Preferential Trade Agreements andMultinational Production

Sebastien Miroudot1 Davide Rigo2

1Senior Trade Economist, OECD2PhD Candidate, The Graduate Institute

Joint WPIA and WPTC workshopon multinational production

OECD, Paris12 November 2018

Rapid increase in PTAs since 90s...

Figure: Number of PTAs over time (1950 - 2015)

0

200

400

600

Cum

ulat

ive

# of

sig

ned

PTA

s

0

10

20

30

40

# of

sig

ned

PTA

s

1955 1965 1975 1985 1995 2005 2015Year

# of signed PTAs

Cumulative # of signed PTAs

...PTAs are “deeper”

Figure: Non-tariff provisions share (1995 - 2015)

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

0 provision 1-2 provisions 3-4 provisions 5-6 provisions

and cover different policy areas

Figure: Non-tariff provisions share (1995 - 2015)

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10

20

30

40

50

%

1995 2000 2005 2010 2015

IPRs Procurement Competition

Investment Services Standards

What do we know on the effect of PTAs on economicintegration?

I Positive impact on bilateral trade flows, especially in thelong-run (Baier and Bergstrand, 2007)

I Heterogeneous effectsI “Deeper” agreements have a larger impact (Mattoo et al.,

2017; Mulabdic et al., 2017; Orefice and Rocha, 2014)I Effect is stronger for intermediate inputs trade (Dhingra et al.,

2018; Lee, 2018) and for trade in services (Dhingra et al.,2018)

I Provisions related to services, investment, and competitionmake up for most of the impact (Dhingra et al., 2018; Lee,2018)

I No study on multinational production (MP), due to lack ofdata

What do we know on the effect of PTAs on economicintegration?

I Positive impact on bilateral trade flows, especially in thelong-run (Baier and Bergstrand, 2007)

I Heterogeneous effectsI “Deeper” agreements have a larger impact (Mattoo et al.,

2017; Mulabdic et al., 2017; Orefice and Rocha, 2014)I Effect is stronger for intermediate inputs trade (Dhingra et al.,

2018; Lee, 2018) and for trade in services (Dhingra et al.,2018)

I Provisions related to services, investment, and competitionmake up for most of the impact (Dhingra et al., 2018; Lee,2018)

I No study on multinational production (MP), due to lack ofdata

What do we know on the effect of PTAs on economicintegration?

I Positive impact on bilateral trade flows, especially in thelong-run (Baier and Bergstrand, 2007)

I Heterogeneous effectsI “Deeper” agreements have a larger impact (Mattoo et al.,

2017; Mulabdic et al., 2017; Orefice and Rocha, 2014)I Effect is stronger for intermediate inputs trade (Dhingra et al.,

2018; Lee, 2018) and for trade in services (Dhingra et al.,2018)

I Provisions related to services, investment, and competitionmake up for most of the impact (Dhingra et al., 2018; Lee,2018)

I No study on multinational production (MP), due to lack ofdata

Foreign affiliates are important players...

Figure: Foreign affiliate output, by country, 2014, %

(28,48](21,28](13,21][4,13]No data

3 main channels through which PTAs might boost MP

1. Demand seeking MPI ↓ costs from tariffsI ↓ costs from non-tariff barriers

2. Efficiency seeking MPI ↓ costs from tariffs & non-tariff barriersI ↓ coordination costs between parent companies and their

foreign affiliates

3. Less uncertainty over MNE investment decisions

3 main channels through which PTAs might boost MP

1. Demand seeking MPI ↓ costs from tariffsI ↓ costs from non-tariff barriers

2. Efficiency seeking MPI ↓ costs from tariffs & non-tariff barriersI ↓ coordination costs between parent companies and their

foreign affiliates

3. Less uncertainty over MNE investment decisions

3 main channels through which PTAs might boost MP

1. Demand seeking MPI ↓ costs from tariffsI ↓ costs from non-tariff barriers

2. Efficiency seeking MPI ↓ costs from tariffs & non-tariff barriersI ↓ coordination costs between parent companies and their

foreign affiliates

3. Less uncertainty over MNE investment decisions

Baseline Estimation Strategy

MPijt =exp(α+ β1PTAijt + β2Deep PTAijt

+ δij + ψit + σjt) + εijt

I MPijt: Output of goods and services by foreign affiliates in country i,controlled by parent companies in country j at time t

I PTAijt: dummy for having a partial scope agreement, free tradeagreement, or customs union at time t

I Deep PTAijt: dummy for having a provision in services, competition andinvestment at time t

