Preferential Trade Agreements and Global Sourcing
60 Pages Posted: 13 Nov 2018 Last revised: 17 Jun 2020
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Preferential Trade Agreements and Global Sourcing
Preferential Trade Agreements and Global Sourcing
Preferential Trade Agreements and Global Sourcing
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: Suggested Citation