Deep Trade Agreements and Vertical FDI: The Devil is in the Details

46 Pages Posted: 20 Apr 2016

See all articles by Alberto Osnago

Alberto Osnago

Independent

Nadia Rocha

World Trade Organization

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Date Written: October 29, 2015

Abstract

Recent data show that the institutional content of preferential trade agreements has evolved over time. Although pre-1990s preferential trade agreements mostly focused on tariff liberalization, recent agreements increasingly contain deep provisions in diverse areas, such as intellectual property rights, investment, and standards. At the same time, there has been a remarkable increase in the internationalization of production through foreign direct investment and outsourcing. This paper employs the Antr?s and Helpman (2008) model of contractual frictions and global sourcing to study how deep trade agreements affect the international organization of production. The paper constructs new measures of the depth of preferential trade agreements and of vertical foreign direct investment to test the theory. Consistent with the model, the analysis finds evidence that the depth of trade agreements is correlated with vertical foreign direct investment, and that this is driven by the provisions that improve the contractibility of inputs provided by suppliers, such as regulatory provisions. Because this implication of the model is specific to the so-called ?property rights? theory of the multinational firm, the findings provide empirical support to this approach vis-?-vis alternative theories of firm boundaries.

Keywords: Trade and Multilateral Issues, Rules of Origin, International Trade and Trade Rules, Trade Policy, Trade Facilitation

Suggested Citation

Osnago, Alberto and Rocha, Nadia and Ruta, Michele, Deep Trade Agreements and Vertical FDI: The Devil is in the Details (October 29, 2015). World Bank Policy Research Working Paper No. 7464. Available at SSRN: https://ssrn.com/abstract=2683689

Alberto Osnago (Contact Author)

Independent

No Address Available

Nadia Rocha

World Trade Organization ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

Michele Ruta

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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