The rising trend in preferential trade agreements

Deeper trade agreements would promote GVC links. For GVCs to operate efficiently, cooperation on border and behind-the-border policies is needed for several reasons: First, international fragmentation of production can create new forms of cross-border policy spillovers that require cooperation to be managed. Second, without such cooperation, governments might face credibility problems over behind-the-border measures in the context of GVCs. And third, heterogeneous regulations might create higher costs in the presence of cross-border production.

DTAs in Latin America and the Caribbean are associated with more GVC participation and with upgrading to more-advanced GVC participation. Globally, deep provisions in trade agreements facilitate and promote GVCs, thus contributing to increased participation in them. GVC-related trade between countries after signing a DTA is 12 percent higher than it was before signing the agreement. The positive link between DTAs and GVC participation also appears in the Latin American and Caribbean region: the value of GVC-related trade in 2017 (proxied by trade in parts and components) was higher on average for the region’s countries that had signed deeper agreements with their trading partners than for countries with shallower agreements. There is also evidence that DTAs are associated with GVC upgrading, though causation is more difficult to establish.

THE RISING TREND IN PREFERENTIAL TRADE AGREEMENTS

Countries around the world have increased their participation in preferential trade agreements (PTAs), especially in the past two decades (figure 2.1). From the 1950s onward, the number of active PTAs increased steadily to almost 50 in 1990. Thereafter, PTA activity accelerated noticeably, with the number of new PTAs more than doubling over the next five years and more than quadrupling by 2010, reaching well over 300 PTAs in force by 2019.

What are the drivers of the global increase in PTAs?

Factors such as lack of progress in multilateral trade negotiations, together with the fear of losing market share by being excluded from existing PTAs, partly explain the increase in the number of PTAs between countries with the objective of increasing market access. The global trend toward tariff liberalization from the 1940s, both multilateral and preferential, has been essential to expanding GVCs. Firms participating in increasingly fragmented production needed access to production inputs at competitive international prices, and they needed better access to destination markets for their products. Latin America and the Caribbean entered this trend at a later stage, when trade reforms in the late 1990s allowed countries to reverse the protectionist excesses of the preceding decades (box 2.1).

But the rise of PTAs and their changing content are also closely linked with the growing importance of GVCs in world trade. Toward the end of the 1990s, more