Trade Creation And Trade Diversion In Deep Agreements

The number of trade agreements has increased significantly since the early 1990s. Considering only the EPAs still in force in 2015, the number of preferential schemes increased from 20 in 1990 to 279 at the end of 2015. The content of the PTAs has also changed. Recent agreements are deeper in the sense that the range of policies covered has been expanded. Older ATPs focused on less than ten policy areas, mainly tariff commitments on industrial and agricultural products and other border measures such as export taxes. Recent agreements have expanded their scope, first in areas such as countervailing measures (compensatory measures, anti-dumping duties) and subsidies, and then to a wider range of border measures in services trade, investment, intellectual property rights and national regulation (Table 1). Brexit and the renegotiation of NAFTA have renewed policymakers` interest in the impact of trade agreements on trade and their consequences (Blanchard 2017, Dhingra et al. 2016, Mulabdic et al. 2017). In a recent paper, we use new information on the content of preferential trade agreements (ATPs) to study the commercial effects of deep integration (Mattoo et al. 2017). Our results can mark the current debate on the consequences of disintegration. A number of examples can help to put this knowledge into play.

We are focusing on three increasingly profound trade agreements – in relation to the number of policy areas covered by the treaty – namely Peru-Chile, Korea-US and the EU. Based on our preferred specifications, a flat agreement, such as Peru-Chile, increased bilateral trade by about 10%, but had only a negligible impact on non-members. Korea-U.S., a medium-deep PTA, increased trade by 14% and increased external exports by 4%. Finally, our estimates indicate that the deepest convergence of our sample, the EU, increased trade flows between members by 44%, while exports from third countries would be about 30% lower without the agreement. In recent years, preferential trade agreements have boomed and expanded their scope to include policies such as investment, competition and intellectual property rights, far beyond tariff reductions. This document uses new information on the content of preferential trade agreements to examine the impact of trade agreements in depth and to reconsider the classic issue of trade creation and diversion. The results indicate that deep agreements lead to more commercial creation and less trade diversion than flat agreements. In addition, some provisions of deep agreements have public well-being and increase trade with non-members.