Managing global value chains and migration through deep preferential trade agreements

19 November 2018
  • Preferential trade agreements (PTAs) can be used by signatory countries to manage their participation in global value chains as well as cross-border migration flows.
  • The inclusion of one additional provision in PTAs stimulates the bilateral fragmentation of production by one percent. PTAs that facilitate visa and asylum administrative procedures stimulate bilateral migration by up to 34 percent.

 

The number of preferential trade agreements (PTAs) around the world has grown exponentially over the past thirty years. From less than 100 in the nineties, there are today over 450 active PTAs notified at the World Trade Organization. This is evidence of an increasingly globalised world where countries ratify bilateral or regional agreements to strengthen commercial relations with consolidated and/or new trade partners.

Preferential trade agreements are traditionally perceived as a means of granting preferential market access to trade partners. An interesting meta-analysis reveals that signature of a PTA raises bilateral exports by approximately 30 percent. Moreover, PTAs can also be used to manage international migration flows and the development of transnational production sharing networks, two challenging aspects of modern globalisation.

Preferential trade agreements and the development of global value chains

The content of PTAs has evolved over time. “Old” agreements, signed during the eighties and nineties, essentially covered preferential market access provisions that reduced bilateral tariffs (symmetrically or not). “New” PTAs tend to cover a wider range of provisions spanning from those already covered by the mandate of the WTO (WTO+) to provisions that go beyond the mandate of the WTO (WTO-X).

Table 1. WTO+ and WTO-X policy areas in preferential trade agreements

Source: Horn et al. (2010)

As noted, modern PTAs include provisions that go beyond pure market access purposes. Some may include, for example, provisions regulating environmental issues, regional and industrial cooperation, or taxation. The number of provisions included in a PTA may be seen as a proxy for its horizontal depth.[1]

The depth of recent PTAs can be seen as a way for countries to secure bilateral partnerships and narrow the international gap in business laws and regulations. In particular, WTO-X provisions, such as those regulating the bilateral movement of capital, competition policy, and intellectual property rights, may favour and enable the development and participation of countries in internationally fragmented production networks. Figure 1 shows the strong correlation between the average depth of PTAs (by decade of signature) and the amount of trade in parts and components among member countries (here intended as a proxy for production network trade).

Figure 1. PTA depth and trade in parts and components

Research shows that the inclusion of one additional provision in a PTA stimulates bilateral trade in parts and component on average by one percent. Specifically, while including an additional WTO-X provision in an agreement increases trade by 1.3 percentage points, having an additional WTO+ provision increases production network trade by 1.5 percent.

The role of PTAs in managing international global value chains thus becomes evident. By playing with the type and depth of provisions included in bilateral or regional agreements, countries may secure and develop their own networks of international production sharing.

Preferential trade agreements as tools to manage international migration

Preferential trade agreements can also be used by signatory countries as an instrument to regulate international flows of migrants. Provisions aimed at easing visa and asylum procedures for workers moving among member countries, and/or provisions regulating labour markets may favour bilateral labour migration.

Moreover, the signing of a PTA (regardless of the inclusion or not of migration-related provisions) may affect bilateral migratory flows by raising awareness of partner countries among potential migrants. All other factors affecting migration being constant, the improved diplomatic relations and greater familiarity among PTA members may induce potential migrants to select their destination country among those with whom the origin has a PTA in common.

Using an instrumental variable approach to solve the endogeneity problem, I find that the signature of a PTA (regardless of its content) stimulates bilateral migration by 24 percent. More interestingly, PTAs that include visa-asylum provisions stimulate bilateral migration flows by 35 percent, while PTAs that include provisions regulating labour markets among member countries stimulate bilateral migration flows by 39 percent.

The design of preferential trade agreements to manage globalisation

These results are of extreme interest for policymakers as they suggest that PTAs may be used to manage international production networks and the cross-border migration of workers.

If governments are restricted in their ability to increase migration inflows and/or develop production networks through direct liberalisation policies (due to negative attitudes towards globalisation among their electorate for example), they can consider using PTAs to manage indirectly immigration in response to labour market shortages and/or production network trade to improve, if needed, the international competitiveness of domestic enterprises.

 

Gianluca Orefice is Economist at the Centre d’Etudes Prospectives et d’Information Internationales (CEPII), Paris.

The post is part of the ICTSD blog series on Understanding Trade and Migration in the Global Economy.


[1] The horizontal depth of a PTA contrasts with the concept of vertical depth, approximated by the degree of integration guaranteed by a given provision.