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Preferential Trade Agreements and Global Sourcing

Author

Listed:
  • Emanuel Ornelas
  • John L. Turner
  • Grant Bickwit
Abstract
We study how a preferential trade agreement (PTA) affects international sourcing decisions, aggregate productivity and welfare under incomplete contracting and endogenous matching. Contract incompleteness implies underinvestment. That inefficiency is mitigated by a PTA, because the agreement allows the parties in a vertical chain to internalize a larger return from the investment. This raises aggregate productivity. On the other hand, the agreement yields sourcing diversion. More efficient suppliers tilt the tradeoff toward the (potentially) beneficial relationship-strengthening effect; a high external tariff tips it toward harmful sourcing diversion. A PTA also affects the structure of vertical chains in the economy. As tariff preferences attract too many matches to the bloc, the average productivity of the industry tends to fall. When the agreement incorporates “deep integration” provisions, it boosts trade flows, but not necessarily welfare. Rather, “deep integration” improves upon “shallow integration” if and only if the original investment inefficiencies are serious enough. On the whole, we offer a new framework to study the benefits and costs from preferential liberalization in the context of global sourcing.

Suggested Citation

  • Emanuel Ornelas & John L. Turner & Grant Bickwit, 2018. "Preferential Trade Agreements and Global Sourcing," CESifo Working Paper Series 7327, CESifo.
    • Handle: RePEc:ces:ceswps:_7327
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    References listed on IDEAS

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    Cited by:

    1. Ornelas, Emanuel & Turner, John L., 2024. "The costs and benefits of rules of origin in modern free trade agreements," Journal of International Economics, Elsevier, vol. 147(C).
    2. Clémence Lenoir & Julien Martin & Isabelle Mejean, 2023. "Search Frictions in International Goods Markets," Journal of the European Economic Association, European Economic Association, vol. 21(1), pages 326-366.
    3. Heid, Benedikt & Vozzo, Isaac, 2020. "The international trade effects of bilateral investment treaties," Economics Letters, Elsevier, vol. 196(C).
    4. Michele Delera & Neil Foster-McGregor, 2020. "On PTAs and Bilateral Trade: Is GVC Trade Sensitive to the Breadth of Trade Policy Cooperation?," Economies, MDPI, vol. 8(4), pages 1-16, October.
    5. Edith Laget & Alberto Osnago & Nadia Rocha & Michele Ruta, 2020. "Deep Trade Agreements and Global Value Chains," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(2), pages 379-410, September.
    6. Sharadendu Sharma & Yadnesh P. Mundhada & Rahul Arora, 2023. "Which Combination of Trade Provisions Promotes Trade in Value‐Added? An Application of Machine Learning to Cross‐Country Data," Economic Papers, The Economic Society of Australia, vol. 42(4), pages 332-346, December.
    7. Karabay, Bilgehan, 2022. "A new dimension in global value chains: Control vs. delegation in input procurement," Journal of International Economics, Elsevier, vol. 137(C).
    8. Ka Zeng & Yue Lu & Ya‐wei Li, 2021. "Trade agreements and Global Value Chain (GVC) participation: Evidence from Chinese industries," Economics and Politics, Wiley Blackwell, vol. 33(3), pages 533-582, November.
    9. Carmen Díaz‐Mora & Erena García‐López & Belén González‐Díaz, 2022. "Bilateral servicification in global value chains and deep trade agreements," The World Economy, Wiley Blackwell, vol. 45(8), pages 2510-2531, August.
    10. Eduardo Rodrigues Sanguinet & Augusto Mussi Alvim & Miguel Atienza, 2022. "Trade agreements and participation in global value chains: Empirical evidence from Latin America," The World Economy, Wiley Blackwell, vol. 45(3), pages 702-738, March.
    11. Richard Chisik & Sara Rohany Tabatabai, 2022. "International sourcing, complementary inputs, and the structure of trade agreements: Deep, shallow, narrow, and wide," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1782-1805, October.
    12. Jules Depersin & B'ereng`ere Patault, 2023. "Revisiting the effect of search frictions on market concentration," Papers 2303.01824, arXiv.org.

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    More about this item

    Keywords

    regionalism; hold-up problem; sourcing; trade diversion; matching; incomplete contracts;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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