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The economics of deep trade agreements: A new eBook

Summary:
While multilateral trade negotiations have stagnated and tensions between major players have surged, bilateral and regional agreements seem to have run away with the trade agenda. There are over 300 agreements today, up from 50 in 1990. Most importantly, many of these agreements have extended their reach well beyond tariffs, aiming to achieve integration beyond trade, or ‘deep’ integration. This column introduces a new eBook from CEPR and the World Bank that focuses on the determinants of deep trade agreements, how they affect trade and non-trade outcomes, and how they might shape trade relations in a post-COVID-19 world. While the 164 members of the WTO have collectively failed to agree on new rules at the multilateral level (Evenett and Baldwin 2020), they

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While multilateral trade negotiations have stagnated and tensions between major players have surged, bilateral and regional agreements seem to have run away with the trade agenda. There are over 300 agreements today, up from 50 in 1990. Most importantly, many of these agreements have extended their reach well beyond tariffs, aiming to achieve integration beyond trade, or ‘deep’ integration. This column introduces a new eBook from CEPR and the World Bank that focuses on the determinants of deep trade agreements, how they affect trade and non-trade outcomes, and how they might shape trade relations in a post-COVID-19 world.

While the 164 members of the WTO have collectively failed to agree on new rules at the multilateral level (Evenett and Baldwin 2020), they all have contributed to writing new trade rules in bilateral and regional trade agreements. The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the United States-Mexico-Canada Trade Agreement (USMCA), the Regional Comprehensive Economic Partnership (RCEP), the African Continental Free Trade Area (AfCFTA) are just some of the major agreements that were signed in recent years.

Regional agreements are not a new feature of the global trade system; they have been around long before multilateral trade rules were even established. What is new is the recent surge in their number, from less than 50 in 1990 to more than 300 today, and especially their increased complexity. While WTO rules still form the basis of most trade agreements, regional agreements have in some sense run away with the trade agenda. As Pascal Lamy recently put it:

More than tariffs, trade agreements today are about regulatory measures and other so called “non-tariff measures”, that were once the exclusive domain of domestic policymaking. For these reasons, “deep” trade agreements, as trade experts refer to this new class of agreements, are fundamentally different than the previous generation of trade agreements. (Lamy, 2020). 

A new CEPR–World Bank eBook (Fernandes et al. 2021) brings together recent research on the economics of deep trade agreements (DTAs). What are the determinants of DTAs? How do their detailed provisions affect trade and non-trade outcomes? Are these effects different from those of shallow trade agreements? The research builds on the detailed information collected by the World Bank on the content of trade agreements in force and notified to WTO up to 2018. In this column, we provide a brief overview of the key new findings in the eBook. 


Download The Economics of Deep Trade Agreements here.


What are deep trade agreements?  

If one looked at what policy areas trade agreements covered when the General Agreement on Trade and Tariffs (GATT), the precursor of the WTO, was signed back in 1947, there would be little difference between the scope of multilateral and regional rules. While the average regional agreement 70 years ago covered eight policy areas, mostly tariffs and other border measures, in recent years they have averaged 17 (Figure 1). At the same time, the number of commitments that governments have taken in trade agreements has largely increased, along with provisions requiring stronger transparency and enforcement mechanisms. The new World Bank data provide evidence on the content of trade agreements both at the extensive margin (number of policy areas covered) and the intensive margin (commitments within a policy area). 

Figure 1 Number of policy areas covered in regional trade agreements, 1970-2017

The economics of deep trade agreements: A new eBook

Source: Hofmann et al. (2017).

Economists traditionally evaluate trade agreements on the basis of the market access they create. Given the complexity of policy areas that are covered by DTAs, the metric of market access – while still important – appears inadequate. The recent Handbook of Deep Trade Agreements (Mattoo et al. 2020) proposes to define DTAs as international arrangements that aim to regulate three (partially overlapping) sets of policy areas (Figure 2). 

  • First, the core policy areas in DTAs aim to establish five economic integration rights: free (or freer) movement of goods, services, capital, people and ideas. The policy areas that directly impact these flows include tariffs, export taxes, services, investment, movement of capital, visa and asylum, and intellectual property rights. 
  • Second, DTAs cover policy areas that aim to support these economic integration rights by limiting government discretion and actions (often of a regulatory nature) at the border and behind-the-border. Policy areas that fall in this category include customs, rules of origin, trade remedies, public procurement, technical barriers to trade (TBT), sanitary and phytosanitary measures (SPS), state-owned enterprises (SOEs), subsidies, and competition policy.
  • Third, DTAs cover policy areas that aim to enhance social or consumer welfare by regulating the behaviour of exporters. Policy areas such as environment and labour impose obligations on exporters to further consumer or social interests. Rules in areas such as competition, SOEs, and subsidies can have a dual aspect: in addition to regulating actions that undermine economic integration rights, they can aim to address distortionary measures that lower economic efficiency. 

Figure 2 A classification of policy areas in DTAs

The economics of deep trade agreements: A new eBook

Source: Mattoo et al. (2020).

