Notes

transparency on subsidies and SOEs, which is currently limited and so constrains the analysis of the economic effects of subsidies and SOEs on trade and on participation in regional and global value chains. Using trade agreements to improve the availability of data on state support and the analysis of its effects on value-chain-based investment incentives can also increase the appeal of trade agreements to the private sector and to communities with a stake in economic upgrading.

Trade agreements will be critical in the recovery from COVID-19

DTAs will be critical to boost GVC integration in Latin American and Caribbean countries as the global economy recovers from the COVID-19 pandemic while tensions in the multilateral trade system persist. The pandemic might reinforce old trade measures and stimulate new ones—many of a protectionist nature—that would limit Latin American and Caribbean countries’ ability to integrate into GVCs. Unsynchronized recovery will create competition for scarce demand, tempting governments to use trade restrictions to redirect demand toward domestic production. And the appeal of tariffs as a source of government revenue might increase with worsening fiscal conditions and the need to use subsidies to help firms recover from the crisis. In addition, rising aversion to risks to health, security, and privacy might open the door to increased regulatory protectionism. Governments with limited fiscal space might be tempted to weaken rules on SOEs or on competition as an indirect support for the economy. In uncertain times, DTA policy commitments might create a more stable institutional environment for the smooth operation of GVCs, thus promoting DTA partners’ ability to integrate into GVCs.

Today’s tensions between large trading partners as well as the persistent fragility of the multilateral trade system increase the usefulness of DTAs for Latin American and Caribbean countries to promote domestic reforms at a critical moment. Tensions between the United States and China might prompt American production facilities to disperse their locations to other regions. And the COVID-19 pandemic could encourage further supply chain reshaping (Freund et al. 2021). These conditions offer the region’s countries an opportunity to further integrate into GVCs. Given the fragilities in the multilateral trade system and the changing trade patterns, DTAs increasingly shape the rules of trade and can be a tool for Latin American and Caribbean countries to overcome structural disadvantages and attract opportunities for GVC participation.

NOTES

1. This report uses the term “preferential trade agreement” to refer to all types of reciprocal trade agreements, regional trade agreements, free trade agreements, and customs unions, both within and across regions. 2. GVC participation data are from the Trade in Value Added (TiVA) database of the Organisation for Economic Co-operation and Development.