Preferential Trade Agreements and Global Sourcing

60 Pages Posted: 13 Nov 2018 Last revised: 17 Jun 2020

See all articles by Emanuel Ornelas

Emanuel Ornelas

Sao Paulo School of Economics

John L. Turner

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Grant Bickwit

University of Georgia

Multiple version iconThere are 3 versions of this paper

Date Written: June 16, 2016

Abstract

We develop a new framework to study the welfare consequences of preferential trade agreements (PTAs) under global sourcing, incomplete contracts and endogenous matching. We uncover several new channels through which PTAs affect global welfare. There are effects stemming
from intensive margin changes---i.e., changes in investment and production in existing vertical
chains---and from extensive margin relocations---i.e., due to the formation and destruction of
vertical chains. In each case, there are potential trade creating, trade diverting and relationship-
strengthening forces. The first two are reminiscent of the classical Vinerian approach, but take
different forms under global sourcing. The third is entirely new in the regionalism literature
and arises because PTAs affect the severity of hold-up problems in sourcing relationships. We
characterize those forces and show circumstances when PTAs are necessarily welfare-enhancing
or welfare-decreasing. In particular, we show that, because of the relationship-strengthening
effect, PTAs can improve global welfare even when all types of trade creation forces are absent.

Keywords: Regionalism; hold-up problem; sourcing; trade diversion; matching; incomplete contracts

JEL Classification: F13, F15, D23, D83, L22

Suggested Citation

Ornelas, Emanuel and Turner, John L. and Bickwit, Grant, Preferential Trade Agreements and Global Sourcing (June 16, 2016). Available at SSRN: https://ssrn.com/abstract=3270993 or http://dx.doi.org/10.2139/ssrn.3270993

Emanuel Ornelas

Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/emanuelornelaseo/

John L. Turner (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

Grant Bickwit

University of Georgia ( email )

Athens, GA 30602-6254
United States

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