Vertical Trade Integration and the Formation of North-South PTAs
56 Pages Posted: 13 Aug 2009 Last revised: 11 Aug 2011
Date Written: 2009
During the last two decades, the number of preferential trade agreements has grown almost exponentially to reach over 250 by late 2008. In contrast to earlier waves of PTAs, today the majority are agreements between developed and developing countries. This change calls into question the applicability of existing models that lump North-South PTAs together with other types of trade agreements.
This paper presents a general framework based on a model of trade policy with multinational ﬁrms and FDI. The integration of manufacturing between and North and South leads to the rapid growth of vertical intra-industry trade, or the exchange of similar goods differentiated by unit values. More capital-intensive goods are exported by the North, while more labour-intensive goods are produced and traded by South. This kind of exchange, I argue, creates incentives for governments to support bilateral trade agreements. I test this model using a new measure of vertical intra-industry trade calculated on the basis of highly disaggregated trade ﬂows. The ﬁndings challenge existing research that has found limited effects of trade itself and provide strong evidence that growing vertical trade integration triggers PTA formation. North-South agreements formed since the end of the Cold War should therefore be seen as part of a broader shift of manufacturing from high- to middle-income countries.
Keywords: preferential trade agreements, intra-industry trade, free trade agreements
JEL Classification: F13, F15, F02
Suggested Citation: Suggested Citation