Deep Trade Agreements and FDI in Partial and General Equilibrium: A Structural Estimation Framework

This paper quantifies the relationships between deep trade liberalization and foreigndirect investment. To this end, it focuses on the effects of deep trade agreements. The analysis relies on a structuralframework that simultaneously enables (i) estimating the direct impact of deep trade agreements on foreign directinvestment, (ii) translating the partial deep trade agreement estimates into general equilibrium effects onforeign direct investment; and (iii) obtaining partial deep trade agreement effects on trade and quantifying the impactof deep trade agreements on foreign direct investment through trade. The paper obtains sizeable, positive, andstatistically significant estimates of the effects of deep trade agreements on both trade and foreign directinvestment. A counterfactual analysis suggests that together with direct and indirect channels deep trade agreements have contributed.