Vertical specialisation and new regionalism

The increased spread in the location of value added coupled with the growing impetus for new forms of bilateral integration are re-shaping international economic activity. The world is becoming more regional and more fragmented but little empirical work has been dedicated to examining the nature of the links between these processes. This thesis aims to fill this gap in the literature. The primary aim of the first essay of this thesis is to extend current indicators of international production so that the bilateral degree of vertical specialisation can be captured. This has been one of the major hurdles in examining the links between vertical specialisation and Free Trade Agreements (FTAs). The comparative static analysis of this first essay reveals that there appears to be a high incidence of regional value chain activity and this motivates the aims of the second essay. It attempts to isolate the impact of an FTA on these flows through a theoretically derived gravity model of input trade. The results suggest that an FTA increases the use of intermediate inputs that are part of a bilateral value chain by 65%. Moreover, the results identify the presence of ‘magnification’ which implies that this type of trade is also more responsive to changes in trade costs and income variables. The third essay then looks at how the changing nature of trade affects the formation of new FTAs. It suggests that the propagation of international production alters the political economy dynamics of countries towards favouring further liberalisation. It also identifies regulatory quality and a growing FTA ‘contagion’ as determinants of new FTAs.