality of institutions to increase the participation of African countries, including Egypt in GVCs.