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 more than 450 active PTAs notified at the World Trade Organization (see Figure 1). This is clear evidence of an increasingly globalised world, where countries sign bilateral or regional agreements to strengthen commercial relations with consolidated and/or new trade partners. Preferential trade agreements are traditionally perceived as a way of granting preferential market access to trade partners. By signing a PTA, bilateral trade is expected to increase because of reduced tariffs. An interesting meta-analysis conducted by Head and Mayer (2014) reveals that the signature of a Preferential Trade Agreement raises bilateral exports by approximately 30%. However, PTAs may also be used by signatory countries to manage international migration flows and develop their networks of international production sharing, two challenging aspects of modern globalisation.

Figure 1: Number of RTAs notified at the WTO, per year and cumulated

The content of PTAs and the development of Global Value Chain

The content of PTAs has evolved over time. “Old” agreements, signed during the eighties and the nineties, essentially covered preferential market access provisions that reduced bilateral tariff (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). See Horn et al. (2010) for a detailed description of WTO+ and WTO-X provisions. Table 1 here below lists synthetically the WTO+ and WTO-X provisions as defined by Horn et al. (2010). Modern PTAs include provisions that go beyond pure market access purposes; as 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 2  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 (intended as a proxy for production network trade). Orefice and Rocha (2014) show that the inclusion of one additional provision in a PTA stimulates bilateral trade in parts and component on average by 1 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 (see table 5 in Orefice and Rocha 2014).
 

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.

PTAs as a device to manage international migration

PTAs can also be used by signatory countries as an instrument to regulate international flows of migrants. PTAs’ provisions aimed at easing visa and asylum procedures for workers moving among member countries, and/or provisions regulating the labor markets of signatory countries may favor bilateral migration of workers.[2] 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, in Orefice (2015) I find that the signature of a PTA (regardless of its content) stimulates bilateral migration by 24%. More interestingly, PTAs that include visa-asylum provisions stimulate bilateral migration flows by 35%; while PTAs that include provision regulating labor markets among member countries stimulate bilateral migration flows by 39%.

The design of PTAs to cope with globalization

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 (for example because of negative attitudes towards globalisation among their electorate), they can consider using PTAs to manage indirectly immigration in response to labour market shortages and/or production network trade if needed to improve the international competitiveness of domestic enterprises.

References

Head, K., and T. Mayer, 2014, "Gravity Equations: Workhorse,Toolkit, and Cookbook", chapter 3 in Gopinath, G, E. Helpman and K. Rogoff (eds), vol. 4 of the Handbook of International Economics, Elsevier: 131-195.

Horn, H., Mavroidis P.C. and A. Sapir (2010) "Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements" in The World Economy, vol.33(11) pp.1565-1588.

Orefice, G. "International Migration and Trade Agreements: the new role of PTAs", Canadian Journal of Economics, 2015, vol.47(4), pp.310-334.

Orefice, G. and N. Rocha "Deep integration and production networks: an empirical analysis”, The World Economy, 2014, vol.37(1), pp.106-136.