The impact of new regionalism on global value chains participation

Abstract

This article investigates the impact of trade agreements on bilateral trade flows of manufactured goods. Compared to other studies, it enriches the analysis by decomposing gross trade flows into their value added components, and by considering the direction of trade flows and the content of trade agreements. The analysis reveals a clear pattern in the effects of economic integration on the degree and type of global value chains (GVC) participation. It shows that free trade agreements enhance GVC-driven trade between developed and developing economies whereby the latter assemble imported intermediates into final goods exports. Deeper integration fosters production fragmentation with a more balanced structure where even the less developed economies participate at more upstream stages and contribute more domestic value added into the supply chain. Finally, an analysis based on the content of FTAs reveals that liberalisation of trade in services is essential for the insertion of less developed economies in global value chains while investment provisions are crucial for their participation at more upstream stages of the value chain.