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 GVC activities to identify the main actors pushing for deep trade integration. To address the critical issue of endogeneity of GVC 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 deep-water ports can accommodate these new larger ships. Armed with this instrument, we find that GVC trade increases the probability of forming deep PTAs that include provisions regulating both trade-related policies and domestic regulatory regimes. GVC trade is a driver of deep preferential trade liberalization.