I Estimated using PPML and robust standard errors clustered bycountry-pair

I Two-years intervalsI Identifying variation

I β1: Entry into force of a new agreementI β2: Equivalent to an interaction variable with PTA

Data

I OECD Analytical AMNE databaseI Decompose foreign affiliate output in 4 components

Descriptive statistics

I Design of Trade Agreements Database (DESTA) fromWTI

I Information for more than 620 agreementsI Covers all PTAs in force in our period of interestI Detailed information on provision categories Provisions

Data

I OECD Analytical AMNE databaseI Decompose foreign affiliate output in 4 components

Descriptive statistics

I Design of Trade Agreements Database (DESTA) fromWTI

I Information for more than 620 agreementsI Covers all PTAs in force in our period of interestI Detailed information on provision categories Provisions

Main Results

% MP of Goods

MP of Services

PTA +20∗∗∗

+31∗∗

Deep PTA −0.1

−23

Deep PTA +2

+19∗∗

(2 years lag)

Total +22∗

+20∗∗

Effect

Main Results

% MP of Goods MP of Services

PTA +20∗∗∗ +31∗∗

Deep PTA −0.1 −23

Deep PTA +2 +19∗∗

(2 years lag)

Total +22∗ +20∗∗

Effect

Sector Results

Figure: Impact of Deep PTA on MP, by services industry

0 20 40 60 80Impact on MP (%)

Publishing activities

Telecommunications

Water transport

Wholesale & retail

Real estate

Air transport

Professional services

Finance & insurance

Warehousing & transport support

Postal & courier

Land transport

Conclusions

I We fill a gap in the literature studying the impact of PTAs onMP

I We show that tariff liberalisations have a positive impact onboth MP of goods and services

I It takes on average two years for deep PTAs to increase MP ofservices

I Deep PTAs are important drivers to the growth of MP andthe participation of FAs in global supply chains

Thank you!davide.rigo@graduateinstitute.ch

Industry classification

ISIC Rev. 4 Description ISIC Rev. 4 DescriptionA Agriculture F ConstructionB Mining G serv Wholesale and retail tradeC10T12 good Food & tobacco H49 serv Land transportC13T15 good Textile & leather H50 serv Water transportC16 good Wood H51 serv Air transportC17T18 good Paper & printing H52 serv Warehousing & transport supportC19 good Coke & Petroleum H53 serv Postal & courierC20T21 good Chemicals I serv Accommodation & foodC22 good Rubber & plastics J58 serv Publishing activitiesC23 good Mineral products J59T60 serv Motion picture & broadcastingC24 good Basic metals J61 serv TelecommunicationsC25 good Metal products J62T63 serv Computer & information servicesC26 good Electronic & optical K serv Finance & insuranceC27 good Electrical L serv Real estateC28 good Machinery M serv Professional & scientific servicesC29 good Transport N serv Administrative servicesC30 good Other transport O Public AdministrationC31T32 good Furniture P EducationC33 good Repair & installation Q HealthD E36 Utilities RTS Arts, recreation & other servicesE37T39 Sewerage & waste management T Household

U Extraterritorial organizations

MP activities over time

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50%

2000 2002 2004 2006 2008 2010 2012 2014Year

MP of Goods

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%2000 2002 2004 2006 2008 2010 2012 2014

Year

MP of Services

FA domestic intermediates FA domestic finals

FA export intermediates FA export finals

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Provision categories

I DESTA 2018 release

Provision Definition

Services Includes substantive provisions stipulating the liberalization of trade in services

Competition Includes a competition chapter

Investment Includes an investment chapter within or beyond a service chapter

Procurement Includes substantive provisions on public procurement

SPS Includes a SPS chapter or provision(s)

TBT Includes a TBT chapter or provision(s)

IPR Includes a substantive provision on protecting IPR

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Correlation matrix

RTA Serv prov Inv prov Comp prov Proc prov SPS prov TBT prov IPR provRTA 1.00Serv prov 0.77 1.00Inv prov 0.63 0.80 1.00Comp prov 0.71 0.91 0.88 1.00Proc prov 0.75 0.86 0.71 0.77 1.00SPS prov 0.93 0.83 0.67 0.76 0.80 1.00TBT prov 0.93 0.83 0.67 0.76 0.80 0.98 1.00IPR prov 0.67 0.75 0.83 0.72 0.75 0.72 0.72 1.00

Share of bilateral treatiesBack

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%

2000 2002 2004 2006 2008 2010 2012 2014Year

PTA Services Investment Competition

Procurement Standards IPRs BIT

Robustness checks

I Reverse causality: control for lead PTA

I 4-year time intervals

I Exclude EU

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