Determinants and effects of deep trade agreements  

There is a large body of literature on the causes and consequences of regional trade agreements (Freund and Ornelas 2010 and Limao 2016 provide excellent surveys). Differently from most of this work, the chapters in this eBook pay special attention to the role of the various policy areas and specific provisions embedded in deep trade agreements.1

Seven main findings emerge from this body of research:

  • DTAs promote trade integration, thus having a positive effect on welfare. National borders create trade costs that fragment markets and limit growth opportunities, especially in developing countries. Deep trade agreements provide the institutional underpinning of market integration and are found to have positive effects on trade and welfare well beyond shallow trade agreements that lower preferential tariffs. The impact of DTAs on aggregate trade can be driven by a subset of key provisions, although precisely identifying which provisions matter and which do not is difficult in light of the high collinearity between different provisions. 
  • The content of DTAs is affected by economic and non-economic factors. Trade agreements allow to coordinate national policies that have cross-border spillover effects. As a result, when these policy spillovers are stronger, such as in the case of economies heavily involved in global value chains, we observe deeper forms of integration. But rules in trade agreements can also be influenced by political economy forces, such as lobbying by large corporations. Thus, specific provisions in DTAs may serve the purpose of special interests in a country rather than the general interest. 
  • The economic effects of DTAs are shaped by the individual provisions in the agreement, particularly those that establish enforceable commitments. The inclusion of rules on antidumping and countervailing duties in DTAs limits the use of these measures vis-à-vis members; opening services increases trade in goods that heavily rely on services; the inclusion of policy areas that increase competition is associated with lower firms’ markups, etc. Within these policy areas, specific provisions, such as those that are enforceable and go beyond what countries agree in the context of the WTO, are often found to be driving the trade effects of DTAs.
  • DTAs have heterogeneous effects within countries, beyond the standard distributional implications of trade integration. Specific rules in trade agreements have asymmetric effects. Regulatory provisions in DTAs tend to reduce the fixed costs created by non-tariff measures and thus increase the exports of regulatory-intensive sectors. Because small exporters have a harder time paying those costs, they also tend to benefit more from these provisions in DTAs. Similarly, trade facilitation provisions reduce fixed entry costs in foreign markets. This favours trade of firms involved in global value chains that import and export and thus bear a larger amount of those costs. 
  • DTAs can have positive spillover effects on non-members. Preferential tariffs increase discrimination between members and non-members of a trade agreement. But DTAs include several policy areas that are non-discriminatory in nature and can thus reduce trade costs for members and non-members alike. Indeed, rules that increase competition, limit domestic subsidies, regulate state-owned enterprises in members’ markets are found to increase (rather than reduce) exports of non-members. Even in policy areas where preferences can be granted, such as public procurement, there are specific provisions that are de facto non-discriminatory and have positive spillovers on non-members’ producers.   
  • Non-trade policy areas in DTAs can affect both trade and non-trade outcomes. The trade effects of non-trade policy areas can be subtle and non-obvious. Countries that sign up to stronger rules on intellectual property rights protection tend to experience increases in exports of sectors like biopharmaceuticals, most likely as they are better able to attract multinationals in these sectors. The relationship between labour clauses and trade volumes is generally negative but depends on the type of clauses in DTAs. Environmental provisions are effective in limiting the negative impact of trade agreements on the environment, particularly as they limit incentives for agricultural extensification that is a leading cause of deforestation. 
  • DTAs may play a large role in shaping trade in the post-COVID-19 world, leading to more fragmentation. The pandemic could lead to old and new trade measures, many of a protectionist nature. Governments may be tempted to use trade restrictions to redirect demand towards domestic production or to resort to regulatory protectionism to deal with rising aversion to various risks, such as health, security, and privacy. In this context, DTAs may shield and promote trade between members while directing protectionist pressures towards non-members. The result could be a more fragmented world. The revival of meaningful multilateralism is needed to complement deep trade agreements in a post-COVID-19 world.

Conclusion

The overarching message of the new body of research in this eBook is that the rules and commitments contained in DTAs matter for economic development as they are important determinants of international trade patterns, global value chain integration, and welfare. The findings support the view that the specific policy areas and provisions in trade agreements bear consequences – not all of which are beneficial. Economists, policy makers and anyone interested in trade and development should pay close attention to the content of DTAs – the devil is in the details. 

References

Dhingra, S, R Freeman and H Huang (2021), “The trade and welfare benefits of deep trade agreements”, VoxEU.org, 21 January.

Evenett, S J and R E Baldwin (eds) (2020), Revitalising Multilateralism: Pragmatic Ideas for the New WTO Director-General, CEPR Press. 

Fernandes, A, N Rocha and M Ruta (2021), The Economics of Deep Trade Agreements, CEPR Press. 

Freund, C and E Ornelas (2010), “Regional trade agreements”, Annual Review of Economics 2: 139-166.

Hofmann, C, A Osnago and M Ruta (2017), “Horizontal Depth: A New Database on the Content of Preferential Trade Agreements”, World Bank Policy Research Working Paper No. WPS 7981.

Lamy, P (2020), “Foreword”, in A Mattoo, N Rocha and M Ruta (eds), Handbook of Deep Trade Agreements, World Bank. 

Limao, N (2016), “Preferential trade agreements”, in K Bagwell and R Staiger (eds), Handbook of Commercial Policy Vol. 1, pp. 279-367.

Mattoo, A, N Rocha and M Ruta (2020), Handbook of Deep Trade Agreements, World Bank.

Mattoo, A, A Mulabdic and M Ruta (2017), “Deep trade agreements as public goods”, VoxEU.org, 12 October.

Endnotes

1 For a similar approach, see (among others) Mattoo et al. (2017) and Dhingra et al. (2021).

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