Connecting to Global Value Chains: The Dynamic General Equilibrium Effects of a PTA between China and Mercosur over the economy of Brazil

International trade governance and the very nature of trade have changed significantly over the last few decades. First, there has been an explosion in the number of Preferential Trade Agreements (PTAs) worldwide. Just over the last two decades, more than four hundred PTAs were notified to the World Trade Organization. Furthermore, some ‘mega-agreements’ are also in negotiation, among a dozen countries in the Pacific area and between the United States and the European Union, indicating that this form of cooperation between countries is likely to increase not only in number but also in size. Simultaneously, production processes have increasingly expanded beyond national borders, with the production of even relatively simple gadgets now spanning several countries. That is, countries have been progressively trading tasks (Grossman and Rossi-Hansberg 2008) instead of trading goods. Indeed, nowadays more than two-thirds of global exports correspond to trade in intermediate goods and services, reflecting the increasing importance of the fragmentation of production (Baldwin and Lopez-Gonzales 2013). A common view is that this global unbundling of production has become an alternative path to industrialization for many developing countries worldwide: rather than building entire domestic supply chains, joining international production networks appears to be a more efficient path towards industrialization. These two trends seem to have evolved hand-in-hand, suggesting that international coordination of trade policies may have either induced or been induced by—or both—the development of global value chains (GVCs). Although numerous anecdotes, hypotheses and informal arguments have been put forward (see for example Baldwin 2011 and World Trade Organisation 2011), there are surprisingly few theoretical and empirical analyses of the possible interconnectedness between those two trends. In this paper, we use a recent and comprehensive data set comprised by global input-outp...