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Preferential Trade Agreements and Global Sourcing

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  • Emanuel Ornelas
  • John L. Turner
  • Grant Bickwit

Abstract

We study how a preferential trade agreement (PTA) affects international sourcing decisions, aggregate productivity and welfare under incomplete contracting and endogenous matching. Contract incompleteness implies underinvestment. That inefficiency is mitigated by a PTA, because the agreement allows the parties in a vertical chain to internalize a larger return from the investment. This raises aggregate productivity. On the other hand, the agreement yields sourcing diversion. More efficient suppliers tilt the tradeoff toward the (potentially) beneficial relationship-strengthening effect; a high external tariffs tips it toward harmful sourcing diversion. A PTA also affects the structure of vertical chains in the economy. As tariffs preferences attract too many matches to the bloc, the average productivity of the industry tends to fall. When the agreement incorporates "deep-integration" provisions, it boosts trade flows, but not necessarily welfare. Rather, "deep integration" improves upon "shallow integration" if and only if the original investment inefficiencies are serious enough. On the whole, we offer a new framework to study the benefits and costs from preferential liberalization in the context of global sourcing.

Suggested Citation

  • Emanuel Ornelas & John L. Turner & Grant Bickwit, 2018. "Preferential Trade Agreements and Global Sourcing," Documentos de Trabajo LACEA 016857, The Latin American and Caribbean Economic Association - LACEA.
  • Handle: RePEc:col:000518:016857
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    Cited by:

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    2. Michele Delera & Neil Foster-McGregor, 2020. "On PTAs and Bilateral Trade: Is GVC Trade Sensitive to the Breadth of Trade Policy Cooperation?," Economies, MDPI, vol. 8(4), pages 1-16, October.
    3. Edith Laget & Alberto Osnago & Nadia Rocha & Michele Ruta, 2020. "Deep Trade Agreements and Global Value Chains," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(2), pages 379-410, September.
    4. Ka Zeng & Yue Lu & Ya‐wei Li, 2021. "Trade agreements and Global Value Chain (GVC) participation: Evidence from Chinese industries," Economics and Politics, Wiley Blackwell, vol. 33(3), pages 533-582, November.
    5. Eduardo Rodrigues Sanguinet & Augusto Mussi Alvim & Miguel Atienza, 2022. "Trade agreements and participation in global value chains: Empirical evidence from Latin America," The World Economy, Wiley Blackwell, vol. 45(3), pages 702-738, March.
    6. Richard Chisik & Sara Rohany Tabatabai, 2020. "International Sourcing, Complementary Inputs, and the Structure of Trade Agreements: Deep, Shallow, Narrow, and Wide," Working Papers 079, Ryerson University, Department of Economics.

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    More about this item

    Keywords

    Regionalism; hold-up problem; sourcing; trade diversion; matching; incompletecontracts.;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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